[Economic Report of the President (2008)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]

 
CHAPTER 7


Searching for Alternative
Energy Solutions


The United States consumes a great deal of energy in support of the
world's largest economy. It produces over 70 quadrillion British
Thermal Units (or ``Btu,'' a measure of energy) of primary energy per
year-mainly from coal, natural gas, petroleum, and nuclear power-and
it consumes 100 quadrillion Btu, more than any other country in the
world. The difference-30 quadrillion Btu-is imported, mostly in the
form of petroleum. For energy security reasons, the United States
seeks to diversify its energy sources and fuels. One way to do this
is to pursue the use and development of domestically-produced
alternative energy sources. The United States has also been concerned
about the environmental effects of current energy use, particularly
the emission of air pollutants and carbon dioxide (CO2). For this
reason, the United States has pursued the use of alternative energy
sources that have the potential to produce lower emissions than
traditional fossil fuels (coal, natural gas, and petroleum), which
are the source of about 85 percent of the energy consumed in the
United States. Therefore, both energy security and environmental
concerns motivate the consideration of policies that diversify
our sources of energy. For purposes of this discussion, alternative
energy will be defined as alternatives to fossil fuels and
will include renewable energy sources (hydroelectric, geothermal,
solar, wind, and biomass), as well as nuclear power and emerging
technologies.
Alternative energy sources are not the only way to address energy
security and environmental concerns. Improved energy efficiency
could reduce our energy demand as well as reduce pollution.
Environmental concerns could also be addressed by developing ways
to use fossil fuels in a less polluting manner, such as through
clean coal and carbon capture and storage (CCS)  technologies.
These are both very important solutions that the Administration
is pursuing in tandem with alternative energy solutions; however,
this chapter will focus on alternatives to fossil fuel.
This chapter will concentrate on two sectors: electricity
generation and transportation. These are not the only two
sectors that could benefit from alternative energy. Primary
energy consumption (that is, the direct use of energy before
it has been subjected to any conversion) can be divided into
five major sectors: electricity generation, transportation, and
energy end use by industry, commerce and residences. The potential
for the direct use of alternative energy by industry, commerce and
residences is important; but, because nearly 70 percent of
petroleum is used in the transportation sector and the vast
majority of coal is used for electricity generation, this chapter
will largely focus on these two sectors.
Alternatives for electricity generation include nuclear power,
hydropower, biomass, wind, geothermal, and solar power.
Alternatives in the transportation sector include developing
domestically-produced transportation fuels such as ethanol and
biodiesel, and finding new ways to power our cars, such as using
electricity for plug-in hybrids or using hydrogen to deliver energy.
Our goal over the next several decades is to change the way in which
we produce and consume energy for electricity generation and
transportation so as to diversify our energy sources. The key points
of this chapter are:
 The current suite of available alternative energy sources
is an important part of achieving our goal, but a number of
technical, regulatory, and economic hurdles must be overcome to
use them fully.
 There are several promising, but currently unproven,
ethods of producing and delivering energy that, if successfully
developed and deployed, will greatly enhance our Nation's energy
portfolio.
 Appropriate and limited government action can play a
useful role in helping to realize our energy security goals.

Energy Sources
The drive for alternative energy is almost a return to our roots,
because energy derived from wood biomass is perhaps the oldest
source of energy. Two hundred years ago, wood supplied nearly
all of our energy needs. It is only over the past two centuries
that fossil fuels-fuels formed from the remains of plants and
animals-began to dominate as our preferred energy source.
Coal began to be used as a fuel in the 1700s for a number of
reasons, including the fact that it burned cleaner and hotter
than wood charcoal. Its use spread to the United States during
the Industrial Revolution in the early 19th Century, increased
with the introduction of steamships and steam-powered railroads,
and finally was used for electricity generation in the 1880s.
The market for natural gas developed from 'town gas,' synthesized
from coal and used for street and house lighting during the 1800s,
and in the 1820s the first well was dug to extract natural gas.
In the 1890s, electricity began to replace natural gas for
lighting purposes, but beginning in the 1940s, a continental-scale
pipeline system evolved to distribute these reserves to urban areas
for residential space and water heating, and ultimately for
power generation.
The first U.S. oil well was drilled in 1859 in Western Pennsylvania,
which spawned the domestic oil industry. After World War II, domestic
oil production continued to rise, but failed to keep pace with
accelerating consumption. The United States became a net importer
of crude oil in 1950. The huge post-war expansion of petroleum
consumption in Europe and the Far East was met from foreign sources,
notably Iran and Saudi Arabia, while the United States itself became
increasingly dependent on petroleum imports. U.S. oil production
peaked in 1970, and since then declining domestic oil production
and rising domestic consumption have increased petroleum imports.
While there have been significant gains in energy efficiency,
economic growth in the United States has led to large increases
in aviation, trucking, and automobile transportation, and has
resulted in increased oil consumption.
While fossil fuels have been the primary source of energy for over
a century, alternative energy has been used throughout our
history. The first electric car was constructed as early as
the 1830s. Hydropower in the form of waterwheels for milling
has been used throughout the world for centuries but dramatically
increased in the United States in the 1800s with advancements in
turbine technology. The first use of hydroelectric power occurred
in 1880 at the Wolverine Chair Factory in Grand Rapids, Michigan,
and the first U.S. commercial hydroelectric power plant opened
in 1882 on the Fox River in Wisconsin. In 1888, the first large
windmill was used to generate electricity in Cleveland, Ohio.
In 1896, Henry Ford's first car was constructed to run on
ethanol. The first commercially available solar water heaters
were produced in California in the 1890s. The basis for nuclear
power originated in 1942 when Enrico Fermi and other scientists
created the first self-sustaining nuclear reactor at the
University of Chicago, and the world's first full-scale
commercial reactor opened in Cumberland, England in 1956.
Today, we continue our search for alternative energy solutions
in order to diversify our energy portfolio.

