investment, or the length of the time horizon before potential gains can be realized) dilute incentives for firms to conduct R&D that would greatly benefit society as a whole.

Needs for public sector R&D can increase over time if the public goods and externality challenges grow or if changing conditions shrink the incentives of firms to conduct some kinds of R&D that promise high returns to society. What has been said above is enough to suggest that both things might recently have been happening. But the real test of whether the current portfolio of public energy R&D is adequate comes from asking whether the R&D programs in the portfolio are addressing, effectively and efficiently, all of the needs and opportunities where the prospects of substantial societal benefits are good and the prospective returns to the private sector are insufficient to elicit the needed R&D.

The Panel's thinking about the adequacy of the current portfolio has been shaped by the understanding of the challenges and opportunities for energy R&D outlined in Chapter 1 of this report and presented in capsule form here in Table 2.3.25 The aim has been to analyze the appropriateness and effectiveness of the DOE energy R&D portfolio in relation to these challenges and opportunities and to recommend changes where warranted. The remainder of this report presents the results of that effort.

25

This table was prepared by the DOE in support of the study of the government's energy R&D portfolio conducted by the Secretary of Energy Advisory Board in 1995 (SEAB 1995).

REFERENCES

Corey 1997: R. Corey, Technology Fountainheads (Boston, MA: Harvard Business School Press, 1997).

CTI 1997: Critical Technologies Institute, communication to the Panel.

DOE 1997a: U.S. Department of Energy, Office of the Chief Financial Officer, FY 1998 Congressional Budget Request: Budget Highlights and Performance Plan (Washington, DC: U.S. Department of Energy, 1997).

DOE 1997b: U.S. Department of Energy, Interlaboratory Working Group on Energy-Efficient and Low-Carbon Technologies, Scenarios of U.S. Carbon Reductions: Potential Impacts of Energy Technologies by 2010 and Beyond (Washington, DC: U.S. Department of Energy, 1997).

Dooley 1996: J. Dooley, “Trends in U.S. Private-Sector Energy R&D Funding 1985-1994", Report PNNL-11295 (Washington, DC: Pacific Northwest National Laboratory, 1996).

DTI 1991-1997: U.K. Department of Trade and Industry, The U.K. R&D Scoreboard (Edinburgh, U.K.: Company Reporting Ltd., series 1990-1997).

EIA 1996a: Energy Information Administration, U.S. Department of Energy, Annual Energy Outlook 1997 (Washington, DC: U.S. Government Printing Office, 1996).

EIA 1996b: Energy Information Administration, U.S. Department of Energy, Annual Energy Review 1995 (Washington, DC: Department of Energy, July 1996).

EIA 1997a: Energy Information Administration, U.S. Department of Energy, Performance Profiles of Major Energy Producers 1995 (Washington, DC: U.S. Government Printing Office, 1997).

EIA 1997b: Energy Information Administration, U.S. Department of Energy, Monthly Energy Review (Washington, DC: Department of Energy, April 1997).

EPRI 1997: Electric Power Research Institute, private communication to the Panel, 1997.

Frosch 1996: R. Frosch, "The Customer for R&D is Always Wrong", Research Technology Management (November-December 1996).

GAO 1996: U.S. General Accounting Office, Federal Research: Changes in Electricity-Related R&D Funding (Washington, DC: U.S. General Accounting Office 1996).

GRI 1997: Gas Research Institute, private communication to the Panel, 1997.

IEA 1996: International Energy Agency, The Role of IEA Governments in Energy (Paris: OECD/IEA, 1996).

IEA 1997: International Energy Agency, IEA Energy Technology R&D Statistics, 1974-1995 (Paris: OECD/IEA, 1997).

Kadama 1995: Fumio Kadama, Emerging Patterns of Innovation: Sources of Japan's Technological Edge (Boston, MA, Harvard Business School Press, 1995).

NSB 1996: National Science Board, National Science Foundation, Science and Engineering Indicators 1996 (Washington, DC: U.S. Government Printing Office, 1996).

OECD 1997: Organisation for Economic Co-operation and Development, Technology and Industrial Performance: Technology Diffusion, Productivity, Employment and Skills, and International Competitiveness (Paris: OECD, 1997).

OMB 1997: Office of Management and Budget, Executive Office of the President of the United States, Budget of the United State Government, Fiscal Year 1998 (Washington, DC: U.S. Government Printing Office, 1997).

Pye and Nadel 1997: M. Pye and S. Nadel, “Energy Technology Innovation at the State Level: Review of State Energy Research, Development, and Demonstration Programs" (Washington, DC: American Council for an Energy-Efficient Economy, 1997).

Roberts 1995: Edward B. Roberts, "A New Look at Technology Management", presented at the International Electric Research Exchange Symposium (Cambridge, MA: MIT, 1995).

SEAB 1995: Secretary of Energy Advisory Board, Task Force on Strategic Energy R&D, Energy R&D: Shaping Our Nation's Future in a Competitive World (Washington, DC: Government Printing Office, 1995).

Williams 1995: R. Williams, “Making Energy R&D an Effective and Efficient Instrument for Meeting Long-Term Energy Policy Goals", presented at the Workshop on Long-Term Energy Strategies for the European Union (Brussels, Belgium: E.U. Directorate General for Energy, 1995).

CHAPTER 3

ENERGY EFFICIENCY

The most urgent, long-term security requirement for the United States is to reduce our
dependence on imported oil by developing clean, safe, renewable energy systems, and energy
conservation programs.

Rear Admiral Eugene Carroll, U.S. Navy, Retired,
Deputy Director, Center for Defense Information

R&D investments in energy efficiency are the most cost-effective way to simultaneously reduce the risks of climate change, oil import interruption and local air pollution, and to improve the productivity of the economy. Improvements in the use of energy have been a major factor in increasing the productivity of U.S. industry throughout the 1980s and early 1990's. Between 1973 and 1986, the nation's consumption of primary energy stayed at around 75 quads, whereas the GNP grew by more than 35 percent.

MOTIVATION AND CONTEXT

The decoupling of energy growth and economic growth is an important factor for the future: it shows that the nation can improve energy efficiency and increase economic productivity. The energy intensity of the economy, measured in terms of energy use per dollar of GDP, has dropped by almost a third since 1970 (Figure 3.1). If energy intensity had remained at the same level as in 1970, DOE estimates that the country would be spending $150 to $200 billion more on energy each year. Even so, consumers and businesses spend some $500 billion per year on energy, a significant fraction of which could be used more productively in other areas of the economy. And, although the economy continues to become more energy efficient, the decline in energy prices that began in 1986 has caused this trend to slow, so that energy demand grew considerably-to more than 91 quads-by 1995.

Between 1978 and 1996, the Federal government invested some $8 billion (1997 dollars) in research, development, and deployment of energy efficiency technologies. This work, in conjunction with other policies (such as standards and incentives), private R&D, and the pressure of high energy costs, helped spur a private sector investment achieving the $150 billion in annual savings—a

Personal communication, elaborating on findings in the Defense Monitor (1993).