The materials and process industries are a large and critical component of the economy. In 1994, the chemical, forest products, and petroleum-refining industries shipped a total of $896 billion worth of products, i.e., they directly accounted for about 25 percent of all value added by manufacturing, and almost 5 percent of U.S. GDP.

Commensurate with their large physical size, the materials and process industries are a major source of jobs in the American economy. In 1994, total employment in these industries was about 2.9 million workers, about 16 percent of U.S. manufacturing employment and about 3 percent of the nation's total nonfarm, private sector employment. In addition to providing direct employment, it is important to recognize the multiplier effect of these jobs. The Economic Policy Institute estimates that each job in the materials and process industries supports four workers employed in supplier, equipment, repair, finance, engineering, sales, and even government occupations.

The materials and process industries also play a large role in the nation's trade picture. In 1994, they employed nearly 3 percent of the U.S. work force, produced nearly 5 percent of U.S. GDP, and accounted for more than 14 percent of our total merchandise trade. To maintain high trade levels, these industries must be extremely competitive, which in turn will require constant improvement in energy efficiency. Technology roadmaps (strategies for R&D and deployment of energy efficient and pollution prevention options), developed jointly by DOE and the respective industries, will make that possible.

The transportation sector poses the nation's greatest energy challenge. The U.S. transportation system is the dominant user of oil, accounting for more than 60 percent of the national oil demand and using more oil than can be domestically produced. Autos, trucks, and buses comprise one of the largest sources of local and regional air pollution, including NOx, particulate matter, and carbon monoxide. Transportation is also responsible for about a third of U.S. CO, emissions. Although the other demand sectors have managed to reduce dependence on oil, the transportation sector is still roughly 97 percent oil dependent (Figure 3.6) thereby making it vulnerable to oil price changes and supply interruptions. Because fuel expense is now a relatively minor part of the cost of driving, there is little incentive for consumers to demand more efficient vehicles.

41).

Transportation policy has been perennially contentious, making effective energy and pollution initiatives difficult and rare. Fuel efficiency standards doubled new car gas mileage between the mid1970s and the mid-1980s, but these standards have been static since then. Further, because more and more consumers are switching to minivans and light trucks, fleet averages for new personal vehicles are dropping. In addition, vehicle miles traveled (VMT) have been increasing, putting additional pressure on oil consumption in this sector.

The Partnership for a New Generation of Vehicles (PNGV) was launched in 1993 to provide technologies to build sedan-type automobiles that are three times as efficient as today's cars - at competitive prices. This program has made some very promising strides, but the Panel believes that work needs to be supplemented by technology initiatives for larger vehicles, sport utility vehicles, light and heavy-duty trucks. Moreover, all of these efforts will require complementary policy changes to ensure that the new technologies fully penetrate the market.

Sector Issues

R&D alone does not ensure that technologies will be successful in the marketplace. The buildings, industry, and transportation sectors each have their own set of technology-introduction barriers. Collaborative government/industry investments in R&D are important, but they need to be supplemented by a diverse portfolio of options including standards, incentives, information, and education programs.

The buildings sector represents a classic case for government involvement in R&D and standardsetting. It is highly disaggregated, engaging hundreds of thousands of architects, developers, and contractors. Even the most innovative among them confront barriers such as local building codes, lack of private investment in R&D, lack of capital for lower income consumers, and the disconnect between the decision maker and the user. Combined, these barriers constitute formidable obstacles to the introduction of new energy efficiency technologies and practices. Too little R&D is being conducted on innovative technologies, and when new technologies and practices do become available it is difficult to get them into the hands of builders, the code books of local officials, or onto the shopping lists of consumers. Yet, there are many important energy efficiency and supply opportunities (see, for example, Box 3.1).

The industrial sector uses significant amounts of energy, but for the most part, energy does not constitute a large portion of operating costs. Although environmental drivers are motivating some industries to improve energy efficiency, unless there are significant price signals, industry will not generally make substantial improvements. However, if energy-efficient manufacturing technologies are available when industry is making capital investments, they will be incorporated if cost-effective.

In the transportation sector, consumer demand for larger and more powerful vehicles reduces energy efficiency improvement. With energy prices low, consumers' concern for fuel efficiency of automobiles is a low priority. The heavy-duty fleet is more price sensitive and therefore more energy efficient, but there are still significant gains to be made.

