4.8-fold. As a fraction of real GDP, DOE's 1997 spending for energy technology was less than half that of DOE's predecessor agencies 30 years earlier, in 1967, at the height of pre-oil-shock American complacency about energy supply and energy prices.

Although data for energy R&D in the U.S. private sector are less comprehensive than those for government spending, the most recent systematic study of energy-industry R&D trends found that the industry's spending for R&D fell 40 percent in real terms between 1985 and 1994, from $4.4 billion to $2.6 billion. The R&D spending of the 112 largest U.S. operating electric utilities fell 38 percent between 1993 and 1996 alone, and the R&D of the four U.S. oil firms with the largest research efforts approximately halved between 1990 and 1996.

There is evidence that Federal and private investments in R&D in general (that is, not for energy alone) tend to rise and fall together, rather than one's rising in compensation when the other goes down. State government funding of energy R&D in the United States, which was probably under $200 million in 1995, may follow electric-utility funding downward.

In the G-7 countries other than the United States and Japan, public sector energy R&D has fallen sharply, decreasing between 1984 and 1994 by more than 4-fold in both Germany and Italy, by about 6-fold in the United Kingdom, and by 2-fold in Canada. Public spending on energy R&D in France, for which 1984 figures were not available, was declining slowly between 1990 and 1995. Japan, however, increased its public sector energy R&D spending from about $1.5 billion in 1974 to $4.2 billion in 1980; by 1995, the figure was $4.9 billion, about twice as high as DOE's energy R&D spending (Basic Energy Sciences included) in that year.

Explanations and Implications of the Declines in Public and Private R&D

Many explanations for the overall downward trends in energy R&D in recent years suggest themselves. One important factor is surely low energy prices. World oil prices fell sharply after 1980, and in the 1990s they have been about where they were in the 1920s and in the 1950s (in inflation-corrected dollars); and natural gas prices in the United States are so low that no other means of electricity generation can compete with gas-fired combined-cycle power plants where gas is available. This situation discourages investment in the development of new energy technologies. The very large demonstration projects in fossil, nuclear, and renewable energy that accounted for much of the post-oil-shock increase in U.S. Federal energy R&D spending came to be regarded as costly anachronisms after prices fell again, and their cancellation was, for the most part, appropriate.

In addition, public sector spending on energy R&D has experienced downward pressure from overall budgetary stringency in government and from public and policymaker complacency attributable to low prices, no gasoline lines, and high confidence in the capacity of the United States and allied military forces to preserve access to Middle East oil. DOE has experienced particular budget-inhibiting scrutiny by critics of "big government,” and its energy R&D spending has been further constrained from within by pressure from larger parts of the Department's budget (notably environmental cleanup and nuclear-weapons programs).

In the competitive environment of declining government spending on energy R&D, moreover, advocates of each energy option have tended to disparage the prospects of the other options, in hopes of gaining a greater share of the budget for their favorite. Thus, the energy community itself has formulated the arguments that budget-cutters have used to downsize energy R&D programs one at a time ("renewables are too costly," "fossil fuels are too dirty", "nuclear fission is too risky", "fusion will never work", "conservation means sacrifice"), with no coherent energy-community voice calling for a responsible portfolio approach to energy R&D—that is, an approach that seeks to address and ameliorate the shortcomings of all of the options.

The private sector, meanwhile, has been experiencing a paradigm shift driven by the increasing globalization of the economy, the revolution in information technology, the increasing power of shareholders and financial markets over corporate decisions, and deregulation and restructuring in important parts of the energy business. These factors have combined with low energy prices and the inherently low profit margins of commodity-based businesses to cause energy companies to place more emphasis on the short-term bottom line, to decrease risk taking on broad-based or long-range R&D projects, and to outsource their R&D to specialized R&D contractors (which may represent a part of private sector energy R&D that is not shrinking).

