    Department of Energy: Key Challenges Remain for Developing and
    Deploying Advanced Energy Technologies to Meet Future Needs
    (20-DEC-06, GAO-07-106).

    Despite periodic price shocks and related energy crises, the
    United States is even more dependent on crude oil and natural gas
    than it was almost 30 years ago. And, without dramatic change,
    the nation will become ever more reliant on imported oil and
    natural gas with attendant threats to national security. The
    nation has also become concerned about global warming, which has
    been linked to carbon dioxide emissions from burning coal and
    oil. To address these concerns, the Department of Energy (DOE)
    has funded research and development (R&D) on advanced renewable,
    fossil, and nuclear energy technologies. GAO examined the (1) R&D
    funding trends and strategies for developing advanced energy
    technologies, (2) key barriers to developing and deploying
    advanced energy technologies, and (3) efforts of the states and
    six selected countries to develop and deploy advanced energy
    technologies. GAO reviewed DOE R&D budget data and strategic
    plans and interviewed DOE officials and scientists, U.S. industry
    executives, independent experts, and state and foreign government
    officials.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-106
        ACCNO:   A64346
      TITLE:     Department of Energy: Key Challenges Remain for
    Developing and Deploying Advanced Energy Technologies to Meet
    Future Needs
         DATE:   12/20/2006
      SUBJECT:   Alternative energy sources
    	     Budget authority
    	     Cost analysis
    	     Crude oil
    	     Energy conservation
    	     Energy consumption
    	     Energy costs
    	     Energy industry
    	     Energy legislation
    	     Natural gas
    	     Nuclear energy
    	     Renewable energy sources
    	     Research and development
    	     Tax expenditures
    	     Policies and procedures
    	     Supply and demand

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    GAO-07-106

         * [1]Results in Brief
         * [2]Background
         * [3]DOE's Budget Authority for Renewable, Fossil, and Nuclear En

              * [4]DOE's Budget Authority for Renewable, Fossil, and Nuclear En
              * [5]DOE's Renewable R&D Focuses on Innovations in Ethanol, Wind,

                   * [6]Ethanol
                   * [7]Wind
                   * [8]Solar
                   * [9]Hydrogen
                   * [10]Geothermal
                   * [11]Hydropower

              * [12]DOE's Fossil R&D Program Has Focused on Reducing Harmful Emi

                   * [13]Coal

              * [14]Oil and Natural Gas
              * [15]DOE's Nuclear R&D Goals Recently Have Focused on Restarting

         * [16]Advanced Renewable, Fossil, and Nuclear Energy Technologies

              * [17]Renewable Energy Technologies Face a Variety of Technical an

                   * [18]Ethanol
                   * [19]Wind and Solar

              * [20]Barriers to Advanced Fossil Technologies Include Harmful Emi
              * [21]Advanced Nuclear Energy Technologies Face Uncertainty about

         * [22]The States and Countries We Reviewed Have Implemented a Vari

              * [23]States Are Stimulating Renewable Energy through Standards, M
              * [24]Some States Are Offering Incentives to Encourage the Deploym
              * [25]The Countries We Reviewed Have Stimulated the Development an

                   * [26]Brazil Has Displaced 40 Percent of Its Gasoline
                     Consumption
                   * [27]Denmark's Wind Energy Generates 19 Percent of Its
                     Electricit
                   * [28]Germany's Renewable Energy Technologies Generate 10
                     Percent
                   * [29]Japan Has Installed over 931 Megawatts of Residential
                     Solar
                   * [30]Spain Began Operating an IGCC Coal Gasification Plant in
                     199
                   * [31]France's Advanced Nuclear Reactor Is Scheduled to Begin
                     Oper

         * [32]Conclusions
         * [33]Recommendation to the Congress
         * [34]Agency Comments
         * [35]Appendix I: Estimated Federal Tax Expenditures Targeted at E
         * [36]Appendix II: Scope and Methodology
         * [37]Appendix III: The States' Use of Renewable Energy Incentives
         * [38]Appendix IV: Three States' Initiatives to Stimulate the Use

              * [39]Minnesota's Ethanol Program

                   * [40]Texas' Renewable Portfolio Standards
                   * [41]California's Solar Programs

         * [42]Appendix V: Comments from the Department of Energy
         * [43]Appendix VI: GAO Contact and Staff Acknowledgments

              * [44]GAO Contact
              * [45]Staff Acknowledgments

                   * [46]Order by Mail or Phone

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    December 2006

    DEPARTMENT OF ENERGY

    Key Challenges Remain for Developing and Deploying Advanced Energy
    Technologies to Meet Future Needs

    GAO-07-106

    Contents

    Letter 1

    Results in Brief 5
    Background 8
    DOE's Budget Authority for Renewable, Fossil, and Nuclear Energy R&D Has
    Declined by over 85 Percent in Real Terms Since 1978; DOE Is Narrowing Its
    R&D Focus 11
    Advanced Renewable, Fossil, and Nuclear Energy Technologies Face Key
    Barriers to Market Deployment 26
    The States and Countries We Reviewed Have Implemented a Variety of
    Initiatives to Encourage the Development and Deployment of Energy
    Technologies 42
    Conclusions 53
    Recommendation to the Congress 54
    Agency Comments 54
    Appendix I Estimated Federal Tax Expenditures Targeted at Energy Suppliers
    and Users, Fiscal Year 2006 56
    Appendix II Scope and Methodology 58
    Appendix III The States' Use of Renewable Energy Incentives, Standards,
    and Mandates 61
    Appendix IV Three States' Initiatives to Stimulate the Use of Renewable
    Energy Technologies 63
    Appendix V Comments from the Department of Energy 67
    Appendix VI GAO Contact and Staff Acknowledgments 68

    Tables

    Table 1: Comparison of Conventional Pulverized Coal and IGCC Technologies
    21
    Table 2: Comparison of Electricity Generating Costs Using Nuclear, Coal,
    and Natural Gas Energy Sources 38
    Table 3: Comparison of Electricity Generating Costs Assuming a Carbon
    Emissions Tax 39

    Figures

    Figure 1: Comparison of the U.S. Energy Portfolio in 1973 and 2004 9
    Figure 2: Projected U.S. Electricity Generation by Energy Source,
    2005-2030 10
    Figure 3: DOE's Budget Authority for Renewable, Fossil, and Nuclear R&D,
    Fiscal Years 1978 through 2005 13
    Figure 4: DOE's Budget Authority for Renewable, Fossil, and Nuclear R&D,
    Fiscal Year 2006 14
    Figure 5: Distribution of State Incentives and Policies for Renewable
    Energy 43
    Figure 6: Number of States Using Each of 12 Renewable Standards, Mandates,
    and Incentives 45

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    Abbreviations

    AFCI Advanced Fuel Cycle Initiative
    DOE Department of Energy
    EIA Energy Information Administration
    EPA Environmental Protection Agency
    GNEP Global Nuclear Energy Partnership
    IGCC integrated gasification combined cycle
    MIT Massachusetts Institute of Technology
    NRC Nuclear Regulatory Commission
    RPS renewable portfolio standards
    R&D research and development

    United States Government Accountability Office

    Washington, DC 20548

    December 20, 2006 December 20, 2006

    The Honorable Bart Gordon
    Ranking Member
    Committee on Science
    House of Representatives

    The Honorable Michael M. Honda
    Ranking Member
    Subcommittee on Energy
    Committee on Science
    House of Representatives

    Since 1974, the nation has been subjected to periodic disruptions of crude
    oil imports resulting in price shocks and related energy crises. Oil
    prices doubled in 1974 and doubled again between 1978 and 1980. These
    price shocks alerted the nation to our growing dependence on imported oil
    and the need to conserve energy and develop alternative energy sources.
    Yet, when world crude oil prices plunged in the mid-1980s, the United
    States continued to rely on oil, and U.S. energy companies reduced their
    investments in developing alternative energy technologies. More recently,
    crude oil prices more than doubled--gasoline prices exceeded $3 per gallon
    in August 2006--as a result of increased world consumption, hurricanes in
    the Gulf of Mexico, and instability in the Middle East and other oil
    producing regions. However, by October 2006, crude oil prices had once
    again declined, though at higher levels than previously. Despite these
    periodic price shocks and related energy crises, the United States'
    dependence on imported crude oil and natural gas continues to
    increase--crude oil imports have grown from 40.5 percent of the U.S.
    supply in 1980 to 65.5 percent of the U.S. supply in 2005, according to
    the Energy Information Administration (EIA), within the Department of
    Energy (DOE). Without dramatic change, the United States is likely to
    become ever more reliant on imported oil and natural gas with all the
    attendant threats to the U.S. economy and national security. Since 1974,
    the nation has been subjected to periodic disruptions of crude oil imports
    resulting in price shocks and related energy crises. Oil prices doubled in
    1974 and doubled again between 1978 and 1980. These price shocks alerted
    the nation to our growing dependence on imported oil and the need to
    conserve energy and develop alternative energy sources. Yet, when world
    crude oil prices plunged in the mid-1980s, the United States continued to
    rely on oil, and U.S. energy companies reduced their investments in
    developing alternative energy technologies. More recently, crude oil
    prices more than doubled--gasoline prices exceeded $3 per gallon in August
    2006--as a result of increased world consumption, hurricanes in the Gulf
    of Mexico, and instability in the Middle East and other oil producing
    regions. However, by October 2006, crude oil prices had once again
    declined, though at higher levels than previously. Despite these periodic
    price shocks and related energy crises, the United States' dependence on
    imported crude oil and natural gas continues to increase--crude oil
    imports have grown from 40.5 percent of the U.S. supply in 1980 to 65.5
    percent of the U.S. supply in 2005, according to the Energy Information
    Administration (EIA), within the Department of Energy (DOE). Without
    dramatic change, the United States is likely to become ever more reliant
    on imported oil and natural gas with all the attendant threats to the U.S.
    economy and national security.

    EIA projects that total U.S. energy demand will increase by about 28 to 35
    percent between 2005 and 2030. Specific sectors reflect even more dramatic
    growth in energy demand: (1) the transportation sector is expected to grow
    by 43 percent, with annual crude oil consumption increasing from about 4.8
    billion barrels in 2004 to about 6.8 billion barrels by 2030 (a barrel of
    oil is equivalent to 42 gallons of gasoline), and (2) the EIA projects
    that total U.S. energy demand will increase by about 28 to 35 percent
    between 2005 and 2030. Specific sectors reflect even more dramatic growth
    in energy demand: (1) the transportation sector is expected to grow by 43
    percent, with annual crude oil consumption increasing from about 4.8
    billion barrels in 2004 to about 6.8 billion barrels by 2030 (a barrel of
    oil is equivalent to 42 gallons of gasoline), and (2) the electricity
    sector is expected to grow by 50 percent, with electricity consumption
    increasing from about 3.6 billion megawatt-hours in 2004 to about 5.3
    billion megawatt-hours by 2030 (a megawatt-hour is sufficient to meet the
    demand of 750 households for 1 hour). EIA projects that the proportions of
    energy derived from renewable, fossil, and nuclear sources for both
    transportation and electricity generation will remain about the same
    through 2030.

    Since its creation in 1977, DOE has had leadership responsibility for
    energy research, development, and demonstration programs (R&D) to enable
    the nation to deploy advanced energy technologies for meeting future
    demands and diversifying its energy portfolio.^1 During the past 29 years,
    the Congress has provided DOE about $50 billion for R&D in renewable,
    fossil, and nuclear energy technologies.^2 Specifically:

               o DOE's renewable energy R&D program has primarily focused on (1)
               developing cost-effective technologies for producing ethanol from
               biomass sources, such as agricultural residues and forest waste,
               and (2) making wind and solar energy technologies more
               cost-competitive sources of electricity. DOE has also funded R&D
               for geothermal and hydropower energy technologies and, in 2003,
               accelerated the R&D funding for developing hydrogen technologies.

               o DOE's fossil energy R&D program has primarily focused on
               reducing emissions of harmful pollutants from coal-fired power
               plants, particularly sulfur dioxide and nitrogen oxide in the
               1980s and early 1990s. More recently, DOE has concentrated on
               developing (1) coal gasification technologies to improve
               efficiency and reduce mercury and carbon dioxide emissions and (2)
               sequestration technologies for the long-term storage of carbon
               dioxide.

               o DOE's nuclear energy R&D program has focused primarily on
               improving nuclear power plant safety--in response to the March
               1979 accident at the Three Mile Island plant near Harrisburg,
               Pennsylvania--and efficiency.^3 More recently, the program has
               focused on developing technologies and designs for new generations
               of nuclear reactors --so-called Generation III and Generation IV.
               Beginning in October 2007, electric power companies are expected
               to apply for the first licenses to construct nuclear reactors
               since 1979. These reactors will use Generation III technologies.
               DOE's nuclear R&D program is developing Generation IV technologies
               for deployment after 2020.

               The market has been slow to embrace advanced energy technologies
               because they typically are not economically competitive with
               conventional energy sources such as oil, natural gas, and coal. In
               part this is because the prices U.S. consumers pay for
               conventional energy do not reflect their true costs, including the
               costs of certain adverse environmental impacts; economists refer
               to these hidden costs as negative externalities. For example, we
               continue to rely on electricity generated from coal-fired plants
               because coal is plentiful and inexpensive in the United States.
               However, carbon dioxide emissions from coal-fired power plants--a
               key concern for global warming--are not currently regulated, and
               thus potential environmental costs associated with global warming
               are not reflected in the electricity prices that consumers pay. In
               contrast, renewable energy sources, such as wind farms, and
               nuclear reactors do not produce carbon dioxide emissions in
               generating electricity.

               The American Jobs Creation Act of 2004 stimulated the deployment
               of ethanol by providing a 51-cent tax credit through December 31,
               2010, for every gallon of ethanol blended into gasoline.^4 The act
               also provides tax credits that expire on December 31, 2006, for
               every gallon of biodiesel and agri-biodiesel. Similarly, the
               Energy Policy Act of 2005 promoted a diversified U.S. energy
               portfolio by reauthorizing DOE's R&D funding and providing tax
               incentives for stimulating investment in advanced renewable,
               fossil, and nuclear energy technologies.^5 Specifically, the
               Energy Policy Act of 2005 extended the production tax credit
               established in the Energy Policy Act of 1992 for renewable
               technologies for 2 years until January 1, 2008. The act also added
               a new (1) investment tax credit of up to $1.3 billion for
               constructing new clean-coal power plants and (2) production tax
               credit of 1.8 cents per kilowatt-hour for up to 6,000 megawatts of
               new nuclear power capacity lasting 8 years after each qualifying
               nuclear reactor begins service. These tax credits and other tax
               incentives are legally known as tax expenditures;^6 revenue losses
               from these tax incentives can be viewed as spending channeled
               through the tax system. Historically, the tax subsidies that the
               U.S. government has provided to the energy sector have been
               directed toward the conventional energy sector. More recently, tax
               incentives available in fiscal year 2006, such as the new
               technology tax credits, have also been directed toward stimulating
               the development and deployment of advanced energy technologies
               (see app. I).

               You asked that we assess the nation's ability to meet its energy
               needs through 2030 by examining DOE's efforts to diversify the
               nation's energy portfolio and reduce its dependence on oil and
               natural gas. Specifically, we examined (1) DOE's R&D funding
               trends and strategies for developing advanced renewable, fossil,
               and nuclear energy technologies; (2) the key barriers to
               developing and deploying technologies that will address the
               nation's future energy needs; and (3) the efforts of states and
               selected countries to develop and deploy renewable, fossil, and
               nuclear energy technologies that address future energy needs.

               To ensure that we obtained a balanced view of future U.S. energy
               challenges, we reviewed documents and interviewed DOE officials,
               including program managers and laboratory scientists; senior
               industry executives; independent experts; officials of several
               state governments and states' associations; and representatives of
               foreign governments and industry associations. More specifically,
               to review DOE's R&D funding trends and strategy for developing
               advanced energy technologies, we analyzed DOE's (1) budget
               authority data for renewable, fossil, and nuclear energy R&D from
               fiscal year 1978 through fiscal year 2006, adjusted for any
               advanced appropriations and rescissions, and (2) strategic plans
               for developing and deploying new energy technologies. For
               perspective, we also reviewed revenue losses due to energy-related
               tax expenditures for fiscal years 2000 through 2006. To assess the
               key technological, economic, and other barriers, we analyzed
               various energy studies and interviewed senior officials at DOE and
               the Nuclear Regulatory Commission (NRC), which regulates the
               construction and operations of nuclear power plants, industry
               executives, and independent experts. To examine the efforts of
               states and selected countries to develop and deploy advanced
               energy technologies, we identified their use of mandates,
               financial incentives, and other actions. We selected Brazil,
               Denmark, France, Germany, Japan, and Spain because they have
               initiated major nationwide programs to stimulate the deployment of
               advanced energy technologies that have changed, or could change,
               their energy portfolios. We found that the data we used to examine
               trends and states' efforts to develop and deploy energy
               technologies to be sufficiently reliable for our purposes. We
               conducted our work from October 2005 through October 2006 in
               accordance with generally accepted government auditing standards.
               (See app. II for further information about our scope and
               methodology.)