Fossil Fuels
Petroleum accounts for 40 percent of the Nation's total energy
consumption (see Chart 7-1), the largest share of any fuel
type, and produces almost 40 quadrillion Btu of energy.
(A gallon of gasoline contains about 115,000 Btu, while a
kilowatt-hour of electricity is equal to 3,413 Btu.) The
United States consumes about 20.7 million barrels of petroleum
per day, making us the largest oil consuming country in the
world. In fact, the United States consumes about 25 percent
of the 84.7 million barrels consumed each day worldwide,
almost three times the amount of oil consumed by China,
the second largest oil-consuming nation. However, China's
oil consumption has grown at an average rate of 6.3 percent
per year since 1982 compared to an average rate of 1.3
percent per year for the United States.


Most of the oil consumed in the United States is used in
the transportation sector, absorbing 69 percent of U.S.
oil consumption in 2006. The rest is used by the residential,
commercial, and industrial sectors, and for electricity
generation (see Chart 7-2). The largest domestic sources
of oil production are offshore wells in the Gulf of Mexico,
and wells in Texas, Alaska, and California. Imported oil
primarily comes from Canada, Mexico, Saudi Arabia,
Venezuela, and Nigeria; and petroleum is the largest
mported energy source for the United States. Because of
this reliance on oil, changes in its price can affect the
U.S. economy, and in 2008, the price of oil hit record
levels (see Box 7-1).

---------------------------------------------------------------------
Box 7-1: Oil Prices

In 2008, the nominal price for crude oil reached its highest level
ever. This increase was due to several economic, geopolitical, and
environmental factors such as growing world demand, limited supply
growth, smaller inventories, security concerns in oil producing
countries, and a decline in the value of the U.S. dollar.

Some fear that high oil prices reflect a peak in oil production and
predict an imminent decline in production in the near future. This
type of prediction often assumes static or growing consumption with
limited additional discovery or production. As the price of oil
rises, however, there is an economic incentive to find new sources or
improve extraction techniques. Enhanced oil recovery (EOR) is one
example of this type of response. EOR is any technique that can
increase the amount of oil that can be recovered from an oil
field, but it is most commonly associated with gas injection,
particularly using CO2, which forces the oil to the surface. The
Department of Energy estimates that state-of-the-art EOR could
potentially add an additional 89 billion barrels to the total
recoverable oil resources of the United States, although not all of
that is necessarily economically recoverable.

Even if production has peaked, we are unlikely to abruptly run out
of oil. As the price rises over time, producers will have an
incentive to retain some of the resource to sell at a later date and
consumers will have an incentive to transition away from oil
consumption. Over time, the price rise will make the adoption of
alternative energy sources more and more likely.
---------------------------------------------------------------------
The next largest fuel types are coal and natural gas, comprising
23 percent and 22 percent of consumption respectively. In 2006, coal
production in the United States reached a record 1,161 million short
tons (one short ton equals 2000 pounds), while consumption was 1,114
million short tons. This coal produced 23.8 quadrillion Btu of
energy, the vast majority of which was used for electricity
generation by the power sector. Coal continues to be a major fuel
source for the United States largely due to its domestic abundance.
The United States has 18,880 million short tons of recoverable coal
reserves at producing mines and an estimated 263,781 million short
tons of total recoverable reserves. Domestic coal production comes
primarily from three geographical regions-Western, Interior, and
Appalachian-and there is a small amount of both imported and exported
coal.
In 2006, the United States consumed 21.9 trillion cubic feet (Tcf)
of natural gas. By comparison, total world natural gas consumption
was 105.5 Tcf, with the United States and Russia combined consuming
36 percent of the world total. U.S. natural gas consumption produced
22.4 quadrillion Btu of energy, with 69 percent used by residential,
commercial, and industrial sources and 29 percent used for
electricity generation. Domestic gas production comes mainly
from the Gulf of Mexico and older-producing areas in Texas, Oklahoma,
and Louisiana. Imports, which make up 16 percent of consumption,
come mainly by pipeline from Canada.

The Need To Diversify
For more than a century, fossil fuels have satisfied the bulk of
America's demand for energy. However, a move to alternative energy
sources can hold a number of benefits.
One of the reasons for shifting away from fossil fuels is improved
energy security. This term can have multiple meanings, but it is
often applied to the desire to reduce the Nation's vulnerability
to oil supply disruptions from political or terrorist actions or
natural disaster. However, because there is a world market for
oil and a world price, the price of oil rises in the case of a
disruption no matter the source of supply, be it foreign or
domestic. Thus, energy security in this context cannot be obtained
by simply shifting from one supplier to another. It requires
diversifying the fuels consumed in our energy portfolio, which
reduces the amount by which a disruption in any one energy source
can affect the economy. In this context, alternative energy
technologies for both electricity production and for transportation
can dampen the impact of sharply rising prices, and thus provides
an energy security benefit.
A second major benefit of alternative energy is that some
alternative energy sources have a lower environmental impact
than traditional fossil fuels. At the point of generation, wind,
nuclear, hydropower, and solar sources produce no local air
pollution, such as sulfur dioxide (SO2) and nitrogen oxides (NOx).
Also, depending on the fuel and technology used, alternative energy
can reduce CO2 emissions. In 2006, the United States emitted
approximately 5.9 billion metric tons of energy-related CO2, almost
73 percent of which were generated by fossil fuel use for
transportation and electricity generation. Approximately one-third
of all energy-related CO2 in the United States came from petroleum
use in the transportation sector and 38 percent came from coal and
natural gas used to generate electricity (see Chart 7-3).
Appropriately chosen alternative energy sources in the
transportation and electricity generation sectors may help
reduce these emissions.
A third potential benefit of alternative energy is that some
believe that it may eventually compete with or cost less than
fossil fuels. It is worth noting, however, that reduced energy
cost, whether achieved through improved energy efficiency or
less expensive energy supply, will result in increased energy
demand, a phenomenon known as the rebound effect. For example,
the Department of Transportation sets mandatory Corporate Average
Fuel Economy (CAFE) standards for passenger cars and light trucks.
When fuel efficiency standards are raised, vehicles use less
gasoline per mile; but, because


the increased fuel efficiency reduces the cost of driving,
people drive more. This  leads to less gasoline savings
than implied by the change in fuel efficiency. The
economic literature puts the rebound effect between 10
percent and 20 percent, which means that a 10 percent
improvement in fuel efficiency would actually only produce
an 8 to 9 percent improvement in energy consumption.