It is also possible, finally, that energy R&D in the private sector, the public sector, or both has become more efficient, in which case declining inputs (funding) need not mean correspondingly declining outputs (innovations that can be successfully marketed or that otherwise improve the human condition). The Panel hopes that this is so, although it is difficult to verify (partly because there are often significant time lags between the conduct of research and its effects on the actual flow of innovations, so that if outputs remained high while inputs fell this might be a temporary condition).

In any case, that the overall declines in both public sector and private sector funding for R&D are largely explainable, and that some of what has disappeared was not needed or effective, does not establish whether what remains is adequate in relation to current and future needs.

In the private sector, energy R&D has been an important engine of progress, enabling firms to improve their products and invent new ones, so as to increase their shares of existing markets, establish and penetrate new ones, and maintain or increase performance while reducing costs. Perhaps these benefits will flow in adequate measure from the new paradigm; but it is also possible that important parts of an industrial R&D system that has served our society extremely well for many decades are now being sacrificed for short-term gain. Concerns have been expressed that the trend toward decentralization of industrial R&D, for example, could erode the interconnectedness among people and among different bodies of knowledge that contributes much to technological innovation in the long term.

Public sector R&D funding has the responsibility for addressing needs and opportunities where the potential benefits to society warrant a greater investment than the prospective returns to the private sector can elicit. Such needs and opportunities relate to public goods (such as the national security benefits of limiting dependence on foreign oil), externalities (such as unpenalized and unregulated environmental impacts), and situations where lack of appropriability of the

research results, or the structure of the market, or the size of the risk, or the scale of the 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. We have said enough already 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 has analyzed DOE's energy R&D portfolio in these terms.

ELABORATION OF FINDINGS AND RECOMMENDATIONS

We turn now to what we found, first in relation to the content of the portfolio's major energy-technology compartments-end-use efficiency, fossil fuel technologies, nuclear technologies (fission and fusion), and renewable energy technologies-and then in relation to crosscutting issues including the role of Basic Energy Sciences, portfolio analysis, commercialization considerations, international dimensions, and DOE management of its energy R&D programs.

End-Use-Efficiency Technology

Between 1975 and 1986, the United States increased its energy efficiency by almost a third. This extraordinary achievement helped pull the country out of its two oil shocks and their attendant stagflation. Efficiency improvements now save U.S. consumers some $170 billion per year, and U.S. emissions of air pollution and CO2 have been reduced by a third or more from their expected values.

Challenges and Opportunities

Those achievements are instructive as we look at future energy, economic, and environmental issues. Technological advances and investments in energy efficiency helped rescue the U.S. economy once, and gave the country decades of breathing room to deal with the energy problem. Many of these advances were made possible by DOE-sponsored R&D. Can a similar improvement be achieved in the years ahead?

The Panel believes it can. We find that investments in energy efficiency are generally the most cost-effective way to simultaneously reduce the risks of climate change, world oil-supply interruptions, and local air pollution, and to improve the productivity of the economy. We have reviewed technologies that can reduce energy use in automobiles by half or more; in motors and drive systems by half, and in buildings by over 70 percent. Many of these technologies are in their

infancy and require a serious R&D effort to make them commercially viable. Others are near market readiness, but need standards and incentives to ensure they spread rapidly.

Budget, Goals, and Initiatives

The Panel recommends that the R&D components of the DOE's energy efficiency budget grow steadily over the next 5 years, from $373 million to $755 million (constant 1997 dollars). The Panel has identified the following goals (some pre-existing, and some newly proposed here) for each of the sectors:

Buildings. To fund and carry out research on equipment, materials, electronic and other related technologies and work in partnership with industry, universities, and state and local governments to enable by 2010: (1) the construction of 1 million zero-net-energy buildings; and (2) the construction of all new buildings with an average 25-percent increase in energy efficiency as compared to a new building in 1996. Additional longer term research in advanced energy systems and components will enable all new construction to average 70 percent reductions and all renovations to average 50 percent reductions in greenhouse-gas emissions by 2030.