    			  Results in Brief

               Despite growing dependence on foreign energy sources, DOE's R&D
               budget authority for renewable, fossil, and nuclear energy
               technologies declined by over 85 percent (in real terms) between
               fiscal years 1978 and 2005. Specifically, DOE's R&D budget
               authority dropped from about $5.5 billion (in real terms) in
               fiscal year 1978 to $793 million in fiscal year 2005. Budget
               authority for renewable, fossil, and nuclear energy R&D peaked in
               the late 1970s before falling sharply in the mid 1980s when crude
               oil prices returned to lower levels. As funding has shrunk, DOE's
               R&D focus has narrowed. For example, DOE's renewable R&D program
               has focused on ethanol, wind, and solar technologies, making
               steady incremental progress in reducing their costs over the past
               29 years. DOE's fossil R&D program has focused primarily on
               reducing harmful emissions of coal-fired power plants, working
               with industry to make significant progress in reducing sulfur
               dioxide and nitrogen oxide pollution during the 1980s and 1990s.
               Currently, DOE is using coal gasification technologies to reduce
               mercury and carbon dioxide emissions and achieve the long-term
               goal of a "near-zero emissions" power plant. From 1978 through
               1998, DOE's nuclear R&D program focused on making incremental
               improvements in nuclear power plant safety and efficiency. Since
               1998, DOE's nuclear R&D program shifted its focus to developing
               "next generation" nuclear facilities for reprocessing spent fuel,
               developing advanced nuclear reactors that produce hydrogen and
               reduce waste, and producing more efficient nuclear fuels. Faced
               with competing R&D priorities and budget constraints, DOE's fiscal
               year 2007 budget proposed eliminating R&D funding for its
               geothermal, hydropower, oil, and natural gas programs.

               Advanced renewable, fossil, and nuclear energy technologies all
               face key barriers to their development and deployment. Among
               renewable energy technologies, for ethanol to garner a significant
               share of the U.S. gasoline market, ethanol producers need to
               deploy cost-competitive technologies for processing agricultural
               residues and other biomass materials; it is unclear whether
               ethanol from corn alone can achieve this result. Widespread
               deployment of ethanol also faces infrastructure challenges--in
               particular, transporting and storing ethanol and retrofitting
               gasoline station pumps. Barriers to electricity generation from
               renewable sources--primarily wind and solar--include the
               difficulty of efficiently converting renewable energy into
               electricity, high up-front capital costs, including connection to
               the electric power transmission grid; the intermittent nature of
               wind and solar energy; and the higher financial risks associated
               with gaps in the renewal of the production tax credit. In
               addition, renewable energy technologies must compete with
               traditional fossil energy sources whose greater environmental
               costs are not reflected in the price paid by consumers, and
               renewable energy R&D budgets have been subject to growing
               congressional earmarks in recent years. For advanced fossil
               technologies, the primary challenge continues to be controlling
               emissions of mercury and carbon dioxide generated by conventional
               coal-fired plants. However, reducing these emissions requires
               plants to use new coal gasification technologies, which cost about
               20 percent more to construct than conventional coal-fired plants
               and carry higher perceived investment risk as new technologies.
               Furthermore, DOE and industry have not demonstrated the
               technological feasibility of the long-term storage of carbon
               dioxide captured by a large-scale, coal-based power plant. For
               advanced nuclear technologies, investors face uncertainties about
               whether NRC's revised review process for new reactors will
               effectively reduce regulatory delays and minimize added costs to
               address safety concerns. While public opposition previously was a
               primary barrier, the nuclear industry reports that public opinion,
               particularly in the southeast United States, is more favorable
               reflecting the increased demand for electricity, perceived
               advances in safety, and growing concerns about global warming.
               Investors also face higher financial risk because of nuclear
               reactors' high capital costs and long construction time frames, as
               well as environmental and nonproliferation concerns about spent
               nuclear fuel.

               While federal R&D has declined and the government has relied on
               the market to determine whether to deploy advanced energy
               technologies, many states have assumed higher profile roles by
               enacting standards, mandates, and financial incentives primarily
               to stimulate renewable energy technologies that address their
               growing energy needs and environmental concerns. In particular, 22
               states have established renewable portfolio standards requiring or
               encouraging that a fixed percentage of the state's electricity be
               generated from renewable sources; 39 states have established rules
               for electric power companies to connect renewable energy sources
               to the power transmission grid and credit producers for excess
               generation; and 45 states offer tax credits, grants, or loans to
               stimulate the deployment of renewable energy. Examples of state
               initiatives include the following: Since 1980, Minnesota has
               enacted various mandates and production incentives to stimulate
               the use of ethanol. Minnesota had displaced nearly 10 percent of
               all of its gasoline consumption with ethanol by June 2006 and had
               nearly one-third of the nation's ethanol fueling stations in
               September 2006. Texas' 2005 legislation extended the state's 1999
               renewable portfolio standard to require the installation of 5,000
               megawatts of new renewable capacity by 2015. As of September 2006,
               electric power companies had installed over 1,900 megawatts of new
               renewable capacity in Texas--approximately 3 percent of its total
               electricity consumption. California's Solar Initiative called for
               3,000 megawatts of new solar capacity by 2017. In response, 150
               megawatts of new solar capacity have recently been installed. Some
               states have also established mandates and financial incentives to
               stimulate advanced fossil and nuclear technologies. For example,
               2002 legislation in Indiana established investment tax credits for
               advanced coal power plants to encourage cleaner coal technologies.
               Similarly, Calvert County, Maryland, recently offered a
               50-percent, 15-year property tax credit to the owner of the
               Calvert Cliffs nuclear power plant if an additional nuclear
               reactor is built.

               Each of the six countries we reviewed--Brazil, Denmark, Germany,
               Japan, Spain, and France--has sustained long-term efforts using
               mandates and/or incentives to deploy advanced energy technologies
               that are providing, or are expected in the future to provide,
               significant amounts of energy. For example, by 2005, Brazil had
               eliminated its need to import crude oil for gasoline by using
               mandates and price subsidies to stimulate the development of an
               ethanol industry that uses domestic sugarcane. Similarly,
               Denmark's stimulation of renewable energy has resulted in wind
               energy generating 19 percent of total electricity consumed in
               2005. Denmark's support of wind energy has also created a thriving
               domestic wind turbine industry, which grew from about 200
               megawatts to more than 3,000 megawatts in annual global sales over
               the past decade. To develop a sustainable energy supply and
               protect the environment, Germany established a goal to increase
               the share of renewable energy consumption to at least 4.2 percent
               of its total energy requirements by 2010 and to 10 percent by
               2020. The 2010 target was exceeded in 2005, when renewable
               technologies accounted for 4.6 percent of consumption. To reduce
               its reliance on imported energy, Japan initiated a 10-year program
               subsidizing the cost of residential solar systems. As a result,
               solar systems were installed on more than 253,000 homes and the
               price of residential solar systems was cut by more than one-half.
               Spain, supported in part by a European Union program to promote
               cleaner energy technologies, is successfully operating a
               320-megawatt coal gasification plant--the largest such plant in
               the world--designed to run more efficiently with fewer emissions
               than conventional coal-fired plants. France leads the United
               States in deploying an advanced Generation III nuclear
               reactor--the European Pressurized Reactor--which is designed to be
               safer, more efficient, and less susceptible to terrorist attacks
               than older reactors, and will also generate nearly 80 percent more
               electricity.

               To meet the nation's rising demand for energy, reduce its economic
               and national security vulnerability to crude oil supply
               disruptions, and minimize adverse environmental effects, we
               suggest that the Congress consider further stimulating the
               development and deployment of a diversified energy portfolio by
               focusing R&D funding on advanced energy technologies.

    			  Background

               For the past several decades, the United States has enjoyed
               relatively inexpensive and plentiful energy supplies, relying on
               market forces to determine the energy mix that provides the most
               reliable and least expensive sources of energy--primarily oil,
               natural gas, and coal. In 1973, oil cost about $15 per barrel (in
               real terms) and accounted for 96 percent of the energy used in the
               transportation sector and 17 percent of the energy used to
               generate electricity.

               In 1973, the Organization of Arab Petroleum Exporting Countries
               embargoed nations that it believed supported Israel during the Yom
               Kippur War. The disruption of oil supplies caused oil prices in
               the United States to double between 1973 and 1974, resulting in
               long gasoline lines and rationing by the U.S. government. Natural
               gas price spikes followed a pattern similar to that of oil. Since
               oil and natural gas accounted for about 35 percent of electricity
               generation in 1973, electricity prices soared, and consumers
               experienced periodic brown outs. Oil disruptions reoccurred with
               the 1979 Iranian Revolution and the 1979 to 1981 Iran-Iraq War,
               which caused oil prices to double once again from the already
               record-high prices, adversely affecting the U.S. economy. Oil and
               natural gas prices fell in the mid-1980s, and U.S. reliance on
               fossil fuels and, in particular on imported oil, continued as the
               U.S. economy expanded and domestic sources of oil declined. By
               2004, about 63 percent of U.S. oil was imported and cost $38 per
               barrel (in real terms);^7 oil accounted for 98 percent of energy
               consumed for transportation, and coal and natural gas accounted
               for about 71 percent of the energy used to generate electricity.

               As shown in figure 1, the current U.S. energy portfolio is similar
               to the energy portfolio in 1973. The primary change is the growth
               of the fledgling nuclear energy industry during the 1970s and
               1980s, as new nuclear power plants came online and efficiency
               improved. However, because nuclear power plants currently operate
               at about 90 percent capacity, new growth will occur only when new
               reactors are built. In addition, while hydropower makes up the
               bulk of energy generated from renewable sources, its share of the
               renewable energy has declined because new wind, geothermal, and
               solar-generating capacity has been added while hydropower
               generation has remained unchanged.

    ^1DOE is also responsible for energy efficiency programs, which are
    integral to addressing future energy challenges by reducing demand.

    ^2All historical DOE R&D budget authority totals are presented in real
    terms by adjusting them to fiscal year 2005 dollars to account for
    inflation.

    ^3The Three Mile Island accident, which involved one of the plant's two
    reactors, was the most serious incident at a U.S. commercial nuclear power
    plant. While there were no deaths or injuries, the reactor's core began to
    melt down, creating widespread concern about health and safety.

    ^4Pub. L. No. 108-357.

    ^5Pub. L. No. 109-58.

    ^6Tax expenditures result in forgone revenue for the federal government
    due to preferential provisions in the tax code. See GAO, Government
    Performance and Accountability: Tax Expenditures Represent a Substantial
    Federal Commitment and Need to Be Reexamined, [47]GAO-05-690 (Washington,
    D.C.: Sept. 23, 2005).

    Figure 1: Comparison of the U.S. Energy Portfolio in 1973 and 2004

    ^7In 2006, crude oil prices peaked at nearly $70 per barrel in the United
    States.

    EIA's model of energy generation in 2030 projects that the United States
    will continue to primarily rely on oil to provide most of the energy in
    the transportation sector and coal to provide most of the energy for
    generating electricity. EIA projects that U.S. electricity generation will
    grow from 3,900 billion kilowatt-hours in 2005 to 5,500 billion
    kilowatt-hours in 2030 (see fig. 2).

    Figure 2: Projected U.S. Electricity Generation by Energy Source,
    2005-2030

    Note: EIA projects a greater reliance on coal to generate electricity if
    oil prices exceed $90 per barrel by 2030 and less reliance on coal and a
    slight reduction in renewable energy if oil prices are less than $30 per
    barrel by 2030.

    In addition to funding energy R&D to develop advanced energy technologies,
    DOE has funded efforts to improve energy efficiency and reduce energy
    demand. For example, DOE has encouraged energy efficiency by, for example,
    establishing energy efficiency standards for home appliances and air
    conditioners, and the federal government provides tax credits for
    purchasing energy-efficient equipment.

    The federal government also provides the energy industry and consumers
    with 23 tax expenditures affecting energy supply, some of which are
    incentives designed to stimulate the development and deployment of
    advanced technologies. From a budgetary perspective, most tax expenditures
    are comparable to mandatory spending for entitlement programs because they
    require no further action. Tax expenditures do not compete directly in the
    annual budget process and, in effect, receive a higher funding priority
    than discretionary spending subject to the annual appropriations process.
    Some tax expenditures are enacted on a temporary basis, providing an
    opportunity for scrutiny before they can be extended.

    Currently, the United States does not regulate carbon dioxide emissions,
    which contribute to global warming. In 1992, the United States ratified
    the United Nations Framework Convention on Climate Change, which was
    intended to stabilize the build-up of greenhouse gases, but did not impose
    binding limits on greenhouse gas emissions. In 1997, the United States
    participated in drafting the Kyoto Protocol, which established some limits
    on greenhouse gas emissions but did not ratify the protocol. Many DOE
    officials and industry executives told us, however, that the federal
    government might begin to regulate greenhouse gas emissions in the future
    to address global warming concerns. The Energy Policy Act of 2005
    authorized R&D funding for the capture and long-term storage--or
    sequestration--of carbon dioxide.

    DOE's Budget Authority for Renewable, Fossil, and Nuclear Energy R&D Has
    Declined by over 85 Percent in Real Terms Since 1978; DOE Is Narrowing Its R&D
    Focus

    DOE's budget authority for renewable, fossil, and nuclear energy R&D
    dropped from $5.5 billion (in real terms) in fiscal year 1978 to $793
    million in fiscal year 2005--a decline of over 85 percent. Energy R&D
    budget authority peaked in the late 1970s in response to the Organization
    of Arab Petroleum Exporting Countries' oil embargo of 1973 and fell
    sharply as crude oil prices plunged in the mid 1980s. However, since
    fiscal year 2000, federal support for the energy industry--through DOE's
    R&D budget authority and federal revenue losses from energy-related income
    tax expenditures--has grown. Since 1978, DOE's renewable energy R&D
    program has made incremental progress in making renewable technologies
    more efficient and reducing their costs. DOE's fossil energy R&D program
    has focused primarily on reducing harmful emissions by coal-fired power
    plants. During the 1980s and 1990s, the program made significant progress
    in demonstrating technologies that reduce sulfur dioxide and nitrogen
    oxide pollutants, and DOE's current objective is to develop a "near-zero
    emissions" power plant by targeting mercury and carbon dioxide emissions.
    In response to the Three Mile Island accident in 1979, DOE's nuclear
    energy R&D program focused on improving the safety and efficiency of
    nuclear reactors. More recently, the nuclear energy R&D program has given
    priority to (1) encouraging electric power companies to submit the first
    applications to NRC in over 30 years for combined licenses to build and
    operate a nuclear reactor to generate electricity, (2) developing
    technologies for reprocessing spent nuclear fuel that minimize the threat
    of spent fuel being used to make nuclear weapons and reduce highly
    radioactive waste, and (3) developing advanced Generation IV reactor
    technologies. Faced with competing R&D priorities and budget constraints,
    DOE has proposed in recent years to concentrate its R&D funding on key
    technologies for meeting the nation's growing energy demand while
    eliminating funding for geothermal, hydropower, oil, and natural gas
    technologies.

    DOE's Budget Authority for Renewable, Fossil, and Nuclear Energy R&D Has
    Substantially Fallen Since 1978

    As shown in figure 3, renewable, fossil, and nuclear energy R&D budget
    authority each peaked in the late 1970s before falling sharply in the
    1980s. Similarly, energy R&D funding as a percentage of total nondefense
    R&D expenditures fell from about 20 percent in the late 1970s to less than
    5 percent in fiscal year 2006, according to the American Association for
    the Advancement of Science. More recently, total budget authority for the
    three energy R&D programs has risen after bottoming out in fiscal year
    1998. Budget authority for renewable energy R&D peaked at $1.5 billion (in
    real terms) in fiscal year 1979, with most of the funding directed toward
    solar energy. Subsequently, renewable R&D budget authority fell, hitting
    its lowest point of $144 million (in real terms) in 1990. Fossil energy
    R&D budget authority peaked at $1.9 billion (in real terms) in fiscal year
    1979 and then has fluctuated. In particular, the Clean Coal Technology
    Program, a joint DOE-industry effort to demonstrate technologies that
    reduce sulfur dioxide and nitrogen oxide emissions, began in 1985 with
    high levels of DOE budget authority in the late 1980s and early 1990s.
    Fossil energy R&D budget authority rose in fiscal year 2001, and the
    administration introduced its "clear skies" initiative to further reduce
    pollution in fiscal year 2002. DOE's nuclear energy R&D program peaked at
    $2.4 billion (in real terms) in fiscal year 1978 and then fell through
    fiscal year 1998, when the nuclear R&D program received no budget
    authority. Since fiscal year 1998, budget authority for nuclear energy R&D
    has gradually increased. Similar to DOE's budget authority for energy R&D,
    estimated federal revenue losses from energy-related tax expenditures grew
    from nearly $2.2 billion (in real terms) in fiscal year 2000 to nearly
    $4.9 billion in fiscal year 2005.^8 While many of the new tax expenditures
    are for developing and deploying advanced energy technologies, tax
    expenditures for conventional energy remain among the largest in terms of
    revenue loss. The alternative fuels production credit is the largest
    energy-related tax expenditure, with estimated revenue losses of about
    $2.4 billion in fiscal year 2006.^9

    Figure 3: DOE's Budget Authority for Renewable, Fossil, and Nuclear R&D,
    Fiscal Years 1978 through 2005

    Note: Budget authority is in real terms, adjusted to fiscal year 2005
    dollars to account for inflation. Excludes DOE program management costs
    and indirect facilities costs of DOE laboratories.

    In fiscal year 2006, the Congress provided about $982 million in budget
    authority for energy R&D, including $324 million for renewable energy R&D,
    about $434 million for fossil energy R&D, and about $224 million for
    nuclear energy R&D (see fig. 4). The biomass, solar, and hydrogen energy
    programs received about 80 percent of the renewable energy R&D budget
    authority. Similarly, coal R&D programs received more than 80 percent of
    the fossil energy R&D budget authority, particularly for developing and
    demonstrating advanced gasification technologies--including integrated
    gasification combined cycle (IGCC)--mercury capture, and sequestration
    technologies. DOE's top nuclear energy R&D priority is to encourage
    electric power companies to submit applications to NRC for licenses to
    build and operate Generation III nuclear reactors by competitively
    awarding funds for preparing early site permits and NRC combined license
    applications. The nuclear R&D program also is developing Generation IV
    nuclear reactor technologies, especially ones that can reprocess spent
    nuclear fuel that reduce both proliferation risks and the amount of waste
    generated.

    ^8Summing tax expenditure estimates is useful to gauge their general
    magnitude but does not take into account interactions between individual
    provisions.

    ^9The alternative fuels production credit is a tax credit of $3 per oil
    equivalent barrel (in 1979 dollars) for gas produced from biomass or
    synthetic fuels produced from coal.