Alternative Energy Production
While some of the electricity produced in the electric power
sector is generated using alternative energy sources, the
majority (71 percent) is generated from fossil fuels. In
the transportation sector, almost all of the energy consumed
comes from fossil fuels. Developing alternative energy
sources in these two sectors could move us down the road
to enhanced energy security and lower pollution.

Alternatives for Generating Electricity
In the United States, electricity is generated using a wide
variety of energy sources, both traditional and alternative.
One factor affecting which type of electricity plant will be
built at any given time is economics: which energy source
will produce the greatest economic return over the lifetime
of the plant. However, it is difficult to compare plants
that differ in both cost and generation capacity. One way
to assess this economic return is to compare the levelized
cost of electricity (LCOE)-the present value of the total
cost of building and operating a generating plant over its
financial life, converted into equal payments and amortized
over the expected annual generation from the plant. Table
7-1 provides the estimated national average LCOE for various
types of electricity generating plants entering service in
2015. The final column of Table 7-1 gives the national
average total system LCOE, while the four columns prior to
the last give the components that make up this total system
cost.
Conventional coal-fired power plants have an average real
LCOE of approximately $61 per megawatt hour produced, which
is the lowest cost of all electricity generation methods
presented. Natural-gas combined cycle plants have an average
LCOE of between $65 and $68 per megawatt hour produced, and
are closely competitive with coal-fired power plants. On an
average LCOE basis, alternative energy based electricity
generation is more expensive than both coal and natural
gas-based plants, which partially explains their lack of
penetration in the market.
The LCOE, however, is not the only consideration in choosing
which type of plant to build. Because the demand for electric
power varies by time of day and season and because electricity
is difficult to store, plants may


be designed to provide base load power (a constant
supply of power), peak load power (when demand is
the highest), or to serve as "merchant" plants, selling
electricity in the commercial market when it is profitable
to do so. The second column in Table 7-1 gives the average
capacity factor, which is the ratio of the actual energy
produced in a given period to the hypothetical maximum
energy output of the plant. While natural gas combustion
turbines have a lower capacity factor and a higher LCOE
than other fossil fuel based plants, they are attractive
as peak load or intermediate load (between base load and
peak load) plants. Additionally, fuel prices vary regionally
due to transportation costs and resources.
Other factors may also be important in determining what
type of plant is built. For example, many states have
renewable portfolio standards that require minimum additions
to capacity from renewable electricity technologies and there
may be tax incentives for alternative energy power generation.
The values in Table 7-1 do not reflect these factors. Power
producers may also consider environmental factors that could
affect technology investment decisions. These considerations
may depend on a regulatory environment that differs
substantially in different regions of the country. Investors
may be concerned that future policies could increase the cost
of coal or make it more difficult to dispatch coal-fired power.
Finally, LCOE estimates are subject to additional uncertainty
not discussed here. For example, actual fuel prices may differ
from those assumed for the LCOE estimates. The "best" power
generation technology may vary throughout the country, but the
LCOE gives some indication of the relative cost of various
types of electricity generating plants.

Nuclear Power

There are currently 104 commercial nuclear power reactors in
the United States, and they generate approximately 20 percent
of the Nation's electricity. While the United States has the
largest nuclear capacity of any nation, no new commercial
reactor has been ordered and approved for construction since
1978, and all of the plants ordered after 1973 have been
cancelled. The last plant to come online was the Watt's Bar
reactor in Tennessee in 1996. Despite this, the total nuclear
capacity per plant in the Nation has increased over time due
to uprating, a process by which a plant is upgraded and then
a more highly enriched fuel and/or a higher percentage of new
fuel is used to generate more power. The Nuclear Regulatory
Commission (NRC) has approved 114 power uprate proposals to
date and is currently reviewing 13 additional uprate proposals,
which would add an additional 1,220 megawatts of electric power.
According to NRC, they could receive 24 additional applications
for power uprates by 2012. However, there is a limit to our
uprate potential, and more reactors will be needed if the
United States chooses to get more of its electricity from
nuclear power plants. To date, the NRC has received applications
for 4 units and a partial application for a fifth unit, and
expects to receive applications for as many as 32 units over
the next three years. However, there is no requirement that a
reactor be built for every license granted.
One advantage to nuclear power is that it has low operating
cost, so the cost differential between limited output and full
capacity is small. These plants operate at close to full
capacity and provide a reliable base load, which is a constant
supply of the electricity to power lines. Another advantage of
nuclear power is that it can produce power using a relatively
small amount of fuel without producing air pollutants or CO2
emissions.
A few of the disadvantages to nuclear power include the length
of time required to build a new plant, high capital costs,
and the cost of liability insurance. In addition to these
economic disadvantages, nuclear power faces a number of
obstacles including social opposition to its use, partially
due to fears generated from the partial meltdown of the core
of the power plant at Three Mile Island in 1979 and the
disaster at the Chernobyl nuclear power plant in Ukraine in
1986, as well as additional safety concerns. There is also
concern about the current lack of long term storage for the
radioactive waste generated that must be properly contained
for centuries. In 2002, the President signed a resolution to
allow for the storage of nuclear waste at Yucca Mountain in
Nevada. The facility is expected to begin accepting waste in
2017, although limits on funding the facility have in the past
delayed the opening and may do so again in the future.
Additionally, the Nuclear Waste Policy Act limits the amount
of waste that can be stored at the facility to 63,000 metric
tons of commercial spent nuclear fuel, and it is estimated that
the commercial nuclear facilities currently operating in the
United States will produce this much spent fuel before 2017.
Unless the capacity at Yucca Mountain is increased by statute
or a second site is opened, we will face challenges in storing
the commercial spent nuclear fuel generated from nuclear plants.
One possible solution to the storage issue is nuclear recycling.
Virtually all of today's nuclear power is generated in an
"open fuel cycle" in which enriched uranium fuel is used once
and then disposed of. However, only part of this fuel is
actually consumed in the process and the residual still has
potential energy. Spent nuclear fuel can be recycled to recover
some of this remaining energy, and this is done in several
nations. A second type of nuclear plant using an ``advanced
burner reactor'' can be designed to consume the residual,
producing a ``closed fuel cycle'' process. It is important,
however, that any such recycling program be implemented in
such a way so as not to produce weapons-grade nuclear material.
This is the central goal of the Global Nuclear Energy
Partnership (GNEP) announced by the President in the 2006
State of the Union Address.