Industry. By 2005, develop with industry a more than 40-percent efficient microturbine (40 to 300 kW), and introduce a 50-percent efficient microturbine by 2010. By 2005, develop with industry and commercially introduce advanced materials for combustion systems to reduce emissions of nitrogen oxides by 30 to 50 percent while increasing efficiency 5 to 10 percent. By 2010, achieve a more than one-fourth improvement in energy intensity of the major energyconsuming industries (forest products, steel, aluminum, metal casting, chemicals, petroleum refining, and glass) and by 2020 a 20 percent improvement in energy efficiency and emissions of the next generation of these industries.

Transportation. By 2004, develop with industry an 80-mile-per-gallon production prototype passenger car (existing goal of the Partnership for a New Generation of VehiclesPNGV). By 2005, introduce a 10-mpg heavy truck (Classes 7 and 8) with ultra low emissions and the ability to use different fuels (existing goal); and achieve 13 mpg by 2010. By 2010, have a production prototype of a 100-mpg passenger car with zero equivalent emissions. By 2010, achieve at least a tripling in the fuel economy of Class 1-2 trucks, and double the fuel economy of Class 3-6 trucks.

The R&D areas requiring increased funding to meet these goals have been identified. The Department has a sufficiently rich agenda, management expertise, history of success, and most important, potential for future contribution, to justify these increases.

Further Findings and Recommendations

The buildings program needs high-profile leadership from within the Administration, closer links with industry, and better mechanisms to distribute its research results. These elements could be brought together in the "Buildings for the 21st Century Initiative." The codes and

standards program needs to be expanded to give greater technical assistance to states and to speed internal progress.

The industries program is effective. It should be expanded to include more industries, and the crosscutting research-which develops technologies for use in many industries-should grow significantly.

Transportation research, most notably the PNGV, is extremely valuable. The PNGV program is insufficiently funded and cannot meet all its goals at current levels. It should be complemented by a "“PNGV II” to augment efforts on long-term technologies, such as fuel cells, with extraordinary potential after 2005. PNGV also needs to give greater attention to air-quality issues, to ensure that technologies selected do not undermine national and state clean-air programs. The Administration must also develop new transportation policies that shift the auto fleet, over time, toward higher efficiency. And advanced vehicle development programs should be coordinated with alternative fuels programs to ensure they are complementary for transportation systems of the future.

R&D in the Department of Transportation should be reorganized around clear public interest goals, and Transportation's energy and environmental pursuits should be consonant with DOE's goals. The Department of Transportation should pursue more multimodal research and system optimization and should increase its focus on developing integrated transit systems with improved efficiency, to reduce urban congestion and enhance air quality. The Automated Highway System research needs to be thoroughly evaluated, key technical assumptions must be documented and peer-reviewed, and then the program should be reorganized around the public interest goals mentioned above.

Increasing energy efficiency has an extraordinary payoff. It simultaneously saves billions of dollars, reduces oil imports and trade deficits, cuts local and regional air pollution, and cuts emissions of carbon dioxide. DOE research, complemented by sound policy, can help the country increase energy efficiency by a third or more in the next 15 to 20 years.

Fossil-Energy Technology

Fossil fuels supply 85 percent of U.S. energy and 75 percent of all energy globally. They will continue to be essential to the energy economies of the United States and the world well into the twenty-first century. R&D on fossil fuel technologies is warranted to minimize the costs, impacts, and risks of this continuing reliance on fossil fuels and to exploit the opportunities it represents for U.S. industry and the U.S. economy.

Challenges and Opportunities

DOE Fossil Energy R&D programs are directed-appropriately in the Panel's judgment— at two important challenges: (1) reducing the environmental impacts (including CO2 emissions) that constrain fossil fuel use; and (2) reducing the vulnerability of the economy to oil price shocks (caused by excessive dependence on imported oil and potential instabilities in the Middle East) by