    Figure 4: DOE's Budget Authority for Renewable, Fossil, and Nuclear R&D,
    Fiscal Year 2006

    Note: Budget authority is in fiscal year 2006 dollars. Excludes DOE
    program management costs, indirect facilities costs of DOE laboratories,
    and funding for fuel cells--historically, an energy efficiency program.

    DOE's Renewable R&D Focuses on Innovations in Ethanol, Wind, Solar, and Hydrogen
    Energy Technologies

    Over the past 29 years, DOE has made steady incremental progress in making
    each of the renewable energy technologies more cost-competitive; for
    example, DOE and its industry partners have reduced wind energy costs by
    more than 80 percent. DOE's renewable energy R&D efforts have focused on
    developing ethanol, wind, and solar energy technologies. More recently, in
    January 2003, the administration announced the Hydrogen Fuel Initiative
    and proposed spending $1.2 billion over 5 years to support research in
    hydrogen and fuel cell technologies. While DOE has conducted R&D in
    geothermal and hydropower technologies since the late 1970s, the
    administration's 2007 budget proposed to eliminate both programs.

      Ethanol

    DOE's ethanol R&D program, the primary component of its biomass R&D
    efforts, is developing technologies to reduce the cost of producing
    ethanol, which can be blended with gasoline to reduce harmful exhaust
    emissions. In the early years of the biomass program, DOE focused on
    developing biofuels and biomass energy systems that primarily relied on
    corn as the energy source. As the biomass program evolved, it sought to
    make biorefinery-related technologies cost- and performance-competitive.
    As of October 2006, 106 biorefineries were operating throughout the United
    States to supply (1) oil refineries with ethanol to oxygenate
    gasoline--ethanol is a substitute for methyl tertiary-butyl ether (MTBE),
    which some states have banned because of concerns about groundwater
    contamination, and (2) fuel suppliers with ethanol to produce E85, a blend
    of 85 percent ethanol and 15 percent gasoline that can be used in flex
    fuel vehicles.^10

    The long-term goal of DOE's biomass R&D program is to enable U.S. industry
    to produce enough biofuels equivalent to 30 percent of current gasoline
    demand--about 60 billion gallons of biofuels per year--by 2030. To meet
    this goal, the biomass program is focused on developing additional sources
    of ethanol from cellulosic biomass, such as agricultural residues, forest
    wastes, and energy crops. According to DOE, producing cellulosic ethanol
    is difficult because it requires a complex chemical process to convert the
    plant material into a simple sugar to use for ethanol. The biomass program
    is also working with industry to demonstrate biorefinery technologies and
    assess infrastructure needs.

    ^10Flex fuel vehicles operate on any blend of ethanol and gasoline, from 0
    percent ethanol and 100 percent gasoline, up to 85 percent ethanol and 15
    percent gasoline.

      Wind

    DOE's wind R&D program primarily is focused on developing efficient wind
    turbines that convert the wind's power into electrical power.
    Historically, DOE's wind program focused on developing wind turbines for
    high-wind sites because it was the easiest way to achieve significant
    levels of electric power generation. High-wind sites--referred to as Class
    6--typically are located in areas where the wind regularly blows from 18
    to 20 miles per hour. During the past 29 years, DOE and its industry
    partners have made technological improvements that reduced the cost of
    wind energy by more than 80 percent, and industry has built wind farms on
    many of the high-wind sites that are easily accessible.

    DOE's wind R&D program primarily is seeking to develop new cost-effective
    technology for deploying wind turbines for low-wind areas in the United
    States and exploring the possibility of offshore wind development.
    Low-wind sites--referred to as Class 4--generally are located in areas of
    sustained winds of 16 to 17 miles per hour and primarily are located in
    the Midwest from Texas to the Canadian border. The advantages of
    developing low-wind resources are that low-wind sites are far more
    plentiful than high-wind sites and are located closer to electricity load
    centers, which can substantially reduce the cost of connecting to the
    electricity transmission grid. DOE's R&D program is focused on developing
    wind turbine technology for low-wind sites because easily accessible
    high-wind sites are becoming scarce. Specifically, the turbine rotor
    diameter must be much larger to harvest the low-energy winds without
    increasing costs, and the tower must be taller to take advantage of the
    increasing wind speed at greater heights. DOE is using public/private
    partnerships to improve wind turbine designs and components and
    demonstrate full-scale prototypes. DOE's goal is to reduce the cost of
    low-wind generated electricity from about 4.5 to 5.5 cents per
    kilowatt-hour in 2002 to 3.6 cents per kilowatt-hour by 2012.

    DOE's wind R&D program is also exploring wind energy technology for the
    distinct needs of offshore wind sites. While the United States currently
    has no offshore wind farms, several projects have been proposed in the
    waters off the Northeast and Gulf coasts. DOE estimates that there are
    over 900,000 megawatts of potential wind energy off the coasts of the
    United States, roughly between 6 and 58 miles offshore. Several European
    countries, including Denmark, Ireland, and the United Kingdom, have
    deployed wind farms in the shallow (less than 100 feet deep) waters off
    their coastlines using wind turbine designs adapted from land-based
    versions. However, the European offshore sites are different from
    potential U.S. offshore wind sites, which are generally located in deeper
    waters and expected to have more severe wind, wave, and ice conditions. As
    a result, many U.S. sites will require new technologies. DOE's offshore
    wind R&D activities include mapping coastal wind resources, organizing
    workshops for knowledge sharing, and collaborating with industry in
    developing offshore technologies to address design, offshore transmission,
    and interconnection issues. DOE is also collaborating with European
    nations on deep-water wind energy and with states to identify the
    regulatory, environmental, and technical issues facing offshore wind
    energy. DOE's goal is to reduce the cost of electricity generated by
    offshore wind farms located in water 100 to 200 feet deep from an
    estimated 12 cents per kilowatt-hour today to 5 cents per kilowatt-hour by
    2016.

      Solar

    DOE's solar R&D program is working to make solar energy technologies a
    more cost-competitive source of electricity. Specifically, DOE's extensive
    work has advanced solar technologies, improved efficiency and reliability,
    lowered costs, and resulted in more than 235 patents. While solar energy
    technologies have evolved and costs have decreased, DOE is focused on
    further reducing solar energy costs to compete in the residential,
    commercial, and industrial energy markets and for solar technology to
    penetrate the market sufficiently to create a sustainable solar industry.
    Currently, DOE's solar R&D program focuses on developing advanced
    photovoltaics, also called solar cells, that produce electricity directly
    from absorbed photons from sunlight; solar heating and lighting systems;
    and utility-size, solar-power plants.

    DOE's photovoltaic R&D program is designed to increase performance, reduce
    costs, and enhance the reliability of photovoltaic systems. DOE initially
    focused on using crystalline-silicon, which continues to hold the majority
    of the photovoltaic market today. DOE's second generation of photovoltaic
    R&D focuses on thin-film technology, which is designed to use less
    materials to reduce costs and can be made into a variety of forms. DOE's
    goal is to lower the cost of photovoltaics so that they are an affordable
    alternative to traditional electricity sources across all sectors. DOE is
    working to reduce the costs of photovoltaics from about 18 to 23 cents per
    kilowatt-hour in 2005 to about 5 to 10 cents per kilowatt-hour by 2015.

    DOE's solar heating and lighting R&D program is developing technologies
    that use sunlight for various thermal applications, particularly space
    heating and cooling, water heating, and to illuminate building interiors.
    DOE's R&D program is focused on advancing materials, design, and
    manufacturability that will lower costs of solar water heaters, improve
    their performance, and ease installation. DOE seeks to reduce the costs of
    solar water-heating systems operating in cold climates from about 11 to 12
    cents per kilowatt-hour today to about 5 to 6 cents per kilowatt-hour by
    2011. DOE is also working with industry to fully commercialize solar
    lighting systems. However, the administration's fiscal year 2007 budget
    proposed eliminating funding for the solar heating and lighting R&D
    program.

    DOE is also working with industry and southwestern states to develop
    utility-size solar power plants that use two types of concentrating solar
    power technologies: trough systems and dish/engine systems. These
    technologies use various mirror configurations to convert the sun's energy
    into high-temperature heat that is used to generate electricity in a steam
    generator. DOE's goal is to reduce the cost of utility-size solar power
    plants in the Southwest from 12 to 14 cents per kilowatt-hour in 2005 to
    10 to 12 cents per kilowatt-hour by 2010.

      Hydrogen

    In January 2003, the administration announced the Hydrogen Fuel Initiative
    and proposed spending $1.2 billion over 5 years to support research in
    hydrogen and fuel cell technologies. The initiative's objective is to
    accelerate the development of technologies to produce and distribute
    hydrogen to power fuel cells to replace the internal combustion engine in
    vehicles. While hydrogen is used as a fuel for aerospace and rocket
    propulsion applications, it is primarily used in the petroleum refining
    and fertilizer industries. DOE's hydrogen R&D program is focused on
    developing technologies for production and delivery, storage, conversion,
    and end-use applications and on standards formulation and other research.
    The program's goal is to develop the technology needed to allow industry
    to make a technology readiness decision in 2015 and introduce new hydrogen
    vehicles by 2020. However, these technologies are not expected to
    penetrate the market or significantly displace oil before 2030.

      Geothermal

    DOE's geothermal R&D program is developing technologies to improve the
    efficiency and cost competitiveness of geothermal technologies, which
    currently provide about 0.3 percent of total U.S. electricity and heating
    needs.^11 DOE's R&D program has changed over time from a
    resource-oriented, long-term, high-risk program to a cost-shared,
    competitively selected R&D program to meet immediate industry needs in
    geosciences, drilling, resource engineering, and energy conversion
    technologies. The program has developed drilling tools that oil and gas
    companies have adapted for exploration and helped introduce geothermal
    heat pumps into the market.^12 The current goals of the geothermal R&D
    program are to (1) decrease the cost of geothermal electricity from about
    8 to 9 cents per kilowatt-hour in 2004 to about 3 to 5 cents per
    kilowatt-hour by 2010; (2) improve hydrothermal technologies by increasing
    the productivity and lifetime of reservoirs, improve technology
    performance, and reduce the costs associated with drilling geothermal
    wells; (3) develop additional geothermal resources; and (4) explore the
    technical feasibility of mining heat from hot dry rock and magma. However,
    the administration's fiscal year 2007 budget proposed eliminating funding
    for the geothermal R&D program.

    ^11See also GAO, Renewable Energy: Increased Geothermal Development Will
    Depend on Overcoming Many Challenges, [48]GAO-06-629 (Washington, D.C.:
    May 24, 2006).

      Hydropower

    Since 1991, annual budget authority for DOE's hydropower R&D program has
    not exceeded $6 million (in real terms) for developing cost-effective
    technologies to improve the operation of hydropower facilities and address
    environmental concerns. Hydropower is currently the largest source of
    renewable energy, generating as much as 10 percent of U.S. electricity.
    The most common type of hydropower plant uses a dam on a river to store
    water in a reservoir. Water released from the reservoir flows through a
    turbine, spinning it, which, in turn, activates a generator to produce
    electricity. Current hydropower technologies can have undesirable
    environmental effects, such as fish injury and mortality from passage
    through hydropower systems, and negative impacts on the quality of water
    downstream. DOE has been working with industry to improve the
    environmental and operational performance of hydropower systems. DOE's
    goal is to demonstrate advanced turbine technologies that will enable a 10
    percent growth in generation at existing hydropower plants and enhance
    environmental performance by 2010. However, the administration's fiscal
    year 2007 budget proposed eliminating funding for the hydropower R&D
    program.

    ^12Geothermal heat pumps are used for space heating and cooling, as well
    as water heating. The heat pump transfers heat stored in the earth or in
    groundwater into a building during the winter and transfers it out of the
    building and back into the ground during the summer.

    DOE's Fossil R&D Program Has Focused on Reducing Harmful Emissions and Improving
    the Efficiency of Burning Coal

    DOE's fossil energy R&D has focused primarily on reducing emissions and
    increasing the efficiency of coal-fired power plants. DOE also has
    supported oil and natural gas R&D through cost-shared partnerships with
    industry, with most funding focused on advanced drilling and piping
    technologies for exploration and production.

      Coal

    In the 1980s and early 1990s, DOE's clean coal technology programs used
    cost-shared cooperative agreements with power companies to demonstrate
    technologies for reducing sulfur dioxide and nitrogen oxide emissions from
    coal-fired power plants. In part as a result of concerns about acid rain
    and transboundary pollution, the 1990 Clean Air Act amendments required
    that the U.S. Environmental Protection Agency (EPA) regulate hazardous air
    pollutants, including sulfur dioxide and nitrogen oxide emissions.^13
    Technologies demonstrated by the clean coal technology program contributed
    to a 98-percent reduction in sulfur dioxide and similar targets for
    nitrogen oxide emissions from coal-fired power plants from 1986 to 2005.

    While DOE's fossil R&D program seeks to further reduce sulfur dioxide and
    nitrogen oxide emissions, its overall objective is to drive all coal-fired
    power plant emissions to "near-zero" levels by 2020. To enable industry to
    meet Clean Air Act standards, as well as new goals set out by the
    administration's Clear Skies Initiative and EPA regulations,^14 DOE has
    focused on reducing mercury and carbon dioxide emissions--significant
    contributors to health hazards and global warming, respectively. DOE's
    objective is to reduce mercury emissions by 95 percent and capture and
    store--or "sequester"--up to 90 percent of carbon dioxide emissions by
    2020. Carbon dioxide capture and storage technologies would separate
    carbon dioxide from other gases produced during the combustion process and
    would transport the captured carbon dioxide to a suitable long-term
    storage site, such as geologic repositories or in the deep ocean.

    ^13Under the Clean Air Act, EPA sets limits on how much of a pollutant can
    be in the air anywhere in the United States, which it can enforce by
    fining companies that violate air pollution limits.

    ^14EPA has promulgated a Clean Air Mercury Rule for mercury and a Clean
    Air Interstate Rule for sulfur dioxide and nitrogen oxide reductions
    across the states.

    DOE is also working to improve the efficiency of coal-fired plants by up
    to 50 percent by 2010 and 60 percent by 2020. According to DOE, pulverized
    coal-fired plants using currently available technology are only about
    35-percent efficient--meaning about 65 percent of the energy generated by
    the plant is lost during the conversion process, mostly as heat that is
    not converted to electricity. Several of DOE's current fossil R&D projects
    aim to develop coal-based plants that employ new, more efficient
    gasification technologies. Rather than burning coal directly, gasification
    breaks coal down into a synthesis gas, comprised primarily of carbon
    monoxide and hydrogen, which is combusted to turn a gas turbine,
    generating electricity. Heat from the combustion process is captured and
    directed toward a steam turbine, which also generates electricity.
    According to DOE, industry, and association officials, power plants using
    an IGCC configuration for gasification increase the efficiency of
    electricity generation and substantially reduce harmful emissions in
    comparison with conventional pulverized coal technology (see table 1).

    Table 1: Comparison of Conventional Pulverized Coal and IGCC Technologies

                                                               IGCC
    Performance               New conventional
    characteristic             pulverized coal
                                            plant   current near future      2020
    Mercury emissions
    (pounds/year)                           45        29          29        26
    Sulfur dioxide emissions
    (tons/year)                          3,027       566         276       250
    Nitrogen oxide emissions
    (tons/year)                          1,412     1,094         219       198
    Carbon dioxide emissions
    (tons/year)                      3,700,000 3,600,000   3,500,000 3,200,000
    Potential for carbon
    capture and sequestration          Limited       Yes         Yes       Yes
    Plant efficiency
    (percent)                             38.6      39.7       45-50     50-60

    Source: The Electric Power Research Institute and DOE.

    Note: DOE is the source of plant efficiency data for the "near future" and
    2020. The Electric Power Research Institute provided all other data.

    Coal-based power plants that employ IGCC technologies break down coal into
    its basic chemical elements, allowing for the capture of carbon dioxide as
    a concentrated gas stream. In contrast, conventional pulverized coal
    plants burn coal directly, creating a more diluted stream of carbon
    dioxide that is much more costly to separate from the larger mass of gases
    flowing from the combustor. As such, IGCC plants offer greater potential
    for carbon capture and sequestration to reduce carbon dioxide emissions.
    Moreover, according to international climate change experts at the United
    Nations Environment Programme and the World Meteorological Organization,
    carbon dioxide capture and sequestration technologies have the most
    potential for significantly mitigating climate change when applied in IGCC
    plants. Currently, only two coal-based IGCC plants in the United States
    are fully operational and produce electricity, and an additional 28 coal
    gasification plants are planned for operation by 2030.

    To meet its emissions and efficiency goals, DOE recently proposed a $1
    billion advanced coal-based power plant R&D project called
    FutureGen--cost-shared between DOE (76 percent) and industry (24
    percent)--which will demonstrate how IGCC technology can both reduce
    emissions and improve efficiency by integrating IGCC with carbon capture
    and sequestration technologies. According to DOE, FutureGen is designed to
    be the first "zero-emissions" coal-based power plant and is expected to be
    operational by 2015. In addition to producing electricity and capturing
    and storing 1 million metric tons of carbon dioxide, the 275 megawatt
    plant also will be capable of producing hydrogen.