Hydropower
Hydropower, which is used almost exclusively to generate
commercial electricity, is the largest renewable energy
source used by the electric power sector. In 2006, the United
States consumed 2.9 quadrillion Btu of conventional hydroelectric
power, about 42 percent of all renewable energy consumption.
The State of Washington generates the most hydropower among
all states, followed by California, Oregon, and New York.
Hydropower works by powering turbines with either the force
of the current or the fall of water from a reservoir or dam.
The advantage of hydropower is that it is a well-understood
renewable power source that can supply both peak load demand,
by reserving available water for high value periods, as well
as base load demand. Hydroelectric plants do not produce air
emissions and there are some positive externalities associated
with them because the reservoirs and dams can provide
irrigation benefits, recreational opportunities, and flood
control. However, hydropower also produces negative ecological
effects. Hydropower's largest disadvantages are its negative
impact on the surrounding environment, low dissolved oxygen in
the water, impacts on the fish and the riverbank habitat, and
alteration of fish migration corridors (e.g. salmon runs).
Even if the environmental concerns are removed, however, there
is limited ability to expand hydropower beyond what is currently
available. The total U.S. hydropower capacity, including
pumped storage facilities, is about 98 gigawatts, and the
Department of Energy estimates that there are only 30 gigawatts
of undeveloped capacity remaining in the entire 50 states.

Biomass
Biomass is organic material from plants and animals,
such as wood, crops, manure, and some garbage, and is second
only to hydroelectric power in providing renewable electricity
to the United States. Biomass, excluding biofuels, makes up
about 2.5 percent of the Nation's total energy consumption and
comprises almost 37 percent of the total renewable energy
consumption in the country. Sixty-four percent of this biomass
is used directly by the industrial sector to generate power.
Only a small portion is used by the power sector to generate
electricity.
The main advantage to biomass is that it is a renewable
source of energy that can be used either as a dedicated
fuel to generate electricity or can be co-fired with other
fossil fuels. Compared with coal, biomass produces fewer
CO2, SO2, and NOx emissions. If biomass is grown
specifically for electricity generation, in a closed
loop system, then the only CO2 emissions come from the
harvesting, transportation, and processing operations.
The main disadvantage to electricity generation using
biomass is that it currently has an average LCOE above
generation using fossil fuels. This is due to a number
of factors, including the cost of obtaining the raw
material. Also, biomass energy consumption is
technically not a zero-emission process.

Geothermal Power
Geothermal energy is contained in underground
reservoirs of steam, hot water, and hot dry rocks.
Large geothermal power plants use this energy to
generate electricity by drilling below the earth's
surface in order to release or produce steam, which
is used to power turbine generators. After the steam
condenses, the water can be injected back into the
ground to be used again. Geothermal energy currently
makes up about 5 percent of the total renewable
production of the country, but it only supplies about
0.4 percent of the Nation's electricity. It is
considered an attractive resource because it requires
a relatively small plant footprint, requires no storage,
has no fuel costs, and can provide continuous base load
power. A study by the Government Accountability Office
reports that there are at least 400 undeveloped wells
and hot springs with potential for future electricity
production.
Geothermal power, however, is limited in its ability to
provide large amounts of electricity to the country. To
be viable, geothermal power requires access to permeable
rock systems filled with steam or water at temperatures
from 300 to 700 degrees. Sites that meet these conditions
are much more prevalent on the West Coast than in other
parts of the country. Also, geothermal sites can produce
some local pollutants and small amounts of CO2.

Wind Power
Wind power supplies about 4 percent of our renewable energy and
less than 1 percent of the Nation's electricity, a small percentage
compared to large wind users such as Denmark, Spain, Portugal,
and Germany. However, the use of wind power in the United States
is on the rise, and appears to be poised for dramatic increases in
the future. In 2006, wind capacity increased by 29 percent, and the
United States has led the world in capacity additions in recent
years. An estimated 4 gigawatts of wind capacity were added in
2007. This growth is due to the fact that, in some areas, wind is
now cost competitive with other sources of energy production,
largely because of a government tax credit of 1.9 cents for each
kilowatt hour produced (not reflected in Table 7-1).
Wind power is desirable because it is a domestic source of power
with no fuel costs or emissions. It has become increasingly popular
for two reasons. First, the current generation of windmills produces
more power from a given wind resource than past technologies. The
amount of electricity generated from a windmill is determined by a
number of factors including the turbine size and the capacity factor.
The size of the turbine dictates the potential output of the windmill,
and the average turbine size has approximately doubled since 2000 to
about 1.6 megawatts. The windmill's capacity factor is its actual
energy output divided by its potential output. The average capacity
factor has shown substantial improvement and is now roughly
35 percent. Second, windmills are increasingly popular because they
can be placed on farms, providing a source of lease income, without
having a large impact on the surrounding farming activity.
The ability of wind power to grow as an alternative energy source
is affected by a number of factors. First, the capacity factor is
very sensitive to the average wind speed and it can drop dramatically
for sites with less optimal wind profiles, meaning less electricity
from each windmill. Second, to maximize the market potential,
wind-generated electricity must be integrated with the overall
power grid, the system of power lines and transformers that
distribute electricity. When wind farms are located in rural areas,
some electricity is lost during the transmission to homes and
businesses. In addition, since wind energy is generated only when
the wind blows and the electricity cannot be economically stored
at this time, wind is an intermittent energy source. Finally,
there is some public opposition to wind power. Because of the height
of the turbine, wind plants produce a large visual footprint, and
there is a potential effect on migratory bird and bat populations.