There is a clear case for an expanded DOE program, given the extraordinary potential of energy savings in the economy, the well-understood market barriers to obtaining such savings, and the profound benefits such savings would render in reduced imports, air pollution, and carbon emissions.

Other factors will hinder the future of technological innovation for energy. Changes in the nature of energy markets-particularly the move toward competitive markets for natural gas and electricity— have caused a significant downturn in R&D expenditures. As the electric sector is restructured, state

supported demand-side management programs are losing their funding (more than a $250 million drop so far), electric utilities are shutting down R&D programs (for example, PG&E is shutting down its $50 million per year operation), and major research organizations such as EPRI and GRI will lose more than $100 million in funding that would normally be used for energy efficiency research. Although some states will pick up some of the slack, states are unlikely to match pre-restructured levels and will not coordinate their efforts.

Industry R&D is becoming more and more focused on the short term. The utility sector in particular has "dimmed its headlights" in its R&D, leaving the medium and longer-term technology options stranded. The nation will ultimately lack a full menu of technology products unless the government builds and expands on a rigorous medium- and long-term agenda.

Box 3.1: Natural Gas and Efficiency Opportunities

Natural gas is widely used in the buildings and industrial sectors, and it has the potential for extensive use in transportation. There are significant opportunities for furthering the already high performance of natural gas systems in these sectors.

Residential and commercial buildings used about 8.7 quads of natural gas, 7.0 quads of electricity (not including losses in electricity generation) and 2.2 quads of oil in 1996; the industrial sector used about 10.3 quads of natural gas, 9.1 quads of oil, 3.5 quads of electricity (not including losses), and 2.4 quads of coal. The popularity of natural gas is due to its high performance, low emissions, relatively low cost," and ease of use. It is identified by many as a key transition fuel to sustainable energy systems due to its low carbon content compared to coal and oil (see Chapter 4).

Natural Igas can also provide important energy efficiency gains. For example, natural gas combined-cycle electricity generation is the cleanest, lowest cost, and highest efficiency fossil fueled system available today in the United States. Yet, even in this case, nearly half of the energy content of the natural gas is unavoidably lost as waste heat from the electricity generation process. This waste heat can potentially be made use of by using the natural gas to power a fuel cell or microturbine located in or near a building or industry and capturing the waste heat to heat the building, to heat water, or to heat an industrial or commercial process. In addition, by generating the electricity near where it will be used, the losses inherent in long distance transmission of electricity can be avoided and the capital costs of distribution transformers can be reduced, among other benefits. As these fuel cell and microturbine technologies are developed and commercialized, this can provide substantial cost, energy efficiency, and carbon savings.

Natural gas can also improve system efficiencies where it is used directly to power end use equipment. For example, using natural gas to directly power a heat pump or chiller has the potential to be more efficient than using natural gas to generate electricity at a central station plant-which loses nearly half the energy as waste heat; then transmitting it to the building which typically loses 6-8 percent of the electricity; and then driving the motor used in the heat pump or chiller which can also have large losses in the motor/compressor system. Alternatively, new technologies that use natural gas directly to power the heat pump or chiller could avoid these losses (but has certain other losses) and provide net system efficiency gains.

Natural gas may also offer substantial opportunities in the transportation sector, as compressed natural gas, through conversion to liquids with gas-to-liquids technology (Chapter 4), or through conversion to hydrogen (Chapter 4). Natural gas can be used either directly in internal combustion engines, in hybrid vehicles, or in fuel cell vehicles. Given its clean conversion, natural gas produces little pollution (additional work on NOx is important, however); its primary drawback is the emission of carbon into the atmosphere. Combined with hydrogen production and carbon sequestration, even this potentially serious problem may be resolvable (Chapter 4).

"The low cost of natural gas refers here to its highly competitive cost, not to a cost below historical commodity price levels.

In some cases, U.S. technology policy can help to spur technological innovations and research by international competitors. For example, PNGV and continued collaborative R&D on fuel cells may have convinced Daimler-Benz to invest almost $300 million in fuel cells and Toyota to invest an estimated $700 million per year on alternative-fuel cars.

In addition, there are export opportunities for U.S. energy efficiency technology and expertise (as an example, see Box 3.2.). As the world moves toward reducing greenhouse gas emissions (GHGs), technologies for improving the efficiency of energy use and the expertise for determining cost-effective energy improvements will be in demand. The United States can be a leader in many of these areas.