    Oil and Natural Gas

    Since 1978, DOE has supported oil and natural gas R&D, mainly through
    cost-shared partnerships with industry. Historically, DOE's R&D funding
    for oil and natural gas was principally divided among specific resources,
    such as gas shales and coal-bed methane. In the mid-1980s, however, DOE
    switched its focus to developing energy technologies that cross multiple
    resources. Recently, DOE's R&D has focused on improving oil exploration
    technologies, extending the life of current oil reservoirs, and developing
    drilling technology for tapping into deep deposits of natural gas. For
    example, DOE is working with industry to develop (1) a composite drill
    pipe that is lighter, stronger, and more flexible than steel to improve
    oil and natural gas extraction and (2) technology for tapping into the
    vast amount of natural gas available in naturally occurring methane
    hydrate found on land in permafrost regions and beneath the ocean floor at
    water depths greater than 1,600 feet. In fiscal year 2005, exploration and
    production and methane hydrate R&D received almost two-thirds of DOE's
    funding for oil and natural gas R&D. While DOE's fiscal year 2006 budget
    proposed terminating the oil and natural gas R&D program, the Congress
    provided $65 million. DOE's fiscal year 2007 budget again proposed
    terminating the oil and natural gas R&D program. In addition to the
    appropriated funds that oil and natural gas R&D program receives, section
    999A-H of the Energy Policy Act of 2005 established a program for R&D and
    commercialization of technologies for ultra-deepwater and unconventional
    natural gas and other petroleum resource exploration and production
    through September 2014 and authorized the use of $50 million per year from
    federal oil and gas lease income for an 11-year period.

    DOE's Nuclear R&D Goals Recently Have Focused on Restarting the U.S. Nuclear
    Power Industry, Reprocessing Spent Nuclear Fuel, and Developing New Reactor
    Designs

    The commercial nuclear energy industry experienced substantial growth
    during the 1960s and 1970s. By 1974, the federal government had approved
    operating licenses for 52 nuclear reactors with plans for dozens more.
    However, the energy crisis in the 1970s led to a significant reduction in
    orders for new reactors and, coupled with concerns about reactor safety
    and performance resulting from the 1979 accident at Three Mile Island, the
    industry canceled the application process for 93 other reactors. DOE began
    to focus on short-term R&D, working specifically to restore public trust
    and regulator confidence by improving safety and efficiency of operations.
    By the mid-1990s, the industry had dramatically improved its safety
    record, and the performance of nuclear power exceeded that of any other
    source of energy, reaching 90 percent of total potential capacity. Left
    with only incremental improvements in operations and uncertain economics,
    the Congress began to phase out funding DOE's nuclear energy R&D and
    terminated nuclear R&D funding altogether in fiscal year 1998.

    In fiscal year 1999, DOE crafted a long-term nuclear energy R&D agenda
    that focused on developing more efficient systems and
    proliferation-resistant fuel cycles, devising new technologies for
    managing nuclear waste, and designing a fourth generation of nuclear
    reactors that would not use conventional light water reactor technology.
    In fiscal year 2001, DOE prioritized its R&D program to focus on (1) the
    Nuclear Power 2010 program, (2) the Advanced Fuel Cycle Initiative (AFCI),
    and (3) the Generation IV Nuclear Energy Systems Initiative.

    DOE's Nuclear Power 2010 initiative has shared the costs that
    participating power companies have incurred in preparing either an early
    site permit or an application for an NRC license to construct and operate
    an advanced Generation III nuclear power reactor. In the years after the
    Three Mile Island accident, the nuclear power industry stated that NRC's
    regulatory process had become too cumbersome, leading to costly delays in
    construction and licensing and becoming a major stumbling block to
    investing in a new nuclear reactor. In response, NRC promulgated
    regulations in 1989 that established a single combined license to
    construct and operate a new reactor, replacing its prior requirement that
    companies obtain both a construction permit and an operating license.^15
    More recently, in fiscal year 2002, to encourage power companies to apply
    to NRC for a combined construction and operating license, DOE initiated a
    demonstration program with three power companies seeking early site
    permits for potential nuclear reactor sites in Illinois, Mississippi, and
    Virginia. The permits, applications for which were submitted to NRC in
    2003, would allow the sites to be used for nuclear power plants, but the
    power companies still would have to apply to NRC for a combined license to
    construct and operate any reactors later built on these sites. In fiscal
    year 2004, DOE began a demonstration program with two industry consortia
    to develop applications for NRC licenses to build and operate two
    additional reactors at existing nuclear power plants. These applications
    may be submitted to NRC next year. Even if NRC approves the licenses,
    which NRC estimates will take 42 months, the industry consortia have not
    committed to constructing the new reactors. The industry has, however,
    received license extensions for 44 of the 103 operating nuclear reactors.
    DOE allocated $65.3 million to the Nuclear Power 2010 program in fiscal
    year 2006 and requested $54 million for fiscal year 2007.

    ^15See 54 Fed. Reg. 15383 (1989).

    The AFCI program is designed to develop and demonstrate technologies for
    reprocessing spent nuclear fuel that could recover the fuel for reuse,
    minimize proliferation threats, and reduce the long-term hazard and
    disposal requirements of spent nuclear fuel. In the 1970s, the United
    States pioneered reprocessing technologies, but it abandoned the concept
    because of concerns about nuclear proliferation--plutonium could be
    separated to manufacture nuclear weapons.^16 Current R&D efforts focus on
    reprocessing spent fuel without separating the plutonium, with the goal of
    rendering it virtually useless to potential proliferators. Much of the
    reprocessed fuel could be reused in commercial reactors to generate
    electricity.

    In February 2006, DOE announced the Global Nuclear Energy Partnership
    (GNEP) program, characterizing it as an extension of the AFCI program.
    GNEP furthers the R&D goals of the AFCI program, accelerating the R&D
    efforts and introducing a global component. DOE's intent is to work with
    other nations that reprocess spent fuel to supply fuel to countries for
    the purpose of generating electricity. The countries then would return the
    spent fuel to the supplier nations for reprocessing. Once reprocessed,
    this fuel would be returned to the countries for reuse. The intent of the
    program is to encourage these "reactor-only" countries not to develop
    their own independent nuclear technologies, thereby reducing proliferation
    risks. Details of the program are still being developed. DOE requested
    $243 million for the combined AFCI and GNEP programs in fiscal year 2007.
    According to DOE officials, the GNEP program would need about $5 billion
    over the next 5 years.

    ^16In 1977, President Carter announced plans to indefinitely suspend U.S.
    reprocessing efforts.

    The Generation IV program focuses on developing new, fourth generation,
    advanced reactor technologies intended to be commercially available by
    about 2020 to 2030. The program, including the United States and 12
    international partners, identified six advanced reactor designs from which
    DOE has focused on two reactor designs: (1) a sodium-cooled fast reactor
    and (2) a gas-cooled very high temperature reactor. A fast reactor manages
    nuclear reactions somewhat differently than current commercial reactors,
    in which neutrons interact with the low-enriched uranium fuel atoms to
    induce fissions--or the splitting of the uranium atom--that emits more
    neutrons and leads to a self-sustaining chain reaction. The fissioning of
    uranium releases large amounts of energy that is captured as heat to drive
    turbines and generate electricity. Because the fission neutrons are born
    at high energy, they are not inherently efficient at causing more
    fissions, so commercial nuclear reactors are filled with water that
    functions both to slow the neutrons down and act as a coolant and heat
    removal system. The lower energy neutrons in current commercial reactors
    are much more effective at sustaining the uranium fission chain reaction.
    In contrast, a fast reactor manages these nuclear reactions at a higher
    energy level. Fast reactors use coolants such as liquid sodium metal that
    do not slow down the neutron energy. Because fast reactors are more
    effective than current commercial reactors at inducing fissions in a wider
    variety of nuclear materials, including plutonium and other materials that
    might otherwise become wastes from the current commercial reactor fuel
    cycle, they can potentially reduce the total amount, temperature, and
    radiotoxicity of the fuel that might otherwise have to be stored for many
    thousands of years in a geologic repository. The lower temperature may
    also allow more spent fuel to be stored at a deep geologic repository,
    delaying the need for additional repository requirements. This continuous
    recycle and burning of spent nuclear fuel materials is key to the GNEP
    program.

    The gas-cooled very high temperature reactor is also being developed
    through DOE's Next Generation Nuclear Plant program because the high
    temperature allows for the efficient production of hydrogen by splitting
    water. U.S. industries annually produce over 9 million tons of hydrogen
    to, for example, manufacture fertilizer and refine petroleum. Very high
    temperature reactors may become an efficient and emissions free
    alternative source of hydrogen, which is made primarily from natural gas.
    The very high temperature reactor can be more efficient than current
    reactors and is designed to be versatile, capable of generating small or
    large amounts of electricity. DOE requested $31.4 million for fiscal year
    2007 for the Generation IV R&D efforts.

    Advanced Renewable, Fossil, and Nuclear Energy Technologies Face Key Barriers to
    Market Deployment

    Advanced renewable, fossil, and nuclear energy technologies all face key
    challenges to their deployment into the market. Renewable technologies
    face technological and market barriers--such as efficiency and high
    up-front capital costs--to substituting for oil and for generating
    electricity. Advanced fossil technologies also face key challenges--such
    as controlling harmful emissions--to deploying advanced technologies for
    generating electricity. Similarly, advanced nuclear technologies face key
    challenges--such as public opposition and high capital costs--that must be
    addressed as the industry considers constructing new nuclear power
    reactors for the first time in nearly 30 years.

    Renewable Energy Technologies Face a Variety of Technical and Deployment
    Barriers

    The primary renewable energy technologies with the potential to
    substantially expand their existing production capacity during the next 25
    years are biomass, a partial substitute for gasoline in transportation,
    and wind and solar energy technologies for generating electricity.

      Ethanol

    In 2005, 95 ethanol refineries located in 19 states produced 3.9 billion
    gallons of ethanol--an increase of 17 percent over 2004 and 126 percent
    over 2001. The United States will consume about 5 billion gallons of
    ethanol in 2006, according to the industry's September 2006 projections.
    Ethanol is blended in 30 percent of the nation's gasoline and is primarily
    produced in the Midwest because of the abundant supply of corn. Ethanol
    demand is expected to continue to grow as a result of the national
    renewable fuels standard,^17 enacted by the Energy Policy Act of 2005, and
    the decision of many oil refineries to switch to using ethanol instead of
    MTBE as a fuel additive in gasoline that improves its octane and
    clean-burning properties.^18

    17The national renewable fuels standard establishes a baseline for
    renewable fuel use, beginning with 4 billion gallons per year in 2006 and
    expanding to 7.5 billion gallons by 2012.

    One of ethanol's biggest challenges is how to cost-effectively expand the
    supply of biomass, in addition to corn, to enable the total ethanol market
    to grow. DOE scientists are exploring technologies that can
    cost-effectively use cellulosic biomass--low-value residues such as wheat
    straw and corn stover or bio-energy crops such as fast-growing grasses and
    trees. Some bio-energy crops, such as switchgrass, require less fertilizer
    than corn and can be grown in many U.S. regions. While cellulosic ethanol
    requires less fossil energy than corn ethanol on a total life-cycle basis,
    capital costs are substantially higher for cellulosic ethanol plants than
    for corn ethanol plants. In addition, cellulosic ethanol producers need to
    reduce costs for (1) harvesting and handling cellulosic feedstock, (2)
    enzymes for converting cellulose to fermentable sugars, and (3) novel
    fermenting micro-organisms that can convert these biomass-derived sugars
    to ethanol. Cellulosic ethanol currently costs at least twice as much to
    produce as corn ethanol, according to DOE officials.

    A related challenge is producing sufficient biomass levels without
    disrupting current production of food and forest products. In 2005, 1.43
    billion bushels of corn--nearly 13 percent of the U.S. corn crop--were
    used for ethanol production. In a 2005 report, the U.S. Department of
    Agriculture and DOE estimated that the nation is capable of producing
    enough ethanol to replace 30 percent of the U.S. oil consumption by 2030
    and still meet food, feed, and export demands.^19 However, some experts
    have expressed concern that large-scale diversion of agricultural
    resources to generate ethanol could result in higher food prices for
    people and livestock. There are also questions about the amount of land
    that will be needed to produce higher levels of ethanol, whether vast
    preserved areas will be transformed into farmland, water quality issues,
    and soil sustainability. In addition, scientists have debated whether
    ethanol is an effective petroleum substitute because of the amount of
    energy needed to produce it--a significant amount of energy is used
    because (1) fertilizer made from fossil fuels is used to grow the corn,
    (2) most U.S. biorefineries use natural gas to convert biomass into
    ethanol, and (3) the corn and the ethanol need to be transported.

    ^18According to EIA, oil refineries decided to eliminate MTBE primarily
    because (1) many states have banned MTBE because of water contamination
    concerns, (2) industry's liability exposure by adding MTBE to gasoline,
    and (3) industry's perception that liability exposure increased because
    the Energy Policy Act of 2005 eliminated the oxygen content requirement
    for reformulated gasoline.

    ^19DOE and USDA, Biomass as Feedstock for a Bioenergy and Bioproducts
    Industry: The Technical Feasibility of a Billion-Ton Annual Supply, April
    2005.

    A third challenge is the distribution of ethanol from the biorefinery to
    the consumer, according to DOE officials. Ethanol cannot use the same
    infrastructure as gasoline because it has corrosive qualities and is water
    soluble.^20 As a result, an independent infrastructure system for
    transporting and storing ethanol would be needed throughout the United
    States. In particular, no pipelines exist to distribute ethanol from the
    Midwest, where it is mainly produced, to major markets on the East and
    West coasts. In addition, infrastructure constrains the distribution of
    E85--a blend of 85 percent ethanol and 15 percent gasoline--because
    regular gas stations must have separate tanks for storing E85 and
    specialized pumps for dispensing it. Currently, fewer than 1,000 fueling
    stations provide E85 nationwide, compared with 176,000 gas stations. These
    ethanol fueling stations are concentrated in the upper Midwest, and about
    75 percent of ethanol is transported by rail and 25 percent is moved by
    truck. U.S. consumers have bought more than 5 million flexible fuel
    vehicles that can run on E85; however, without a ready supply of E85, many
    of these vehicles will continue to operate using gasoline.

    Ethanol also faces the challenge of becoming more price-competitive with
    gasoline. Currently the market for ethanol relies on federal tax
    incentives. One such incentive is the volumetric ethanol excise tax
    credit, enacted in 2004, which provides a 51-cent tax credit for every
    gallon of ethanol used to produce a fuel mixture through December 31,
    2010. Even with tax incentives for ethanol producers, the fuel has been
    more expensive than gasoline, in part because ethanol's energy content is
    lower than gasoline's. According to DOE and EPA, flex fuel vehicles
    require about one-third more ethanol to match gasoline's energy content.
    Similarly, in October 2006, Consumer Reports, estimated that drivers
    paying $2.91 per gallon for E85 in August 2006 actually paid about $3.99
    for the energy equivalent of a gallon of gasoline because the distance
    vehicles traveled per gallon declined by 27 percent.

    ^20It is a normal occurrence for water to accumulate in oil pipelines. In
    most cases, water enters the system through terminal and refinery tank
    roofs or can be dissolved in fuels during refinery processes. Introducing
    ethanol into an oil pipeline risks rendering it unusable as a
    transportation fuel.

    Finally, congressional earmarks of DOE's biomass R&D funding rose from 14
    percent of the fiscal year 2000 funds to 57 percent ($52 million) of the
    fiscal year 2006 funds, according to a DOE program official.^21 DOE
    program officials told us that the rising number of biomass earmarks
    shifted funding away from DOE's R&D program, causing the biomass program
    to change its program priorities and terminated some of its cost-shared
    projects. Congressionally earmarked projects typically are not subject to
    peer review, are not selected on either their technical merits or their
    contribution to meeting program goals, and are only voluntarily
    accountable for reporting results.

      Wind and Solar

    Both wind and solar technologies have experienced substantial growth in
    recent years; they have benefited from federal and state financial
    incentives, DOE's R&D programs that decreased costs and improved
    efficiencies, and environmental and energy security concerns. For example,
    U.S. wind electric generation capacity has grown from 2,000 megawatts in
    1999 to 10,000 megawatts by August 2006, enough energy to power about 2.5
    million homes^22 with electricity on a typical day. Similarly, the total
    photovoltaic market has grown, on average, about 30 percent per year over
    the past 10 years, according to a solar manufacturer. In 2005, the United
    States had an estimated 475 megawatts of installed photovoltaic capacity,
    enough to power about 240,000 homes. EIA data show that in 2005 domestic
    shipments of solar photovoltaic solar technology increased by 72 percent
    over 2004.

    The wind energy industry faces technological challenges to improve turbine
    design, performance, and reliability that will enable wind power to expand
    into low wind and offshore locations. These locations use bigger wind
    turbines with longer blades mounted on taller towers, requiring complex
    design improvements in such areas as blade development, advanced drive
    train and power electronics, and advanced controls to reduce system loads.
    For example, while traditional blade materials have used fiberglass
    technology, the next generation of turbines will need stiffer and stronger
    materials, such as carbon fiber, to make longer, thinner, but equally
    durable blades. Similarly, offshore wind development faces new technical
    challenges, such as understanding the effects of wave and current loads on
    the base of wind structures, connecting offshore wind farms to the
    electric transmission grid, and designing support structures for turbines
    located in deep water.

    ^21Similarly, earmarks accounted for about $43 million, or 27 percent, of
    appropriated funds for DOE's hydrogen and fuel cell R&D program in fiscal
    year 2006.

    ^22One megawatt of wind power generates about as much electricity as 240
    to 300 households use each year.

    Solar technologies also face challenges of improving the scientific
    understanding of the electronic process of capturing and converting
    sunlight at the molecular level and technical challenges of improving
    performance and reliability. For example, DOE is pursuing thin-film
    photovoltaic technologies, which are designed to reduce material costs by
    using thin layers of semiconductor material. According to DOE, this
    technology is not as efficient in converting sunlight to electricity as
    conventional crystalline-silicon solar cells, but manufacturing costs are
    anticipated to be lower. The challenge is to increase their efficiency,
    while continuing to reduce the costs of manufacturing thin-film
    technologies. DOE scientists are also seeking to reduce failure rates for
    components in solar water-heating systems that are exposed to high
    temperatures and improve the 12-year tank life of current solar heaters in
    cold climates.