Solar Power
Solar power has captured the imagination of alternative energy
advocates and lends itself to creative demonstration projects like
the installation of solar panels on the roof of the West Wing of the
White House. Solar power is attractive because its output closely
aligns with peak electricity demand. The fact is, though, beyond some
niche markets, solar power is not yet an economically competitive
method of supplying large amounts of electricity. Solar power currently
comprises 1 percent of the total renewable energy production and it
produces a negligible amount of the Nation's electricity. This is
largely because solar power has a levelized cost of electricity above
other energy sources.
Solar power generation generally comes in two forms: photovoltaic and
thermal. Photovoltaic generation involves the direct conversion of
light energy into electricity through the use of semiconducting
material like silicon. This technology already has some commercial
success for low-power devices like calculators and emergency phones,
but is a relatively expensive method of producing large amounts of
electricity. At present, photovoltaic generation is generally used
when grid connection is difficult or impossible, such as for
satellites. However, progress has been made in reducing the cost
and improving the efficiency of silicon-based photovoltaic cells
as well as newer, thin-film technologies. Photovoltaics can be
used for distributed electricity generation at homes and businesses,
and may eventually serve as an alternative to bulk power provided by
the electricity sector.
Solar thermal devices use direct heat from the sun, concentrating it
in some manner to produce heat. Solar power plants focus heat in
troughs, dishes, or large power towers to generate electricity, in
what is called "concentrating solar power" (CSP) technology. If
combined with thermal storage, CSP could reduce the problem of an
intermittent power supply. However, currently, CSP plants are expensive.
They also require a large amount of space and are considered
aesthetically unappealing by some, and thus could be sited away from
population centers. This means that there would be transmission losses
in moving the electricity to population centers.

Summary of Alternatives for Generating Electricity
There are many alternative sources of energy for generating electricity.
Some of them are more promising than others due to costs and other
technological barriers. Nuclear power's LCOE is closest to coal and
natural gas production and is currently best suited to produce large
amounts of electricity without using fossil fuels, but it requires
large and expensive plants and is often socially unpopular.
Hydropower currently provides the majority of the Nation's renewable
electricity production, but it is very limited in its ability to
expand. Biomass, geothermal, and wind power are close to economically
competitive with nuclear and fossil fuel production and have the
potential for expanded use, provided that the constraints described
above can be overcome. Finally, while solar power is currently an
expensive way to produce large amounts of electricity, it could be
an important source of alternative energy if costs can be reduced.

Alternatives for Transportation
Twenty-eight percent of the energy consumed by the United States
is used for transportation: cars, trucks, planes, trains, and ships.
Unlike the energy used to generate electricity (of which 31 percent
is generated using non-fossil fuels), transportation relies almost
entirely on petroleum-derived fuels. As with electricity generation,
a great emphasis has been placed on finding alternative
transportation fuel sources for both energy security and
environmental reasons.
One solution is to find an alternative fuel to use in our cars and
trucks. At present, corn-based ethanol is the largest alternative
fuel source, but other fuels, like biodiesel, are also available.
Our current vehicle fleet can burn a gasoline mixture containing
up to 10 percent ethanol without any modification; flexible fuel
vehicles are already being sold that can operate on 85 percent
ethanol; and other alternative fuel vehicles, such as natural
gas-powered vehicles, have long been used in niche markets. In
addition, investments in second generation biofuels, like
cellulosic technologies to convert non-food crop residues,
grasses, and forest biomass, are on the rise.
Another alternative energy solution for transportation is to
design a different type of car. Hybrid vehicles are part of
the current car stock, but other advanced technologies are
under development including hydrogen-powered vehicles and
plug-in hybrids that would allow consumers to charge on-board
batteries and achieve a limited range using electricity.