Box 3.2: Materials Compatibility and Lubricant Research:
A Government/Industry Success Story

DOE's Office of Building Technology, State and Community Programs participates in a grant administered by the Air Conditioning and Refrigeration Technology Institute to support R&D enabling U.S. manufacturers of heating, ventilation, air conditioning, and refrigeration (HVAC&R) equipment to move away from chlorinated refrigerants, the basis of nearly all air conditioning and refrigeration systems for 50 years. The HVAC&R industry consists of relatively small companies with limited R&D capabilities and funds. No single company could undertake the capital intensive and technically complex refrigerant research.

The materials compatibility and lubricant research (MCLR) program supports U.S. compliance with the Montreal Protocol to phase out the use of chlorofluorocarbons (CPC). It was initiated in 1991 with a DOE contribution of $10 million, with industry providing a direct cost-share of 7 percent and in-kind contributions estimated at $1.5 million. Private and national laboratories and universities conduct the R&D projects that address refrigerant and lubricant properties, materials compatibility, and ancillary systems-related issues, such as lubricant circulation, heat transfer enhancement, and fractionation of blends. The MCLR program terminates in 1999. Projects are selected competitively, and the program has stimulated industrywide precompetitive research.

As a direct result of this R&D program, the U.S. HVAC&R industry could support the White House initiative to advance the phaseout of CPCs from the year 2000 to 1996. By December 1995, the industry had alternative non-CFC products for all applications. In fact, many applications were totally CFC-free by mid-1993. These achievements gave the U.S. HVAC&R industry a large technologically competitive edge over foreign manufacturers. Beginning in 1991, the international balance of trade for the industry's products exploded, from a trade surplus of several hundred million dollars to a trade surplus of as much as $2.5 billion. The R&D program continues to seek better CFC-free refrigerants. Further, the HVAC&R industry has developed a research agenda to work cooperatively to improve energy efficiency and indoor environment.

Lessons Learned

1. It is appropriate for the govemment to participate in programs that stimulate precompetitive research by companies within an industry.

2. The government should support those energy R&D projects that can provide U.S. industries with an early entrant's advantage in international markets, especially when significant global environmental benefits can be achieved.

FINDINGS AND RECOMMENDATIONS

This and the following sections address the current programs and technologies for each sector (buildings, industry, and transportation); suggests operating goals for the programs; and outlines barriers, technologies, budgets, and programs that can help ensure success into the next century and achievement of the highest possible energy savings, pollution savings, and productivity improvements. A few recommendations are relevant for all three sectors:

• Government investment in R&D is crucial, but needs to be supplemented by standards, incentives, information, and education programs. Programs that have combined R&D, incentives, and standards—e.g., refrigerators have achieved extraordinary energy savings and speedy market penetration.

The Administration should explore opportunities for multiyear funding for select programs, since the start/stop nature of many programs reduces their effectiveness. Multiyear funding might take the form of two-year allocations coinciding with the congressional calender.

• Federal agencies, in particular the General Services Administration (GSA) and Department of Defense (DOD), should purchase innovative and cost-effective technologies that reduce energy use and improve the environment. The Federal role is twofold. First, the government should be an early adopter of technologies with large long-term potential, such as electric vehicles and fuel cells. Second, the government, as a major purchaser, lessor and user of buildings, appliances, and vehicles, should purchase and operate buildings and equipment based on consideration of full life-cycle costs. Future energy savings should be compared with capital costs whenever a building is built, purchased, or renovated. Agencies should be encouraged to use energy service performance contractors (ESCOs) to achieve savings, and DOE and GSA should be much more aggressive about using the new "super-ESCOs" toward this end.

• Many technology initiatives-such as zero net energy buildings, advanced fuel cells, advanced sensors, and whole system optimization-require coordination across groups within energy efficiency and across other DOE programs such as renewables, fossil energy, and fundamental energy-linked science programs (including portions of Energy Research and Basic Energy Sciences). DOE should develop clearly articulated technology paths for initiatives that exploit and coordinate R&D resources as appropriate.

THE BUILDING SECTOR

DOE's Office of Buildings Technologies, State and Community Programs (BTS) has achieved some remarkable successes in the past 20 years. The BTS programs have helped develop and disseminate a number of technologies including low-E windows (Box 3.3), electronic ballasts for lighting, and high efficiency compressors and refrigeration systems--that have transformed their respective markets. These technologies have been complemented by energy efficiency standards for new appliances and equipment that have drastically reduced energy consumption-all at an extraordinary savings to consumers.