    A second major challenge to deploying both wind and solar technologies is
    overcoming investors' concern about their higher up-front capital costs.
    In particular, wind investors pay substantial up-front capital costs to
    build a facility and connect it to the power transmission grid.
    Constructing a wind farm may cost less than connecting the facility to the
    power transmission grid, according to DOE officials who noted that the
    connection could cost $100,000 or more per mile, on average, depending on
    such factors as the project's size, the terrain, and the transmission line
    rating. In addition, in most areas, a wind farm's investors would pay for
    upgrading the power transmission grid to carry the extra load, which can
    be high because prime wind resources are often found far from large urban
    areas that need the electricity. Similarly, the primary barrier to
    deploying solar photovoltaic technologies is their up-front purchase
    costs, which continue to make them more expensive than traditional energy
    sources, according to DOE and industry executives.^23 More recently, the
    rapidly growing solar energy industry has experienced an industrywide
    shortage of solar-grade silicon--the principal material for making
    crystalline-silicon photovoltaic cells--because of competition from other
    industries, such as computer chip manufacturers. As a result, the price of
    silicon wafers on the market has doubled in each of the past 2 years,
    according to EIA. The tight silicon supply has also created back orders of
    several months. Because photovoltaic manufacturing costs have risen
    sharply, manufacturers have changed their business strategies to maintain
    profits and continue to finance their plans to expand their production and
    strengthen their distribution capabilities.

    ^23The Energy Policy Act of 2005 also established a new residential
    investment tax credit for solar energy systems that provides a 2-year tax
    credit through December 31, 2007.

    Both wind and solar power also have unique intermittency characteristics
    that can constrain their use because the existing power transmission grid
    was built to accommodate large central-station power plants located near
    population centers that operate full time. This system relies on precisely
    predicting and controlling power plant output to avoid blackouts and other
    disruptions. However, wind and solar energy are intermittent energy
    sources because wind speed and sunlight vary, depending, for example, on
    the time of day and the weather--on average, wind turbines operate the
    equivalent of less than 40 percent of the hours in a year due to the
    intermittency of wind. Alternatively, the electricity generated must be
    immediately used or transmitted to the power transmission grid because no
    cost-effective means exists for storing electricity. DOE is conducting R&D
    in this area.

    A recent challenge facing the wind industry is mitigating environmental
    and community concerns about its adverse effects. While wind energy does
    not create the pollution or greenhouse gas emissions associated with
    fossil fuel power generation, some wind farms have resulted in the death
    of birds and bats because they are located amidst migratory pathways or
    important habitats.^24 Our 2005 report found that impacts of wind farms on
    birds and other wildlife varied by region and by species, and the lack of
    comprehensive data on bird and bat fatalities from wind turbines make it
    difficult to make national assessments of the impact of wind turbines on
    wildlife.^25 In addition, wind energy may face community opposition
    because it affects visual aesthetics and landscapes. For example, the
    first proposed U.S. offshore wind project, consisting of 130 wind turbines
    off the coast of Massachusetts, ran into opposition from local residents
    and organizations who oppose the appearance of wind turbines in Nantucket
    Sound.

    ^24The Fish and Wildlife Service estimates that some of the leading
    sources of bird mortality per year are attacks by domestic and feral cats,
    hundreds of millions of bird deaths; collisions with building windows, 97
    million to 976 million bird deaths; poisoning from pesticides, at least 72
    million bird deaths; and collisions with communication towers, 4 million
    to 50 million bird deaths.

    ^25See GAO, Wind Power: Impacts on Wildlife and Government
    Responsibilities for Regulating Development and Protecting Wildlife,
    [49]GAO-05-906 (Washington, D.C.: Sept. 16, 2005).

    Another challenge for wind energy is that the federal production tax
    credit--the primary federal financial incentive to stimulate the
    deployment of renewable energy systems--periodically must be legislatively
    extended, creating uncertainty among investors whether the tax credit will
    be extended. The federal production tax credit, initially established by
    the Energy Policy Act of 1992 for a limited duration, had expired before
    being renewed by subsequent legislation in 1999, 2001, and 2003. The
    Energy Policy Act of 2005 extended it an additional 2 years, until January
    1, 2008. According to DOE officials and industry representatives, the
    production tax credit has helped to offset the significant higher capital
    costs per unit of generating capacity needed to start up wind power
    projects, compared with projects for fossil fuel power generation.
    However, the uncertainty about the production tax credit's availability
    has created a boom-and-bust cycle for installing new wind power
    capacity--installation of new capacity fell dramatically in years when the
    authorization for the tax credit expired and its renewal was delayed, as
    compared with years when it was available without interruption. Potential
    developers are reluctant to commit resources to the planning and
    construction of new capacity without the certainty that the tax credit
    will be reauthorized. Furthermore, according to the American Wind Energy
    Association, 4 to 6 months before the tax credit expires, financial
    lenders hesitate to provide capital for wind projects because of the
    uncertainty of whether the tax credit will be extended.

    DOE officials and industry representatives believe the continued
    availability of the production tax credit, or other subsidy support, is
    vital to the potential future growth of the wind industry. According to an
    industry representative, a long-term production tax credit would
    facilitate steady market development for wind power and other renewable
    sources by encouraging companies to enter the market, allowing the
    industry to conduct long-term planning, and eventually help the industry
    stand on its own. According to some stakeholders, renewable energy sources
    require subsidies, such as the production tax credit, to level the playing
    field because various subsidies for fossil fuel and nuclear technologies
    have made it difficult for renewable energy sources to compete.

    Both DOE's wind and solar R&D programs have experienced a large increase
    in the amount of congressional earmarks in recent years. Wind energy
    earmarks grew from 6 percent of funding in fiscal year 2004 to about 33
    percent ($13 million) of funding in fiscal year 2006, according to a DOE
    program official. Similarly, solar energy earmarks grew from 1 percent of
    funding in fiscal year 2004 to about 17 percent ($14 million) of funding
    in fiscal year 2006, according to a DOE program official. An industry
    association executive noted that congressional earmarks reduce DOE's
    ability to adequately fund its solar R&D programs and meet targets.

    Barriers to Advanced Fossil Technologies Include Harmful Emissions and High
    Capital Costs of New Coal Gasification Plants

    While coal-fired power plants have substantially reduced their sulfur
    dioxide and nitrogen oxide emissions, electric power companies face
    important challenges to deploying a new generation of advanced IGCC coal
    gasification power plants. These challenges are to further reduce mercury
    and carbon dioxide emissions and manage the risk associated with high
    construction and operating costs of new advanced coal technologies. The
    administration's Clear Skies Initiative set goals for coal-fired plants to
    cut their 2003 emissions--49 tons of mercury, 10.2 million tons of sulfur
    dioxide, and 3.9 million tons of nitrogen oxide--by an average of 70
    percent by 2018. However, coal-fired plants also annually emit 2.1 billion
    tons of carbon dioxide--the most significant contributor to greenhouse
    gases and global warming--or 36 percent of the nation's total carbon
    dioxide emissions. EPA currently does not regulate carbon dioxide
    emissions but might do so in the future to address the growing concern
    about the harmful effects of greenhouse gases.

    IGCC coal-gasification technology enables power plants to separate sulfur
    dioxide, nitrogen oxide, mercury, and carbon dioxide before the synthesis
    gas is burned, thus reducing their emission into the air. DOE and industry
    are conducting R&D to develop sequestration technologies for the long-term
    storage of carbon dioxide gas without the gas gradually leaking back into
    the atmosphere. DOE has funded 25 carbon-dioxide sequestration projects as
    of September 2006, but has not yet demonstrated the storage of carbon
    dioxide captured by a large-scale, coal-based power plant. Specifically,
    when carbon dioxide is compressed and stored in geologic formations, such
    as oil and gas reservoirs, its density is close to that of some crude
    oils, resulting in buoyant forces that tend to drive carbon dioxide
    upwards. It is unknown whether carbon dioxide will remain safely
    sequestered if pressure, temperature, or other conditions change.
    According to international climate change experts, leakages could
    significantly affect climate change or contaminate groundwater. Moreover,
    given the long-term nature of carbon dioxide capture and sequestration,
    storage sites may require monitoring for very long periods of
    time--possibly for "eternity," according to one DOE official.

    New coal gasification plants also face the high costs associated with
    employing advanced energy technologies, such as IGCC and carbon dioxide
    capture and sequestration systems. In particular, IGCC plants are 20
    percent more expensive--about $100 million more--than pulverized coal
    plants that use currently available technology, according to International
    Energy Agency, DOE, and industry officials. Moreover, carbon dioxide
    capture and sequestration technologies will further increase an IGCC
    plant's costs because capturing and sequestering carbon dioxide increases
    fuel consumption by as much as 25 percent. According to international
    climate change experts, an IGCC plant that employs carbon dioxide capture
    and sequestration technologies could increase the cost of electricity per
    kilowatt hour from 21 to 78 percent, depending on plant design, the cost
    of fuel, and the storage site characteristics.^26

    In addition to technological and cost barriers, the uncertainties
    surrounding new coal-gasification technologies create substantial
    investment risks that threaten to hinder development. Despite the greater
    efficiency, reduced emissions, and the ability to capture carbon dioxide,
    only four coal-based IGCC power plants currently operate worldwide. The
    unproven nature of IGCC technology creates uncertainty and reluctance
    among industry to invest in building a new coal-based IGCC power plant,
    particularly given the additional cost, according to DOE and industry
    officials. Furthermore, international climate change forecasting models
    predict that carbon dioxide capture and sequestration systems are unlikely
    to be deployed on a large scale without explicit government regulations
    that substantially limit greenhouse gas emissions to the atmosphere. In
    light of such technological uncertainties, industry officials noted that
    cost-sharing initiatives with DOE will continue to be an important factor
    in encouraging the demonstration and deployment of IGCC plants.

    ^26The higher cost of electricity generated using IGCC technology in
    comparison with conventional coal-fired technologies more fully reflects
    the total cost of burning coal by including the cost of controlling the
    release of harmful emissions. Alternatively, several countries have
    enacted a carbon tax that puts a value on the carbon emissions that
    conventional coal-fired technologies generate.

    Advanced Nuclear Energy Technologies Face Uncertainty about NRC's Regulatory
    Process, Public Opposition, High Capital Costs, and the Storage of Nuclear Waste

    The nuclear energy industry, DOE, and NRC face important challenges in
    reinvigorating the nuclear power industry include an untried regulatory
    process, the public's concern about safe operations, investor concerns
    about high capital costs, and uncertainty about the long-term storage of
    nuclear waste. During the 1960s and 1970s, several nuclear power plants
    experienced construction costs that doubled and time frames that extended
    several years longer than anticipated--in one case, a project took nearly
    20 years to build and begin operations, according to the Nuclear Energy
    Institute, an industry association. Since 1974, power companies have
    cancelled applications for 93 proposed reactors and have shut down 22 of
    126 operating reactors before their 40-year license expired. NRC issued
    its last permit to construct a nuclear reactor in 1978, the year before
    the Three Mile Island nuclear reactor accident, which heightened public
    opposition to nuclear power and tightened NRC's oversight of nuclear power
    plant operations. More recently, however, NRC has approved a 20-year
    license extension for 44 of the 103 operating nuclear reactors in the
    United States and is reviewing applications to extend the licenses for 10
    additional reactors.

    Because NRC has not issued a construction permit in almost 30 years,
    investors worry that the problems that contributed to the schedule delays,
    cost overruns, and abandonment of many planned reactors may not be
    resolved. Among the reasons for these problems were that electric power
    companies custom-built many of the nuclear power plants, rather than using
    a standard design, and sometimes began construction with preliminary
    design information, only to resort to mid-construction retrofits as final
    design plans changed. In addition, NRC's regulatory process at that time
    required the applicant to obtain a construction permit first and apply for
    an operating license in the midst of construction. Final approval of the
    operating license sometimes hinged on time-consuming and costly retrofits,
    particularly if operational procedures conflicted with design features.

    To reduce these high costs and long time frames, NRC streamlined its
    licensing process in 1989 by combining its construction and operating
    licenses into a single license that requires applicants to submit final
    design information, safety analyses, and environmental data in advance of
    or with the license application. While industry representatives generally
    agree that the revised licensing process reduces risk of costly retrofits,
    they are concerned that the new process has not been tested and could
    still lead to extensive delays. For example, some representatives noted
    that NRC has already fallen behind schedule in reviewing the early site
    permits that three electric power companies submitted as part of a DOE
    demonstration program to stimulate power companies to apply to NRC for a
    combined construction and operating license. The early site permits
    address site suitability matters such as safety and environmental issues
    and, once obtained, can be used as a reference in a combined license
    application to streamline the site suitability portion of the
    application.^27 NRC acknowledged the delays, attributing them to a
    learning process under new procedures and regulations; an unexpectedly
    large number of public comments received electronically; and, in one case,
    the applicant's decision to change the design. Electric power companies
    have notified NRC that they plan to submit license applications to build
    and operate at least 29 new reactors. To prepare, NRC has implemented a
    design-centered approach that encourages applicants to use a standardized
    design for each reactor manufacturer with variations only to address the
    site's local characteristics, such as environmental conditions. NRC also
    has created a separate Office of New Reactors to oversee the licensing
    process, plans to hire 400 additional staff by fiscal year 2008, and is
    developing a more robust system to handle electronic comments. NRC expects
    to review license applications and issue a decision within 42 months.
    However, while it has issued its draft regulatory guidance for submitting
    and reviewing the combined license applications, NRC does not expect to
    finalize the guidance until March 2007.

    A second challenge that investors face is public opposition to nuclear
    power. According to the nuclear energy industry, public support for
    nuclear power has increased in recent years, primarily as a result of the
    industry's improved safety record and a growing awareness that nuclear
    power production releases few greenhouse gases.^28 Electric power
    companies plan to construct most of the announced new reactors at existing
    nuclear power plants in the southeast United States, where public opinion
    is more favorable toward nuclear power. Reactor projects at existing
    nuclear power plants also benefit from existing power transmission lines
    and historical environmental data for the required environmental impact
    assessment. However, industry officials acknowledge that public support is
    fragile and note that a nuclear accident anywhere in the world could
    undermine this support.

    ^27See 10 C.F.R. pt. 52.

    ^28Mining and processing of uranium and transporting of nuclear fuel
    result in some greenhouse gas emissions. In addition, greenhouse gas
    emissions result from site construction and worker transportation for both
    nuclear and renewable energy facilities.

    A third challenge facing nuclear energy is the high capital costs to build
    new nuclear reactors and a potential shortage of skilled workers. Nuclear
    energy representatives expect a new nuclear power plant to cost between
    $1.5 billion and $4 billion--more than double the cost of a comparably
    sized conventional coal-fired plant. These costs may increase if (1)
    transmission lines need to be installed or upgraded, (2) significant
    delays occur during construction or start-up operations, and (3) lawsuits
    are filed resulting in higher legal costs and delays. Although nuclear
    power plants have relatively low operating costs and can operate at
    90-percent capacity, the overall cost of construction makes nuclear energy
    a high-cost option. In addition, nuclear energy industry officials noted
    that a potential shortage of skilled workers creates additional
    uncertainties over construction schedules that could increase the cost of
    a new plant. With the hiatus in nuclear power plant construction, industry
    officials have expressed concerns that there may be a shortage of workers
    with the skills critical to the construction of new nuclear power plants,
    particularly if several utilities plan construction simultaneously.

    The Energy Policy Act of 2005 has facilitated the construction of new
    nuclear power reactors by providing a 1.8 cents/kilowatt-hour tax credit
    for up to 6,000 megawatts of new nuclear energy capacity for the first 8
    years of operation (up to $125 million per reactor). The Department of the
    Treasury is to prescribe the process for allocating the tax credit in
    consultation with the Secretary of Energy. In addition, the act authorizes
    the Secretary of Energy to enter into six contracts with sponsors of
    advanced nuclear facilities to ensure against certain delays in attaining
    full-power operation and provide indemnification of (1) 100 percent of
    covered costs, up to $500 million each for the first two reactors and (2)
    50 percent of covered costs, up to $250 million each for the next four
    reactors after an initial 180-day delay.

    Recently, the Massachusetts Institute of Technology (MIT) and the
    University of Chicago issued studies comparing nuclear power's costs with
    other forms of generating electricity. ^29 Both studies concluded that,
    assuming no unexpected costs or delays in licensing and construction,
    nuclear power is only marginally competitive with conventional coal and
    natural gas and, even then, only if the nuclear power industry
    significantly reduces anticipated construction costs. The nuclear power
    industry has proposed constructing modular plants based on a set of
    reference designs in the hopes of reducing construction costs. New
    technologies that use more reliable and less expensive passive safety
    systems also can reduce costs considerably compared with active safety
    systems currently used. For example, several of the proposed nuclear
    reactors utilize less piping. Despite the projected cost reductions, the
    MIT authors suggested that investors would most likely prefer conventional
    coal or natural gas over nuclear energy for generating electricity. Table
    2 shows that without substantial cost reductions, nuclear energy cannot
    compete with either conventional coal or natural gas.

    ^29MIT. The Future of Nuclear Power (Cambridge, MA: July 2003); University
    of Chicago, The Economic Future of Nuclear Power (Chicago, IL: August
    2004).

    Table 2: Comparison of Electricity Generating Costs Using Nuclear, Coal,
    and Natural Gas Energy Sources

    Cents per kilowatt-hour
    Energy source           25-year period 40-year period
    Nuclear (base case)                7.0            6.7
    Nuclear (best case)                4.7            4.4
    Coal                               4.4            4.2
    Natural gas                        4.9            5.1

    Source: MIT.

    Note: Costs were calculated using 2002 dollars and an 85 percent capacity
    factor using merchant plant financing, reflecting a risk premium for
    nuclear energy. The best case for nuclear energy assumes a 25-percent
    reduction in construction costs and a 12-month reduction in construction
    time. The natural gas case assumes combined cycle turbine technology and a
    price that starts at $4.50/million Btu and rises at a 2.5 percent rate
    over 40 years. Although natural gas prices were lower in 2002 than today,
    construction and other costs have risen, resulting in a good measure of
    relative costs, according to one of the MIT authors.