Corn-Based Ethanol
Ethanol is a fuel made from grains and biomass that can be
used as a gasoline supplement for automobiles. By far, the
most common raw material or feedstock used to produce
ethanol in the United States is corn. Since 1978 major
manufacturers of fuel tanks have provided the same warranties
for use of both unblended gasoline and ethanol blends up to
E10 (10 percent ethanol and 90 percent gasoline). Flex-fuel
vehicles (FFVs) can use blends containing more than 10 percent
ethanol, such as E85, and auto manufacturers can produce FFVs
at only a small additional cost. In 2007, of a total 229
million light-duty cars and trucks on the road, an estimated
5.5 million were FFVs, and this portion will likely grow. It
is estimated that by 2030, approximately 10 percent of the
total U.S. car and truck sales will be FFVs. However, of
approximately 170,000 fueling stations in the United States,
only 1,183 offer E85, so flex-fuel vehicles have a harder time
locating stations offering this fuel.
Ethanol has a number of advantages over oil. First, it is
domestically produced, so its use decreases the impact from
a disruption in the oil market. Second, the production of
ethanol releases less carbon monoxide emissions (but can
increase other pollutants such as nitrogen oxides and non-exhaust
volatile organic hydrocarbon) than gasoline use. Finally,
depending on how it is produced, ethanol may reduce CO2
emissions.
Since January 1999, annual ethanol production has increased
more than 300 percent, from 1.5 billion gallons to an estimated
6.3 billion gallons in 2007. Including new and expanding plants,
one industry group estimates that the United States may soon have
the capacity to produce more than 13 billion gallons of ethanol
annually. Four major factors have driven the dramatic growth in
this market. First, high oil prices have increased the demand for
an alternative fuel. While ethanol has one-third less energy content
than gasoline, oil prices are high enough for ethanol to compete
with gas on an energy-equivalent basis. However, as oil and ethanol
prices move, so will the significance of this factor. Second, the
elimination of MTBE-a gasoline additive used to produce cleaner
fuel in cities with smog problems that was found to contaminate
groundwater-has increased the demand for ethanol as a substitute
oxygenating agent. Third, there are financial incentives for ethanol
production. There is a 51-cent per gallon Federal tax credit for
blending ethanol into gasoline (and an associated 54-cent per gallon
tariff on imported ethanol) and additional subsidization in some states.
Finally, the Energy Policy Act of 2005 mandated the use of 7.5 billion
gallons of renewable fuel by 2012, much of which was expected to
be met with ethanol. The recently passed Energy Independence and
Security Act of 2007 increases this mandate to 36 billion gallons
of renewable fuel by 2022, which will likely increase the
demand for ethanol.
There are a number of concerns about ethanol. First, some worry
that production will outstrip the capacity to blend ethanol into
the gasoline supply. (See Box 7-2) Second, the current oil pipeline
infrastructure is not capable of transporting ethanol, so it must be
shipped by truck, train, and barge. To remain cost competitive,
ethanol plants are generally located within 50 miles of where the
corn is grown. Ninety percent of the productive capacity is in eight
Midwestern States while 80 percent of the U.S. population (and thus,
the ethanol demand) lives along the coastline. Rail transport capacity
from the Midwest to the coasts is limited, and dedicated ethanol barges
(to move ethanol from the Midwest to the Gulf Coast) will take time and
money to construct. Third, there are environmental concerns about
ethanol production depleting groundwater aquifers and water pollution
from fertilizers used to grow crops for biofuels. Finally, there are
fiscal concerns, particularly the cost of the 51-cent per gallon
blender's credit.
The growing demand for corn-based ethanol as fuel is affecting the
overall corn market. Most of the adjustment will take place over
the next couple of years, as corn-based ethanol production responds
to market signals. Over time, other markets will adjust to higher
corn demand, and ethanol substitutes will come online. The Department
of Agriculture estimates that acres of planted corn increased to 93.6
million in marketing year 2007/08 and corn production increased to
13.1 billion bushels, an increase of almost 24 percent from
marketing year 2006/07. Corn prices are also projected to rise
to as much as $3.75 per bushel by 2009/2010 before stabilizing,
and the U.S. share of global corn trade is projected to fall to
less than 60 percent.
Increased production of ethanol will also affect other crops,
particularly soybeans because it competes with corn for cropland.
Land devoted to soybeans is expected to decrease from 71 million
acres now to 69 million acres by 2009/2010, and the price of
soybeans is expected to rise from $5.66 per bushel in 2005 to
$7.30 by 2009/2010 before stabilizing. Livestock production
will also face higher costs as grain prices rise and the price
of its final product (meat, eggs, and milk) will follow. Corn
farmers will obtain higher
---------------------------------------------------------------------
Box 7-2: The Blend Wall

In the United States, nearly all of the ethanol produced is blended
into E10 fuel. In 2005, nearly 4 billion gallons of ethanol were
blended into 137 billion gallons of gasoline. By 2007, ethanol
production is estimated to have grown to 6.3 billion gallons,
and the total capacity could eventually reach 13 billion gallons
per year. Some worry that production will ultimately outstrip the
capacity to blend ethanol into E10. (By definition, ethanol cannot
exceed 10 percent of the gasoline pool if it is blended exclusively
into E10.) This limit to the use of ethanol (basically, where
ethanol supply exceeds demand) is referred to as a "blend wall."

There are a number of reasons why the blend wall is unlikely to pose
a significant problem. The United States consumes around 140 billion
gallons of gasoline per year, meaning that almost 14 billion gallons
of ethanol can be used for E10 alone. In addition, if all existing
FFVs used E85, they would consume an additional 3.5 billion gallons
of ethanol. Therefore, the total potential demand for ethanol
blending is currently around 17.5 billion gallons, and this amount
will grow as more FFVs are produced. Even extrapolating the rapid
growth in ethanol production, potential demand is well above the
production capacity. As the supply of ethanol grows (reducing the
price of ethanol) or as the price of oil rises, ethanol looks
increasingly attractive compared to oil, and more trucks and rail
cars will be devoted to distribution and more E85 pumps will be
installed in order to capture the profits of an economically
valuable commodity.
---------------------------------------------------------------------
prices for their products, but livestock producers will
face higher production costs; and government counter-cyclical
payments and market loans will likely decrease due to
higher commodity prices. On net, however, it is likely
farm incomes will rise as consumer prices rise.

Cellulosic Ethanol

Cellulosic ethanol is similar to corn-based ethanol, but it
can be produced from a variety of biomass feedstocks such as
agricultural plant wastes, industrial plant wastes (such as
sawdust and wood pulp), and crops grown specifically for fuel
production (such as switchgrass). Because cellulosic ethanol
can come from a variety of raw materials, it can be produced
in nearly every region of the country and has the potential
to supply more fuel per acre than corn. Cellulosic ethanol
production also produces less greenhouse gas (CO2, methane,
and nitrous oxide) emissions than either gasoline or
corn-based ethanol.
While clearly desirable from both an energy security and an
environmental perspective, cellulosic ethanol is not yet
commercially available because the conversion technology is
only in its introductory stages and is expensive. There are
currently no commercial cellulosic ethanol refineries in
operation in the United States, but the Department of Energy
has announced that it will invest $385 million over the next
four years in a cost-sharing program with private companies
to fund six biorefinery projects located in California,
Georgia, Florida, Kansas, Idaho, and Iowa. By 2012, these
refineries are expected to produce 130 million gallons of
cellulosic ethanol each year at less than $2 a gallon.

Biodiesel
Biodiesel is a renewable fuel that can be made by chemically
combining natural oils and fats with an alcohol. It can be
used by vehicles that use diesel fuel, and it is typically
blended with petroleum diesel at levels up to 20 percent.
Most U.S. biodiesel is made from either soybeans or yellow
grease from restaurant cooking oil. Like ethanol, biodiesel
is a domestically produced fuel and, depending on how it is
produced, its use generates about two-thirds less greenhouse
gas emissions than petroleum-based diesel. At present,
however, it is economically viable only because of a $1 per
gallon tax credit for blending biodiesel from virgin oil (oil
in its first-use) and a $0.50 per gallon credit for blending
with recycled oil.