    However, the MIT study found that if a tax on carbon emissions were
    introduced, nuclear energy could become much more competitive because
    conventional coal and natural gas power plants would be subject to the tax
    while nuclear reactors would not because they do not emit carbon dioxide
    during the generation of electricity (see table 3). Coal-based IGCC plants
    could perform better than the conventional coal-fired power plants in
    capturing and sequestering carbon dioxide emissions, but these plants are
    considerably more expensive to build and operate than conventional
    coal-fired plants. Part of DOE's R&D efforts include reducing the cost of
    construction of coal-based IGCC plants.

    Table 3: Comparison of Electricity Generating Costs Assuming a Carbon
    Emissions Tax

    Cents per kilowatt-hour
    Energy source                     25-year period 40-year period
    Nuclear (base case)                          7.0            6.7
    Nuclear (best case)                          4.7            4.4
    Coal ($50/ton carbon tax)                    5.6            5.4
    Coal ($100/ton carbon tax)                   6.8            6.6
    Natural gas ($50/ton carbon tax)             5.3            5.6
    Natural gas ($100/ton carbon tax)            5.8            6.0

    Source: MIT.

    Note: Costs were calculated using 2002 dollars and an 85 percent capacity
    factor using merchant plant financing, reflecting a risk premium for
    nuclear energy. The best case for nuclear energy assumes a 25-percent
    reduction in construction costs and a 12-month reduction in construction
    time. The natural gas case assumes combined cycle turbine technology and a
    price that starts at $4.50/million Btu and rises at a 2.5 percent rate
    over 40 years. Although natural gas prices were lower in 2002 than today,
    construction and other costs have risen, resulting in a good measure of
    relative costs, according to one of the MIT authors.

    The revival of the nuclear power industry is also challenged by
    uncertainty about long-term disposal of commercial reactors' spent nuclear
    fuel. DOE reports that about 55,000 tons of commercial spent nuclear
    fuel--enough to fill the area of a football field about 10 feet
    deep--currently sits in interim storage at 72 sites in 33 states, mostly
    at operating reactor sites. This spent fuel must be safely disposed of to
    protect the public and the environment from harm because it will remain
    highly radioactive for hundreds of thousands of years. The Atomic Energy
    Commission, DOE's predecessor, initially planned to recycle spent nuclear
    fuel to reduce the amount of waste for disposal, but the 1970s recycling
    technology did not address concerns that plutonium might be separated and
    diverted for use in manufacturing nuclear weapons. The Nuclear Waste
    Policy Act of 1982 determined that the spent fuel should be disposed of in
    a deep geologic repository; and, in 1987, an amendment to the act
    identified Yucca Mountain, about 100 miles northwest of Las Vegas, Nevada,
    as the one site that DOE should study further. However, DOE has extended
    the repository's commissioning date from the original 1998 target to
    2017.^30 In addition, once the repository is completed, decades may be
    needed to transport the spent fuel from various locations across the
    country to Yucca Mountain. In the meantime, utilities continue interim
    storage of spent nuclear fuel at operating reactor sites.^31

    30The Nuclear Waste Policy Act of 1982 originally set 1998 as the date for
    DOE to begin accepting spent nuclear fuel for disposal. DOE has revised
    its estimate of the repository's opening first to 2010 and currently to
    2017, characterized by DOE as a "best-achievable schedule."

    Many states have expressed alarm at the delays in opening Yucca Mountain,
    fearing that the repository will suffer continual delays or might never
    open, forcing the nuclear power plants to store the spent fuel
    indefinitely. While the states are concerned about the public health and
    environmental risks, especially with about 2,200 tons of spent nuclear
    fuel being added to the national inventory annually, DOE and NRC cite a
    long list of studies that indicate that the risks of radiation release
    from spent fuel in interim storage in pools or in dry storage casks is
    low.^32 The states are also concerned that Yucca Mountain project delays
    are resulting in ongoing costs for the consumer because, under the Nuclear
    Waste Policy Act, users of nuclear power generated electricity pay $0.001
    per kilowatt-hour into a Nuclear Waste Fund, which is designed to pay for
    the permanent disposal of all commercial spent nuclear fuel and high-level
    waste, including the siting, licensing, and construction of a nuclear
    waste repository. In fiscal year 2006, DOE reported $19.4 billion in the
    fund. DOE reported that from project inception in fiscal year 1983 through
    fiscal year 2005 that it had spent approximately $11.7 billion (in real
    terms).^33 Recently, DOE revised the start date from 2010 to 2017 and
    estimated that the project would incur an additional $10.9 billion (in
    real terms) from fiscal year 2006 to fiscal year 2017. According to the
    National Council of State Legislatures, seven states have prohibited the
    construction of new nuclear plants, citing the need to resolve the spent
    nuclear fuel issue.

    ^31NRC requires that utilities store spent nuclear fuel immersed in deep
    pools of water or in dry storage casks consisting of all steel or steel
    and concrete. Currently, 37 commercial dry storage facilities exist in 27
    states. However, Private Fuel Storage in Utah, a facility licensed to take
    waste from a consortium of commercial reactors, is not yet operational.
    Two sites in Colorado and Idaho that are managed by DOE and store
    commercial spent nuclear fuel from the Fort St. Vrain and Three Mile
    Island reactors, respectively, are not included in this count.

    ^32NRC has determined that there is reasonable assurance that a geologic
    repository will be open by 2025, giving it confidence that the nuclear
    waste issue will be resolved. In the meantime, NRC testified that
    continued interim storage is considered safe. In February 2006, NRC
    licensed a centralized interim storage facility in Utah that the electric
    power industry is pursuing to relieve congested spent fuel pools. However,
    there is no timetable for construction.

    ^33Funding includes $8.3 billion from the Nuclear Waste Fund, $3 billion
    from defense waste, and the remainder from various reprogramming actions.
    Both commercial spent nuclear fuel and high-level defense waste are
    planned for disposal at Yucca Mountain.

    Nuclear energy representatives also told us that another barrier facing
    nuclear power is states' opposition to transporting spent nuclear fuel.
    Specifically, once Yucca Mountain opens, DOE expects to make about 175
    shipments of spent nuclear fuel each year to Yucca Mountain, by both rail
    and truck, over at least 24 years. Some states and public interest groups
    have cited safety concerns if an incident occurred while the spent fuel
    was near populated or environmentally sensitive areas. DOE and NRC
    officials report that transportation casks have been certified to
    withstand severe accidents and, according to numerous studies, have also
    been found to withstand certain acts of sabotage and are considered safe
    for transporting spent nuclear fuel.

    In fiscal year 1999, DOE began R&D to develop proliferation-resistant
    technology for reprocessing spent nuclear fuel. The new technology--called
    uranium extraction or UREX--strives to keep plutonium mixed with other
    highly radioactive elements. The resulting product can be used as fuel in
    a fast reactor, but it would be very unattractive to proliferators because
    the desired plutonium is mixed with thermally hot and highly radioactive
    elements. The technology still needs to be demonstrated to show that it
    can be cost competitive. In addition, while supporting the idea of
    reprocessing spent fuel, industry representatives noted that reprocessing
    technologies are technically challenging and very expensive and would make
    nuclear energy less economic. DOE and industry representatives have
    suggested that the reprocessing program, including development of a fast
    reactor, could cost about $5 billion by 2012 and could exceed $35 billion
    by 2050. DOE and NRC officials noted, however, that the reprocessing
    program could delay the need for a second repository, potentially saving
    money over the long term.

    The States and Countries We Reviewed Have Implemented a Variety of Initiatives
    to Encourage the Development and Deployment of Energy Technologies

    While federal R&D funding has declined and the government has relied on
    the market to determine whether to deploy advanced energy technologies,
    the states and countries we reviewed have enacted various standards,
    mandates, and financial incentives in an effort to deploy energy
    technologies that address their energy needs and environmental concerns.
    The states have focused their efforts on stimulating the deployment of
    renewable energy technologies; some states have also provided incentives
    for stimulating the deployment of advanced fossil and nuclear energy
    technologies. Each of the six countries we reviewed has sustained
    long-term efforts resulting in the deployment of one or more advanced
    renewable, fossil, and/or nuclear energy technologies. While the
    countries' initiatives have not been without difficulties, they have
    sustained long-term efforts using mandates and/or incentives to deploy
    advanced technologies that are providing, or are expected to provide,
    significant amounts of energy.

    States Are Stimulating Renewable Energy through Standards, Mandates, and
    Financial Incentives

    Forty-five states have enacted legislation or developed initiatives to
    stimulate the deployment of renewable energy technologies, primarily to
    address their growing energy demand, reduce adverse impacts on the
    environment, encourage local economic development, and/or provide a
    reliable, diversified supply of electricity for residents. (See app. III
    for states' use of five types of standards, mandates, and financial
    incentives for stimulating renewable energy.) As of 2006, (1) 39 states
    have established interconnection and net metering rules that require
    electric power companies to connect renewable energy sources to the power
    transmission grid and credit, for example, the monthly electricity bill of
    residents with solar-electric systems when they generate more power than
    they use;^34 (2) 22 states have established renewable portfolio standards
    (RPS) requiring or encouraging that a fixed percentage of the state's
    electricity be generated from renewable sources; and (3) 45 states offer
    various tax credits, grants, or loans including, for example, exemptions
    from the state sales tax for purchases of renewable energy equipment and
    low- or no-interest loans for the purchase of renewable energy equipment.
    As shown in figure 5, states in the West, Northeast, and Midwest are
    leading many of these efforts.

    ^34The Public Utility Regulatory Policies Act of 1978, (Pub. L. No.
    95-617, (1978)) requires that utilities buy excess energy generated by
    small energy producers. The states determine its minimum purchase price.

    Figure 5: Distribution of State Incentives and Policies for Renewable
    Energy

    Note: The map does not show the magnitude of state incentives. For
    example, while Minnesota has more types of financial incentives for
    renewable energy than California, California's rebate programs have a
    collective budget over 500 times greater than the budget for the single
    rebate program administered by Minnesota.

    Many states have adopted various standards, mandates, and financial
    incentives to stimulate the deployment of renewable energy technologies by
    offsetting their high startup costs. The following are two examples of
    states' initiatives:

               o In 2002, New Mexico enacted a production tax credit of 1 cent
               per kilowatt-hour for companies that generate electricity from
               wind, solar, or biomass. In February 2006, New Mexico enacted a
               30-percent personal income tax credit (up to $9,000) for residents
               who purchase and install photovoltaic or solar thermal systems.
               New Mexico also has net-metering and interconnection rules, which
               address connecting renewable energy sources to the power
               transmission grid and crediting producers for excess power
               generation.

               o Since 2004, Massachusetts has provided $2.5 million annually in
               grants to consumers who install qualified clean-energy
               technologies under the state's RPS. These technologies include
               solar thermal electric power, photovoltaics, and wind generation.
               Massachusetts also has net-metering and interconnection rules.

               Figure 6 shows the number of states that provide each of 12
               incentives we reviewed to stimulate renewable energy

               Figure 6: Number of States Using Each of 12 Renewable Standards,
               Mandates, and Incentives

               Note: Net metering and interconnection refer to eligibility and
               pricing rules for connecting renewable energy sources to the power
               transmission grid and for crediting producers for excess
               generation. A public benefit fund is a general fund to support
               renewable energy resources, energy efficiency initiatives, and
               renewable energy projects for low-income residents, supported by a
               small surcharge on each consumer's electricity bill.

               In addition to specific incentives and policies, some states have
               implemented statewide programs to stimulate the deployment of
               advanced renewable energy technologies. Three examples of states'
               efforts are described as follows (see app. IV for further
               details):

               o Since 1980, Minnesota has provided mandates and production
               incentives to stimulate ethanol production. In particular,
               Minnesota (1) established an incentive in 1986 that paid ethanol
               producers 20 cents per gallon over 10 years and (2) mandated in
               2003 that all gasoline sold in the state contain at least
               10-percent ethanol. In 2004, Minnesota's governor proposed raising
               this mandate to 20 percent. As a result, the state is now home to
               one-third of the nation's E85 (85 percent ethanol and 15 percent
               gasoline) stations and has replaced nearly 10 percent of all its
               gasoline consumption with ethanol.

               o In 2005, Texas enacted legislation that extended its 1999 RPS to
               require the installation of 5,000 megawatts of new renewable
               capacity--in addition to 880 megawatts of existing renewable
               capacity--by 2015. The Texas RPS represents 5 percent of the
               state's electricity demand. Electric power retailers that do not
               comply with RPS requirements are subject to penalties of up to $50
               per megawatt-hour, or 5 cents per kilowatt-hour. Moreover, to
               ensure a wide variety of renewable projects, the Texas RPS
               requires that 500 megawatts of new capacity come from renewable
               sources other than wind. According to the Electric Reliability
               Council of Texas, Inc., as of September 2006, Texas had installed
               over 1,900 megawatts of new renewable energy, representing about 3
               percent of its total electricity consumption.

               o In 2006, California enacted a $2.2 billion solar initiative to
               support the governor's goal to install 3,000 megawatts of new
               solar energy by 2017. In particular, the initiative provides
               rebates for new photovoltaic and solar thermal systems, and
               pay-for-performance incentives that reward high-performing solar
               systems (greater than 100 kilowatts). The initiative also sets
               aside 10 percent of its funding to subsidize solar energy for
               low-income and affordable housing projects. According to a state
               official, California has already installed more than 150 megawatts
               of new solar energy capacity.

    			  Some States Are Offering Incentives to Encourage the Deployment of
    			  New Fossil and Nuclear Energy Technologies

               In addition to the investment tax credits and loan guarantees that
               the Energy Policy Act of 2005 authorizes for the deployment of
               fossil and nuclear technologies, some states have enacted
               financial incentives and requirements to further stimulate the
               deployment of advanced fossil and nuclear technologies that
               support state needs and goals. For example, Indiana enacted
               legislation in 2002 to provide financial incentives for clean coal
               projects using Illinois Basin coal or gas and extended these
               incentives in 2005 by establishing investment tax credits for
               state investments in IGCC power plants. Similarly, Pennsylvania's
               Energy Deployment for a Growing Economy program provides
               low-interest loans for IGCC plants in an effort to build advanced
               coal plants that use coals abundant to the state.

               However, states provide far fewer incentives for fossil and
               nuclear technologies--both in variety and number--than for
               renewable energy technologies. As of 2006, only seven states had
               incentives for coal gasification and IGCC technologies, according
               to the National Conference of State Legislatures. We found no
               national database on states' nuclear incentives, although industry
               officials said that states or localities may offer a variety of
               economic incentives to attract large businesses, such as a nuclear
               power plant.

               An industry association official noted that states may have an
               important influence over regulatory incentives for fossil plants,
               such as requiring new coal-fired plants to employ mercury removal
               technologies. For example, Idaho has stopped construction on all
               conventional pulverized coal-fired power plants until the state
               finishes researching the possibility of building new gasification
               plants that significantly reduce mercury emissions. Similarly,
               while industry officials say state and local incentives for new
               nuclear plants--the most common of which are property tax
               breaks--do not significantly impact the high costs of plants,
               states may have an indirect impact on encouraging or discouraging
               the construction of new nuclear plants. For example, seven states
               specifically discourage or prohibit the construction of new
               nuclear plants until methods of waste disposal are determined. In
               contrast, some states and localities may send more positive signs
               about nuclear energy by offering economic enticements. For
               instance, Calvert County, Maryland, recently offered a 50-percent,
               15-year property tax credit to the Calvert Cliffs nuclear power
               plant's owner if another nuclear reactor is built.

    			  The Countries We Reviewed Have Stimulated the Development and
    			  Deployment of Advanced Renewable, Fossil, and Nuclear Energy
    			  Technologies

               We identified six countries--Brazil, Denmark, Germany, Japan,
               Spain, and France--that illustrate a range of financial
               initiatives and mandates to stimulate the development and
               deployment of advanced renewable, fossil, and nuclear energy
               technologies. For example, successful use of financial incentives
               and/or mandates has enabled Germany to generate 10.2 percent of
               its electricity from renewable sources and Denmark to generate 19
               percent of its electricity from wind technologies, surpassing the
               United States in the percentage of electricity derived from
               renewable sources.

    			  Brazil Has Displaced 40 Percent of Its Gasoline Consumption with
    			  Ethanol

               In 1975, in response to oil price shocks, Brazil initiated a
               program to replace imported oil with ethanol produced from
               domestic sugarcane to power vehicles. To stimulate its ethanol
               industry, Brazil (1) required its major oil company, Petrobras, to
               purchase a guaranteed amount of ethanol; (2) provided $4.9 billion
               in low-interest loans to the agricultural and industrial sectors
               to stimulate ethanol production for transportation use; (3)
               provided subsidies so ethanol's price at the pump was 59 percent
               of the price of gasoline; and (4) required that all fuels be
               blended with a minimum of 22 percent ethanol (called E22 fuel).
               Brazil removed its price supports for ethanol in 2000, when it
               deregulated the ethanol market, but still requires that all fuels
               be blended with 20 to 25 percent ethanol, depending on market
               conditions. Moreover, to receive an operating license, all fueling
               stations must provide an ethanol or ethanol-blend pump. In 2003,
               the Brazilian government introduced flex-fuel cars--which can run
               on ethanol, gasoline, or a blend of the two, thus allowing
               consumers to choose which fuel to use based on the current oil and
               ethanol prices--further encouraging the consumption of ethanol.

               As of 2005, Brazil was the world's ethanol leader, producing 4.2
               billion gallons of ethanol per year, or 47 percent of the world's
               supply. Brazil no longer needs to import crude oil for
               transportation, saving an estimated $1.8 billion per year by
               displacing 40 percent of its gasoline consumption--200,000 barrels
               of oil per day--with ethanol, according to Brazilian experts. In
               comparison, the United States produced 3.9 billion gallons of
               ethanol in 2005, displacing about 3 percent of gasoline
               consumption. By 2011, Brazil's ethanol production is expected to
               increase to 27 billion gallons per year--a more than 600 percent
               increase--from efficiency improvements and land expansion. With
               the introduction of flex-fuel cars, consumer confidence in ethanol
               consumption has grown significantly, according to Brazilian
               embassy officials. As a result, more than 70 percent of cars sold
               in Brazil today run on ethanol or ethanol blends, and according to
               Brazil's former Secretary of Environment, ethanol is now fully
               competitive with international gas prices--sold for 60 to 70
               percent of the price of gasoline at the pump.

               Brazil has also significantly improved its environmental profile
               by replacing oil with ethanol in the transportation sector. From
               1975 to 2000, for instance, the use of ethanol in cars saved 100
               million tons of carbon emissions, according to Brazilian
               authorities. In addition, ethanol production has helped Brazil
               become more self-sufficient in electricity. In particular, by
               burning sugarcane waste, mills have been able to generate energy
               surpluses of around 600 megawatts per crop season, allowing them
               to be completely self-sufficient in electricity, and in some
               cases, to export electricity abroad.

    			  Denmark�s Wind Energy Generates 19 Percent of Its Electricity

               Successive Danish governments have committed to a series of
               national energy plans aimed at reducing dependency on imported
               fuels, improving the environment, and moving toward greater
               sustainability. As a result, since 1980 there has been general
               consensus in Denmark that renewable technologies--and especially
               wind energy--require special support to gain an advantage in the
               market. Specifically, the Danish government has (1) conducted R&D
               in wind turbine technologies since the 1970's; (2) provided
               investment subsidies for 30 percent of the installation cost of
               wind turbines until 1990; and (3) required that electric power
               companies purchase wind energy from private producers at a fixed
               price until 1999, when the obligation moved to electricity
               consumers paying for all increased costs associated with wind
               power. In addition, the government exempts wind generators from a
               carbon dioxide tax,^35 gives wind power priority access to the
               electric power grid, and has established regulations for building
               wind turbines.

               In 2005, renewable energy accounted for approximately 28 percent
               of the Danish electricity supply, including 19 percent from wind
               power--the highest percentage in the world. Since 1980, more than
               6,000 wind turbines have been established in Denmark. From 2001 to
               2003, a repowering program led to approximately 1,500 smaller wind
               turbines being replaced by approximately 300 new and larger wind
               turbines, which together have tripled the capacity. At the end of
               2005, Denmark had 3,122 megawatts of installed wind power
               capacity--more than the 2,631 megawatts of the installed capacity
               in Texas, the nation's leader in wind power.

               Denmark's long-term support of wind energy has fostered a thriving
               wind turbine industry, with global sales increasing over the last
               decade from about 200 megawatts of capacity per year to more than
               3,000 megawatts per year. Danish wind turbine manufacturers
               accounted for about 40 percent of global sales in 2004, providing
               about 20,000 jobs domestically, or 4 percent of Danish industrial
               production. In particular, Denmark is a world leader in offshore
               wind power development. Denmark built the first offshore wind farm
               in 1991 and had eight operating offshore wind farms by the end of
               2005. Two additional offshore wind farms are planned to supply
               electricity to 350,000 to 400,000 households, or about 4 percent
               of the total Danish electricity consumption.^36 As a result of its
               experience, Denmark has gained extensive technical knowledge in
               how to integrate wind power into the overall electricity system,
               how to combine wind power with other sources of energy to maintain
               the electrical system's stability, and how to develop offshore
               wind farms--including the logistics of transporting, installing,
               and maintaining wind turbines at sea.

    			  Germany�s Renewable Energy Technologies Generate 10 Percent of Its
    			  Electricity

               In 2000, the German government enacted the Renewable Energy
               Sources Act to accelerate the growth of renewable energy
               technologies in the German electricity market. It amended the act
               in 2004 to increase country targets for renewable technologies and
               further develop the framework conditions for renewable
               technologies.^37 The Renewable Energy Sources Act requires
               electricity grid operators to purchase electricity generated from
               renewable energy technologies and establishes minimum rates for
               it. Germany's goal is to increase the share of renewable energy
               consumption to at least 4.2 percent of its total energy
               requirements by 2010, 10 percent by 2020, and at least 50 percent
               by 2050. The target for 2010 was exceeded in 2005, when renewable
               technologies accounted for 4.6 percent of consumption. The German
               government is also offering tax relief for biofuels and financial
               support for constructing plants that generate heat and/or
               electricity from renewable energy sources. In response, Germany
               has more than doubled its electricity consumption from renewable
               energy sources--from 4.8 percent in 1998 to 10.2 percent in 2005.
               In particular, Germany generated about 1 billion kilowatt-hours of
               solar electricity in 2005, tripling the generation of electricity
               from solar cells in 2 years. Germany has also become the world
               leader in wind energy with 18,428 megawatts of installed wind
               capacity that produced 26.5 terawatt-hours of electricity in 2005.

               Under the Kyoto Protocol and as a member of the European Union,
               Germany has committed to a 21-percent reduction in the 1990
               baseline year's greenhouse gas emissions from 2008 to 2012. The
               German government believes the Renewable Energy Sources Act is one
               of Germany's most effective and efficient instruments for climate
               protection, stating that using renewable energy technologies
               prevented the emission of approximately 84 million tons of carbon
               dioxide in 2005. The government also states that renewable energy
               technologies have created jobs in Germany--the renewables sector
               had 157,000 jobs in 2004, including 64,000 jobs in wind power,
               57,000 jobs in biomass, and 25,000 in the solar industry. The
               government estimates that renewable energy jobs increased to
               170,000 in 2005, and German industry estimates that this number
               will grow to more than 255,000 by 2010.

    			  Japan Has Installed over 931 Megawatts of Residential Solar
    			  Systems

               In 1994, Japan launched a 10-year residential solar project as
               part of its efforts to deploy domestic energy technologies that
               would diversify its energy portfolio and reduce its dependence on
               energy imports.^38 The goal of the residential solar project was
               to reduce the cost of photovoltaics and promote installation of
               solar systems in residential communities. Initially, the Japanese
               government provided a subsidy covering 50 percent of the cost of
               installing a residential solar system. This percentage
               subsequently dropped to 33 percent and eventually became a fixed
               amount as the 10-year project matured. As a result of the project,
               over 253,000 homes installed solar systems that collectively
               generate over 931 megawatts of power. Even though the government
               subsidy decreased, the number of systems installed increased
               considerably year by year, as the installation price decreased.
               According to a solar manufacturer, the cost of installing a solar
               system dropped from about $16,000 per kilowatt in 1994 to about
               $6,000 per kilowatt when the project ended. Due to the successful
               transformation of the photovoltaic market, Japanese homeowners
               continue to buy and install solar systems without the government
               subsidy.

               The 10-year residential solar project has also helped create a
               Japanese solar industry that has become a world leader in the
               photovoltaic market. According to the European Commission,
               Japanese manufacturers' share of the world photovoltaic market is
               now greater than 40 percent. The residential solar project also
               enables the Japanese government to fulfill its commitment to
               increase its share of renewables in its energy portfolio to about
               3 percent by 2010 and reduce its greenhouse gas emissions under
               the Kyoto Protocol.

    			  Spain Began Operating an IGCC Coal Gasification Plant in 1997

               In the early 1990s, the European Union and the Spanish government
               collaborated to construct the world's largest coal-based IGCC
               plant in Puertollano, Spain, to improve the efficiency, cost, and
               environmental profile of coal-based power plants. The 320-megawatt
               IGCC plant, which began generating electricity from coal in 1998,
               is operated by a consortium of eight utilities from France,
               Germany, Italy, Portugal, Spain, and the United Kingdom as part of
               a European Union program to demonstrate energy technologies that
               promote clean coal and reduce the European Union's dependency on
               natural gas.

               The European Union and the Spanish government supported the
               construction of the Puertollano plant by subsidizing about 8.5
               percent of its nearly $900 million cost. European consortium
               members noted that, in comparison, DOE can fund up to 50 percent
               of the cost of commercial IGCC demonstration projects. In 2000,
               the Puertollano plant produced nearly 1 million megawatts of
               electricity using synthetic gas. The Puertollano plant is expected
               to operate at over 45 percent efficiency and eliminate 99.9
               percent of sulfur dioxide emissions. DOE plans to achieve
               efficiencies and emissions levels comparable to the Puertollano
               plant by 2010--currently, U.S. IGCC plants are about 40-percent
               efficient and eliminate 98 percent of sulfur dioxide emissions.

    			  France�s Advanced Nuclear Reactor Is Scheduled to Begin
    			  Operations in 2012

               In response to the oil price shocks in 1973, France decided to
               reduce its reliance on oil-fired power plants to generate
               electricity by launching a nuclear initiative designed to make
               nuclear power a primary source of electricity. France built 56
               nuclear reactors during the 1970s and 1980s and, according to the
               International Energy Agency, spent about 90 percent of its energy
               R&D funding on nuclear energy from 1985 through 2001. The French
               government reported that its R&D efforts during this time focused
               on technological improvements and safety, as well as development
               of a fast reactor. Today, France has 58 nuclear reactors
               generating 75 to 80 percent of its electricity.

               France does not license reactors for a specific amount of time,
               but conducts reviews every 10 years to grant continued operational
               authority. Reactors are expected to operate for about 40 years.
               Some interest groups in France have called for an end to nuclear
               energy, citing radioactive waste and safety issues and noting that
               Germany has decided to phase out of nuclear energy and close down
               its reactors. However, the French government has maintained its
               support for nuclear energy, deciding in a 2005 law to keep the
               nuclear option open for the future and planning to potentially
               replace its current reactors with a new generation of reactors
               designed to be more efficient, safer, and less susceptible to
               external threats. As part of this effort, France has developed the
               European Pressurized Reactor, which uses Generation III technology
               and will be capable of generating 1,600 megawatts of electricity,
               a significant increase over the capacity of existing reactors,
               which range from 900 megawatts to 1,450 megawatts. Two European
               Pressurized Reactors are under construction--one in Flammanville,
               France, scheduled to be operational in 2012 and a second in
               Finland scheduled to be operational in 2009.

               France is one of 13 partners in the Generation IV International
               Forum that collaborates on R&D to develop next generation nuclear
               reactor technologies. France is conducting R&D on several nuclear
               reactors, including the sodium-cooled fast reactor that is a
               critical element of the U.S. GNEP program. In addition, France has
               provided U.S. researchers with access to the French Phenix fast
               reactor to study how highly radioactive nuclear fuel might be
               converted to less radiotoxic material.

    			  Conclusions

               It is unlikely that DOE's current level of R&D funding or the
               nation's current energy policies will be sufficient to deploy
               alternative energy sources in the next 25 years that will reverse
               our growing dependence on imported oil or the adverse
               environmental effects of using conventional fossil energy. The
               United States has generally relied on market forces to determine
               the nation's energy portfolio, primarily conventional supplies of
               oil, natural gas, coal, and nuclear energy. In contrast, advanced
               energy technologies have higher up-front capital costs that make
               them less cost competitive than conventional technologies. As a
               result, despite periodic energy price spikes caused by disruptive
               world events and about $50 billion (in real terms) in energy R&D
               funding since 1978, the United States has made only steady
               incremental progress in developing and deploying advanced
               renewable, coal, and nuclear technologies that can compete with
               conventional energy technologies. However, continued reliance on
               conventional technologies leaves the United States vulnerable to
               crude oil supply disruptions, with economic, energy security, and
               national security consequences.

               The nation is once again assessing how best to stimulate the
               deployment of advanced energy technologies in response to recent
               high energy prices--caused by the growing world demand for energy,
               wars in the Middle East, and last year's hurricanes--and concerns
               about the adverse environmental effects, particularly greenhouse
               gas emissions, of using conventional fossil energy. Reducing the
               nation's dependence on oil and carbon dioxide emissions in the
               next 25 years is not unlike the 1960s challenge to put a man on
               the moon. Without sustained high energy prices or concerted,
               high-profile federal government leadership, U.S. consumers are
               unlikely to change their energy-use patterns, and the United
               States will continue to rely upon its current energy portfolio.
               Specifically, government leadership is needed to overcome
               technological and market barriers to deploying advanced energy
               technologies that would reduce the nation's vulnerability to oil
               supply disruptions and the adverse environmental effects of
               burning fossil fuels.

               The nation's current energy portfolio has raised concerns about
               the adverse environmental effects of energy
               generation--particularly greenhouse gas emissions from coal-fired
               and oil-fired power plants and the long-term storage of spent
               nuclear fuel. In addition, the duration of certain federal tax
               incentives has been insufficient to stimulate investment decisions
               to deploy advanced energy technologies. For example, renewable
               energy industry representatives have stated that the 2-year
               extension of the production tax credit in the Energy Policy Act of
               2005 does not provide sufficient certainty to stimulate
               investment. In providing a production tax credit to stimulate the
               construction of projects using advanced technologies, the credit's
               duration is key to encouraging companies and their lenders to
               undertake the substantial investments and build an industry over
               time.

               Several states have taken the lead in encouraging the deployment
               of advanced energy technologies, particularly in renewable energy.
               For example, in the past 7 years, Texas tripled its renewable
               energy use as a result of its renewable portfolio standard.
               Similarly, Minnesota's ethanol program has displaced 10 percent of
               gasoline consumption with ethanol. Many other states have
               initiatives to stimulate renewable energy generation as well.
               States' initiatives that diversify our energy portfolio and reduce
               harmful emissions are positive steps. Similarly, foreign
               countries, including Brazil, Denmark, and Germany, have sustained
               long-term efforts using mandates and/or financial incentives to
               deploy advanced energy technologies that are providing, or are
               expected in the future to provide, significant amounts of energy.
               Approaches taken by these countries may provide useful insights
               and opportunities for fostering the deployment of advanced energy
               technologies.

    			  Recommendation to the Congress

               To meet the nation's rising demand for energy, reduce its economic
               and national security vulnerability to crude oil supply
               disruptions, and minimize adverse environmental effects, the
               Congress should consider further stimulating the development and
               deployment of a diversified energy portfolio by focusing R&D
               funding on advanced energy technologies.

    			  Agency Comments

               We provided DOE with a draft of this report for its review and
               comment. In its written response, DOE did not comment on our
               recommendation to the Congress. (See app. V.) DOE provided
               technical comments, which we have incorporated as appropriate.

               As arranged with your offices, unless you publicly announce its
               contents earlier, we plan no further distribution of this report
               until 30 days from the report date. At that time, we will send
               copies to interested congressional committees, the Secretary of
               Energy, the Director of the Office of Management and Budget, and
               other interested parties. We will also make copies available to
               others upon request. In addition, the report will be available at
               no charge on the GAO Web site at http://www.gao.gov .

               If you or your staffs have any questions about this report, please
               contact me at (202) 512-3841 or wellsj@gao.gov. Contact points for
               our Offices of Congressional Relations and Public Affairs may be
               found on the last page of this report. GAO staff who made major
               contributions to this report are listed in appendix VI.

               Jim Wells
    			  Director, Natural Resources and Environment

    ^35Renewable technology plants are exempt from taxes placed on power
    plants that emit carbon dioxide.

    ^36One of the new offshore developments, Horns Rev II, is expected to be
    operational by 2009.

    ^37The German government also amended the Atomic Energy Act in 2002, which
    will systematically decommission the nation's existing nuclear power
    plants once the volume of electricity specified for each plant is
    generated--the last nuclear power plant in Germany is estimated to shut
    down about 2020.

    ^38About half of Japan's total energy demand is for oil, which is
    primarily imported from the Middle East.

    			  Appendix I: Estimated Federal Tax Expenditures Targeted at Energy
    			  Suppliers and Users, Fiscal Year 2006

    Dollars in millions
                                                                      Estimated
          Federal tax expenditures targeted                   First   FY 2006
          at energy suppliers and users^a     Budget function year^b  revenue loss
    1  Capital gains treatment of          Energy            1974          $90
          royalties on coal
    2  Excess of percentage over cost      Energy            1974          670
          depletion, fuels
    3  Expensing of exploration and        Energy            1974          680
          development costs, fuels
    4  New technology credits (addresses   Energy            1978          510
          energy production from several
          technologies, including wind and
          solar energy)
    5  Alcohol fuel credits^c              Energy            1980           40
    6  Alternative fuel production credit  Energy            1980        2,390
    7  Exclusion of interest on energy     Energy            1980           90
          facility bonds
    8  Exception from passive loss         Energy            1988           40
          limitation for working interests in
          oil and gas properties
    9  Tax credit and deduction for        Energy            1992           90
          clean-fuel burning vehicles
    10 Enhanced oil recovery credit        Energy            1994            0
    11 Credit for holding clean renewable  Energy            2005            0
          energy bonds
    12 Deferral of gain from dispositions  Energy            2005          620
          of transmission property to
          implement the Federal Energy
          Regulatory Commission's
          restructuring policy^d
    13 Credit for production from advanced Energy            2005            0
          nuclear power facilities
    14 Credit for investment in clean coal Energy            2005           50
          facilities
    15 Temporary 50 percent expensing for  Energy            2005           10
          equipment used in the refining of
          liquid fuels
    16 Pass through low sulfur diesel      Energy            2005            0
          expensing to cooperative owners
    17 Natural gas distribution pipelines  Energy            2005           20
          treated as 15-year property
    18 Amortize all geological and         Energy            2005           40
          geophysical expenditures over 2
          years
    19 30 percent credit for residential   Energy            2005           10
          purchases/installations of solar
          and fuel cells
    20 Credit for business installation of Energy            2005           80
          qualified fuel cells and stationary
          microturbine power plants
    21 Alternative Fuel and Fuel Mixture   Energy            2005          170
          tax credit
    22 Bio-Diesel and small agri-biodiesel Agriculture       2004           90
          producer tax credits
    23 Expensing of small refiner capital  Natural           2004           10
          costs with respect to complying     resources and
          with EPA sulfur regulations         environment
          Total estimated tax expenditures^e                  $5,700

               Source: GAO analysis of tax expenditures reported by the
               Department of the Treasury.