Alternative Vehicles
An alternative to developing new fuels is to develop a
different type of car that uses less gasoline. Two such
vehicles currently exist. Conventional hybrid vehicles combine
the internal combustion engine of a standard vehicle with the
battery and electric motor of an electric vehicle. This gives
them the power, range, and convenient fueling of conventional
vehicles, but lower emissions and better gas mileage. Hybrid
passenger cars first became available in the United States in
2000 and have gained an increasing share of the U.S. car
market, growing to 2.1 percent of the U.S. car sales in 2007.
Part of this is due to a tax credit introduced in 2006 for
purchasing a hybrid vehicle. This credit of up to $3,400
varies by model and is based on both the lifetime fuel
savings and the fuel efficiency of the car measured against
a 2002 baseline. However, in order to limit cost to the
taxpayer while providing incentive to multiple automakers,
this tax credit is phased out for each car manufacturer once
it has sold over 60,000 eligible vehicles. A number of
manufacturers have already reached this limit.
A second type of alternative vehicle is one powered by natural
gas. Though major auto makers sell natural gas-powered cars in
Europe, Asia, and South America, they have not sold well in
the United States. There are about 150,000 natural gas vehicles
in the United States (compared to 5 million worldwide), most
of which belong to corporate or government fleets. The low
demand for these vehicles is due, in part, to a shorter driving
range, smaller trunks due to larger fuel tanks, and a lack of
retail stations selling natural gas. However, increased use of
natural gas-powered vehicles could both provide both greater
fuel diversity and lower CO2 emissions.

Plug-in Hybrids
Plug-in hybrid cars are a different type of vehicle that has
the potential to both improve energy security and decrease
pollution. Unlike conventional hybrids, which only recharge
the electric battery through braking recovery, a plug-in hybrid
is also charged with electricity delivered to the home or
business. As a consequence, the vehicle can displace gasoline
consumption with electricity that it draws from the grid. Some
models under development would run on electricity for about 40
miles. Since 50 percent of personal automobiles travel 20 miles
or less daily, plug-in hybrids may consume substantially less
gasoline than a conventional hybrid. A recent study suggests
that if plug-in hybrids were to be widely adopted and powered
with low-carbon generated electricity, they could mitigate a
large portion of the Nation's CO2 emissions
from transportation.
The major hurdle to the commercialization of the plug-in hybrid
vehicle is the battery. Technology barriers include the battery
cost, size and weight, power density, durability, reliability,
and safety. With continued improvements, however, plug-in hybrids
could eventually become commercially feasible.

Hydrogen-Based Fuel Cell Vehicles
Hydrogen can be used as a fuel with its chemical energy converted
to electricity in a fuel cell. Pressurized hydrogen gas is forced
through a catalyst and is split into positively charged hydrogen
ions and electrons. The hydrogen ions are combined with oxygen to
form water and the electrons are used to generate electricity.
There are many possible uses of fuel cells, including primary
electricity generation from stationary fuel cells, as well as
hydrogen-based fuel cell vehicles. In a fuel cell vehicle, a
series of fuel cells generate electricity to power the car's
electric motor, and there is no exhaust other than water vapor.
Since hydrogen can be produced domestically, fuel cells could
provide domestically-fueled vehicles that produce no CO2 or
other harmful emissions from the tailpipe.
While hydrogen has great potential as an alternative fuel,
it does face some limitations. Currently, it is more expensive
than other energy sources. Production, storage, and delivery
are the largest cost categories associated with hydrogen-based
energy. Hydrogen can be produced in small quantities where it
is needed, such as at a vehicle refueling station, but the
production cost can be high. In contrast, larger, centralized
facilities can produce hydrogen at a lower cost, but the
delivery costs are high. Additionally, the full infrastructure
has not been built to accommodate hydrogen fuel, and there are
safety concerns with hydrogen pipelines and dispensing systems.

Summary of Alternatives for Transportation
While the United States currently blends corn-based ethanol,
the transportation sector still depends on petroleum as its
primary energy source. Changes to either the fuel we use or
the vehicles themselves will be necessary if we are to
substantially reduce this dependency. On the fuel side, we
can reduce our reliance on oil by developing alternative fuel
like cellulosic ethanol and biodiesel. On the vehicle side,
we can develop vehicles that simply do not require gasoline,
such as plug-in hybrids or hydrogen-fueled vehicles. Done
carefully, these measures will not only enhance energy security
but could also reduce CO2 emissions.

The Road Forward
What we do over the next few years will dictate how quickly
we can move away from fossil fuel consumption. The Energy
Information Administration projects that, absent any
additional action, primary energy consumption in the
United States will increase 24 percent to 123.8 quadrillion
Btu by 2030, an average annual increase of 0.9 percent per
year. Total consumption of coal is projected to grow from
1,114 short tons in 2006 to 1,682 short tons in 2030.
Natural gas is expected to increase from 21.8 trillion
cubic feet in 2006 to 23.4 trillion cubic feet in 2030.
Total consumption of liquid fuels and other petroleum
products is projected to grow from 20.7 million barrels per
day in 2006 to 24.9 million barrels per day in 2030. Total
electricity sales are projected to grow from 3,821 billion
kilowatt hours in 2006 to 5,149 billion kilowatt hours in
2030, an average annual increase of 1.3 percent.
Some alternative energy will enter the market as a result
of market prices, and as the market fluctuates there will be
additional economic incentives to diversify our energy
portfolio. If research and development leads to lower renewable
energy prices, then sources such as wind power and geothermal
energy may eventually become fully cost competitive. Fuel
efficiency is expected to increase not only as a result of
an increase in the Corporate Average Fuel Economy standards,
but also due to price-driven consumer demand and the
introduction of more advanced vehicles into the market.
Combined total consumption of marketed renewable fuels
(including ethanol for gasoline blending) is projected to
grow from 6.8 quadrillion Btu in 2006 to 11.5 quadrillion Btu
in 2030, with ethanol consumption growing especially rapidly.
However, for alternative energy to dramatically penetrate the
market, technological and other hurdles must be overcome.

Policy Tools
There are a number of policy tools available to any administration
interested in promoting alternative energy and enhancing energy
security. The traditional approach is to use research and
development grants to subsidize the development of new technologies
that are then adopted by the private sector. An alternative is to
establish a mandate, through legislation or regulation, and require
the private sector to meet it. While both approaches may be useful
for advancing the adoption of alternative energy, some worry that
these approaches dictate which technology must be adopted. Also,
while mandates do not involve direct government expenditure, they
are not free. Consumers may have to pay higher prices for some
alternative energy in order for the United States to receive the
energy security and environmental benefits.
Another approach is to try to overcome the cost gap between
conventional and more expensive alternative sources. This can be
done through either tax credits or subsidies equal to the cost
differential between the two technologies. In either case, there
is a public cost either directly through the subsidy or indirectly
through the revenue loss on allowed credits. Loan guarantees are
another possible tool that can encourage investment by shifting risk
to the government, but at the price of some moral hazard: if the
government assumes too much of the financial risk, investors may
take on highly speculative projects that have little hope of
success, shifting the cost onto the Federal taxpayers.
Market-based mechanisms such as cap-and-trade and Pigovian
taxes are another possible way to encourage the switch to
alternative energy, provided that these programs are workable
and can meet the desired objective. Cap-and-trade programs
dictate the total permissible emissions or total input desired
(the cap) and allow companies to trade the right to make those
emissions or produce those quantities (the trade). Trading
assures that the desired outcome will be achieved at the lowest
cost. For example, the Renewable Fuels Standard (RFS) set in 2005
required that 7.5 billion gallons of gasoline be replaced with
renewable fuel by 2012. Obligated parties were to demonstrate
compliance with the program by acquiring credits (called renewable
identification numbers (RINs)) representing the amount of
renewable fuel blended into conventional gasoline or used in
its neat (unblended) form. Under the trading program, however,
obligated parties could purchase these credits from other obligated
parties rather than acquire them themselves.
An alternative approach is to set a fixed fee (sometimes called a
Pigovian tax) for each unit of the traded good. This is theoretically
equivalent to a cap-and-trade program when the costs and benefits of
the program are known. A hybrid approach is a cap-and-trade program
with a safety valve, in which the trading of credits occurs normally,
but obligated parties can choose to pay a fee (the safety valve) to
demonstrate compliance rather than trading. In 2007, the President
proposed that the 2005 RFS be increased to 35 billion by 2017, but
proposed an automatic safety valve to protect against unforeseen
increases in the prices of alternative fuels or their feedstock.
One final policy tool that has shown occasional promise is the
use of inducement prizes. When a specific goal is known, the
government may choose to award a prize for successfully
reaching this goal as a way to spur technological innovation.
For example, the government could offer a prize for overcoming
the technical barriers associated with the commercialization of
hydrogen and fuel cells. Prizes are desirable because they focus
on rewarding the actual achievement of the goal using whatever
technology gets to the solution first, whereas subsidies, grants,
and contracts might only be dispersed to existing technology.

Current Efforts
Diversifying our energy sources and fuels will not come quickly or
cheaply and may require incentives for some of the alternative
energy options discussed in this chapter. Over the past several
years, there have been a number of successful programs promoting
alternative energy. In 2006, the President announced his Advanced
Energy Initiative, which called for a 22 percent increase in
funding for clean-energy research and a significant reduction in
our oil imports over time.
To help meet the growing demand for base load electricity generation,
there are a number of programs aimed at expanding nuclear energy.
The Nuclear Power 2010 program is a joint government and industry
effort to develop advanced nuclear plant technology and reduce the
technical, regulatory and institutional barriers to the deployment
of new nuclear power plants. The United States is also part of two
broad international efforts related to the development of nuclear
power. The Generation IV International Forum is a cooperative effort
to develop competitively priced nuclear energy systems that address
nuclear safety, waste, proliferation, and public perception concerns.
The goal is to have these systems available for international
deployment by 2030. The Global Nuclear Energy Partnership is a
group of nineteen countries that seek to expand the use of nuclear
energy for peaceful purposes through a proliferation-resistant closed
nuclear fuel cycle. Under this program, nations with secure, advanced
nuclear capabilities would provide fresh fuel and reprocessing
services to other nations who agree to employ nuclear energy for
power generation purposes only.
Other efforts are aimed at improving electricity generation from
renewable sources. The Department of Energy's Wind Energy Program is
focused on the development of technology to make wind power
cost-competitive in various areas of the country and to help reduce
the barriers to electric grid interconnections. The goal of the
Solar America Initiative is to make solar energy cost-competitive
with conventional forms of electricity by 2015.
Finally, the recently passed Energy Independence and Security Act
of 2007 takes a significant step in the direction of implementing
the President's Twenty in Ten plan, which was aimed at reducing
domestic gasoline consumption by 20 percent in 10 years. Under this
Act, mandatory fuel standards require the production of 36 billion
gallons of renewable and alternative fuels by 2022. Also, the
Corporate Average Fuel Economy standards will be raised to 35 miles
per gallon by 2020, a 40 percent increase from the present level.
Because fuel economy standards reduce oil consumption directly
(including the rebound effect) and renewable fuels are produced
domestically and may generate less CO2 than oil, both of these
measures produce energy security and environmental benefits.

Conclusion
Both energy security and environmental concerns motivate the
consideration of policies that move toward alternative energy
sources. Currently, 85 percent of our energy consumption comes
from fossil fuels, and energy consumption is projected to
increase 24 percent by 2030. This means that the incentive
to find alternative energy solutions is growing.
Fortunately, some solutions exist. With regard to electricity
generation, nuclear power is close to cost competitive and
could contribute a larger share to our Nation's energy portfolio.
Even though there are some constraints on their use, we should
utilize our biomass, geothermal, and wind energy potential where
it is economically viable. On the horizon, technological advances
and cost reductions might bring in solar power. With regard to
transportation, corn-based ethanol and other alternatives
already reduce our gasoline consumption. The introduction of
cellulosic ethanol in the next few years could reduce it further.
In the longer term, introducing new vehicles like plug-in hybrids
and hydrogen-based fuel cell cars could dramatically reduce our
oil consumption. While none of these solutions can resolve fully
our energy security and environmental concerns, together, they
provide a potential portfolio of solutions to our search for
alternative energy.