               Note: For descriptions of tax expenditures, see Office of
               Management and Budget. Analytical Perspectives, Budget of the
               United States Government, Fiscal Year 2007, (Washington, D.C.:
               2005).

               aThis list does not include five tax expenditures whose primary
               focus is energy conservation--exclusion of utility conservation
               subsidies, deduction for certain energy efficient commercial
               building property as well as tax credits for construction of new
               energy efficient homes, energy efficiency improvements to existing
               homes, and energy efficient appliances--with revenue loss
               estimates summing to $510 million for fiscal year 2006. This list
               also does not include tax incentives for general research and
               development available for all businesses. Also, the Department of
               Treasury does not report tax expenditures with revenue losses
               below $5 million.

               bFirst year the Department of the Treasury reported expenditures.

               cThe alcohol fuel credit includes, among other things, the
               volumetric tax credit for ethanol, which was enacted in 2004.
               Treasury estimates a $2.1 billion reduction in excise tax receipts
               in fiscal year 2006 as a result of income tax revenue losses and
               reduced excise tax receipts.

               dThis tax expenditure was listed under the community and regional
               development budget function in 2004.

               eSumming tax expenditure estimates does not take into account
               interactions between individual provisions.

    			  Appendix II: Scope and Methodology

               To review the Department of Energy's (DOE) research and
               development (R&D) funding trends, we analyzed DOE budget authority
               data for renewable, fossil, and nuclear energy R&D from fiscal
               year 1978 through fiscal year 2006. The data consist of DOE's
               annual appropriations, adjusted for any advanced appropriations
               and rescissions. To assess the reliability of these data, we
               interviewed DOE program managers and budget officials with
               oversight of each of the technologies. We asked DOE officials a
               series of data reliability questions, including questions covering
               data classification, particularly over time; program changes that
               could impact data classification or budget accounts; custody and
               maintenance of the data, including updates; quality control
               procedures; and accuracy and completeness of the data. Where
               appropriate, we adjusted the data to ensure consistency in
               reporting over time. We obtained historical documents, program
               plans, and assessments from other entities to corroborate the
               data. We determined that the data were sufficiently reliable for
               the purposes of this report. In addition to DOE's R&D funding, we
               reviewed revenue losses from energy-related tax expenditures for
               fiscal years 2000 through 2006 by reviewing tax expenditure
               revenue loss estimates prepared by the Department of the Treasury
               and published in the President's annual budget. While the
               aggregate value for energy-related tax expenditures is useful for
               gauging their general magnitude, summing does not take into
               account interactions between individual provisions. We excluded
               annual tax expenditures below $5 million because Treasury does not
               report them. To review DOE's strategy for developing advanced
               energy technologies, we reviewed DOE documents, including
               strategic plans, program plans, and studies on each of the
               technologies. We also collected and analyzed documents from
               industry and industry associations. In addition, we interviewed
               senior DOE managers, program managers and scientists at DOE
               laboratories, senior power company and industry association
               executives, and independent experts.

               To assess the key technological, economic, and other barriers to
               developing and deploying new energy technologies, we analyzed
               various documents from DOE, including program plans, energy
               studies and assessments, and key budget documents, including
               supporting documentation justifying budget requests. We also
               analyzed documents from other federal agencies; utilities;
               industry associations; state utility commissions and associations;
               and independent experts, including studies from the Electric Power
               Research Institute, the Massachusetts Institute of Technology, and
               the University of Chicago. We interviewed DOE and NRC officials;
               program managers and scientists at DOE laboratories; executives of
               utilities, manufacturers, and industry associations; public
               utility commissions from various states; and selected state
               governments and government associations.

               To examine the efforts of states to develop and deploy advanced
               energy technologies, we analyzed reports and assessments from DOE,
               various state governments and associations, industry and industry
               associations, and independent experts. We also used the Database
               of State Incentives for Renewable Energy, maintained by the
               Interstate Renewable Energy Council, to analyze state initiatives
               and select three states with successful initiatives--Texas'
               renewable portfolio standards, Minnesota's ethanol program, and
               California's solar programs. To assess the reliability of this
               database, we reviewed relevant documentation and obtained
               responses from the database administrator to a series of data
               reliability questions covering issues such as data entry, access,
               quality control procedures, and the accuracy and completeness of
               the data. We determined that the data were sufficiently reliable
               for the purposes of this report. In addition to the database, we
               collected documents and interviewed officials from DOE; industry
               and industry associations; and various state organizations,
               including the National Conference of State Legislatures and the
               Western Governor's Association; and selected public utility
               commissions.

               To develop a nonprobability sample of countries that have
               developed and deployed advanced renewable, fossil, and nuclear
               technologies, we (1) reviewed the Energy Information
               Administration's (EIA) international data to identify significant
               changes in consumption patterns among renewable, fossil, and
               nuclear energy technologies; (2) examined other related
               information; and (3) interviewed cognizant DOE officials and
               independent industry experts.^1 We selected Brazil, Denmark,
               France, Germany, Japan, and Spain because they have initiated
               major efforts to deploy advanced energy technologies that could
               change their energy portfolios. To obtain information on each
               country's initiatives, we analyzed documents from EIA, the
               International Energy Agency, each of the countries, and
               independent experts. We also interviewed DOE officials; officials
               from each country, either at their U.S. embassy or by telephone or
               e-mail; and independent experts.

               We conducted our work from October 2005 through October 2006 in
               accordance with generally accepted government auditing standards.

    ^1Results from a nonprobability sample cannot be used to make inferences
    about a population because in a nonprobability sample some elements of the
    population being studied have no chance or an unknown chance of being
    selected as part of the sample.

    			  Appendix III: The States� Use of Renewable Energy Incentives,
    			  Standards, and Mandates

                                           Public   Renewable      Net metering &
                            Tax           benefit   portfolio     interconnection
    State          credits^a Rebates^b funds^c standards^d             rules^e
    Alabama                o
    Alaska
    Arizona                o                             o
    Arkansas                                                                 o
    California             o         o       o           o                   o
    Colorado                                             o                   o
    Connecticut                      o       o           o                   o
    Delaware                         o       o           o                   o
    Florida                                                                  o
    Georgia                                                                  o
    Hawaii                 o                             o                   o
    Idaho                  o
    Illinois                         o       o           o
    Indiana                                                                  o
    Iowa                   o                             o                   o
    Kansas                                                                   o
    Kentucky                                                                 o
    Louisiana                                                                o
    Maine                            o       o           o                   o
    Maryland               o         o                   o                   o
    Massachusetts          o         o       o           o                   o
    Michigan                                                                 o
    Minnesota                        o       o           o                   o
    Mississippi
    Missouri               o                                                 o
    Montana                o                 o           o                   o
    Nebraska
    Nevada                           o                   o                   o
    New Hampshire                                                            o
    New Jersey                       o       o           o                   o
    New Mexico             o                             o                   o
    New York               o         o       o           o                   o
    North Carolina         o                                                 o
    North Dakota           o                                                 o
    Ohio                   o                 o                               o
                                           Public   Renewable      Net metering &
                            Tax           benefit   portfolio     interconnection
    State          credits^a Rebates^b funds^c standards^d             rules^e
    Oklahoma               o                                                 o
    Oregon                 o         o       o                               o
    Pennsylvania                             o           o                   o
    Rhode Island           o         o       o           o                   o
    South Carolina                   o
    South Dakota
    Tennessee
    Texas                  o                             o                   o
    Utah                   o                                                 o
    Vermont                          o                   o                   o
    Virginia                                                                 o
    Washington                                                               o
    West Virginia          o
    Wisconsin                        o       o           o                   o
    Wyoming                          o                                       o
    Total                 21        17      15          22                  39

               Source: GAO analysis of the Database of State Incentives for
               Renewable Energy, maintained by the Interstate Renewable Energy
               Council.

               aProvided to corporations or individuals that purchase or install
               renewable energy equipment. For example, New Mexico offers a
               30-percent personal income tax credit (up to $9,000) for residents
               who install photovoltaic or solar thermal systems. Tax credits are
               one of the most frequently used state-level financial incentives.

               bTypically provided in the form of cash rebates to residents and
               businesses for the purchase and installation of renewable energy
               equipment. For example, New York provides $4 to $4.50 per watt to
               eligible installers for the installation of approved,
               grid-connected photovoltaic systems.

               cA surcharge on each consumer's electricity bill that goes into a
               general fund to support renewable energy resources, energy
               efficiency initiatives, and renewable energy projects for
               low-income residents. For example, Connecticut residents are
               charged up to 0.1 cents per kilowatt-hour on their utility bills,
               which provides funding for Connecticut's Energy Efficiency Fund
               for energy efficiency and Clean Energy Fund for renewable energy.

               dRequire that a fixed percentage of the state's electricity be
               generated from renewable sources. For example, Texas enacted
               legislation in 2005 requiring the installation of 5,000 megawatts
               of new renewable capacity by 2015. According to the National
               Conference of State Legislatures, renewable portfolio standards
               have been particularly successful in encouraging wind power
               development.

               eEligibility and pricing rules for connecting renewable energy
               sources to the power transmission grid and crediting producers for
               excess generation. For example, the value of energy generated in
               excess of what is used is subtracted from the monthly utility bill
               of residents in Arizona with solar-electric systems.

    			  Appendix IV: Three States� Initiatives to Stimulate the Use of
    			  Renewable Energy Technologies

               Minnesota, Texas, and California have implemented programs to
               stimulate the use of renewable energy technologies. In response to
               various incentives and mandates, Minnesota now has one-third of
               the nation's ethanol fueling stations and had displaced nearly 10
               percent of its gasoline consumption with ethanol by June 2006.
               Since Texas enacted renewable portfolio standards (RPS) in 1999,
               its electric power companies have installed over 1,900 megawatts
               of new renewable energy capacity--approximately 3 percent of the
               state's total electricity generation. Since California began its
               Solar Initiative in January 2006, over 150 megawatts of new solar
               capacity have been installed.

    			  Minnesota�s Ethanol Program

               Minnesota's Ethanol Program began in 1980 as an effort to expand
               the state's farm economy by building a new market for corn, its
               largest crop; meet EPA standards for air quality in the Twin
               Cities area by reducing carbon monoxide emissions from cars; and
               reduce dependence on imported oil. To reach these goals, Minnesota
               established financial incentives and mandates to encourage the
               development of a state ethanol industry over a 17-year period. As
               of June 2006, ethanol had displaced nearly 10 percent of
               Minnesota's gasoline consumption.

               The Minnesota Ethanol Program encouraged growth in the state's
               ethanol industry, primarily through the use of producer incentives
               and mandated ethanol blends. In particular, state legislation
               passed in 1980 provided a tax credit for gasoline that was blended
               with 10-percent ethanol, and in 1986, the state set up a producer
               payment incentive that paid ethanol producers 20 cents per gallon
               for a 10-year period. Legislation enacted in 1992 required that
               all gasoline offered for sale in the state be blended with 7.7
               percent ethanol beginning in 1997. This provision was amended in
               2003 to require blends to contain at least 10 percent ethanol. In
               1995, Minnesota also established a statutory goal to develop over
               200 million gallons of ethanol production. The tax credits were
               eliminated in 1997, and the producer incentive payments were
               phased out beginning in the late 1990s.^1 In 2004, Minnesota
               enacted legislation doubling the requirement to 20 percent by
               2013.

               Currently, nearly all gasoline in Minnesota is blended with
               10-percent ethanol, representing over $100 million in annual
               savings on oil imports. Ethanol production has expanded from 1.5
               million gallons in 1987 to a current capacity of over 500 million
               gallons. Corn prices have also doubled to 30 cents a bushel, and
               the Twin Cities area is in compliance with EPA air quality
               standards, according to Minnesota officials. Minnesota is the
               nation's leader in the use of renewable fuels, with the highest
               renewable fuel use per capita in the nation. It is home to 32
               percent of the nation's E85 stations.

    			  Texas� Renewable Portfolio Standards

               To reduce a growing dependency on imported fossil fuels, make
               better use of the region's natural renewable resources, and
               improve air quality profiles, Texas enacted legislation in 2005
               that extended its 1999 RPS to require the installation of 5,000
               megawatts of new renewable capacity, or about 5 percent of the
               state's electricity demand, by 2015. Texas has already tripled its
               use of renewable energy in the 7 years since its RPS was initially
               enacted.

               Texas uses more total energy--including electricity, petroleum,
               natural gas, and coal--than any other state. In the early 1990s,
               Texas' use of renewable energy was less than 1 percent, the lowest
               in the United States. In 1992, Texas became a net importer of
               energy. Moreover, if Texas was a country, it would have ranked 7th
               in the world for greenhouse gas emissions in the early 1990s,
               according to climate change experts at the Pew Center on Global
               Climate Change. Despite these conditions, however, Texas also
               ranks first in abundance of U.S. solar and biomass resources, and
               second for wind resources. To encourage the use of the state's
               abundant renewable resources and improve its environmental
               profile, Texas' 1999 legislation established an RPS mandating that
               state utilities derive 2,000 megawatts of new generating capacity
               from renewable sources by 2009. When Texas had nearly reached this
               capacity by 2005, new legislation increased the mandate to 5,000
               new megawatts by 2015. Electric power retailers that do not comply
               with RPS requirements are subject to penalties of up to $50 per
               megawatt-hour, or 5 cents per kilowatt-hour, as tracked by a
               renewable energy credit system. To encourage a wide variety of
               renewable developments, the Texas RPS also requires that 500
               megawatts of total mandated new capacity come from renewable
               sources other than wind, because wind power is the most
               competitive renewable energy technology in Texas--98 percent of
               new installed capacity in Texas prior to 1999 was wind power. In
               addition, Texas' RPS set a nonbinding target of 10,000 megawatts
               of installed renewable capacity by January 1, 2025.

               According to the Electric Reliability Council of Texas, Inc., as
               of September 2006, Texas had tripled its renewable energy
               capacity, installing over 1,900 megawatts of new capacity,
               representing about 3 percent of its total electricity consumption.
               During 2001 alone, Texas installed 912 megawatts of wind
               power--more than the entire country had installed in any previous
               year--and created 2,500 wind-power related jobs. Texas' 2025 goal
               would result in an estimated $5 billion in consumer electric bill
               savings and the creation of nearly 20,000 jobs, according to the
               Union of Concerned Scientists.

    			  California�s Solar Programs

               Since 1998, California has supported the installation of solar
               systems--including photovoltaic systems and solar thermal
               systems--by establishing production incentives and rebates for
               solar energy generators and consumers. These programs are designed
               to reduce electricity demand and improve the reliability of the
               state's electricity system. In January 2006, California enacted a
               $2.2 billion Solar Initiative to install 3,000 megawatts of new
               solar energy by 2017, supporting the governor's 2006 "Million
               Solar Roofs Plan" to power 50 percent of all California homes--or
               1 million roofs--with solar energy by 2019. As of January 2006,
               California had installed over 150 megawatts of new solar systems
               on over 20,000 homes, businesses, schools, and government
               buildings, according to California state officials and a
               California environmental group.

               California established the Emerging Renewables Program in 1998.
               Implemented by the California Energy Commission, the program has
               encouraged the use of naturally abundant solar resources by
               allocating $118 million in rebates from 2002 through 2006 for the
               installation of new, primarily residential, renewable energy
               generating systems. In particular, for systems less than 30
               kilowatts, the program offered $2.60 per watt for the installation
               of solar-cell systems and $3.00 per watt for the installation of
               solar-thermal systems. The Emerging Renewables Program also
               allocated $10 million toward a performance-based incentive option
               for photovoltaic installations, giving electricity generators
               $0.50 per kilowatt-hour over a 3-year period. In 2001, the
               California Public Utilities Commission initiated the
               Self-Generation Incentive Program, which offers rebates through
               2007 for nonresidential distributed renewable generation for 30
               kilowatt or larger systems. Since its inception, the rebate
               program has spent about $50 million per year, achieving 50
               megawatts of installed solar capacity, with another 62 additional
               megawatts in progress. In 2006, the Public Utilities Commission
               introduced the California Solar Initiative, which will provide
               $2.9 billion in solar energy incentives over 11 years and support
               the governor's Million Solar Roofs Plan to install 3,000 megawatts
               of new solar energy capacity by 2017. By integrating California's
               existing Emerging Renewables Program and rebate solar programs,
               the initiative will continue to encourage new solar installations
               through rebate incentives for new photovoltaic and solar thermal
               systems, and pay-for-performance incentives that reward
               high-performing solar systems (greater than 100 kilowatts). To
               help sustain the solar industry, rebates for new solar systems
               will begin at $2.50 per watt, but will decline by about 10 percent
               annually over the next 10 years. In addition, the initiative sets
               aside 10 percent of program funding for low-income and affordable
               housing projects.

    ^1Some payments are still being made to producers that qualified for the
    program prior to 1999. However, these payments are now less than 20
    percent and are being continuously phased out.

    			  Appendix V: Comments from the Department of Energy

    			  Appendix VI: GAO Contact and Staff Acknowledgments

    			  GAO Contact

    			  Jim Wells (202) 512-3841 or wellsj@gao.gov

    			  Staff Acknowledgments

               In addition to the individual named above, Richard Cheston,
               Assistant Director; Robert Sanchez, Kerry Lipsitz, Christina
               Connelly, Chuck Bausell, MaryLynn Sergent, Anne Stevens, and
               Alison O'Neill made key contributions to this report. Also
               contributing to this report were Doreen Feldman, Barbara
               Timmerman, and Jenny Chanley.

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    Highlights of [58]GAO-07-106 , a report to congressional requesters

    December 2006

    DEPARTMENT OF ENERGY

    Key Challenges Remain for Developing and Deploying Advanced Energy
    Technologies to Meet Future Needs

    Despite periodic price shocks and related energy crises, the United States
    is even more dependent on crude oil and natural gas than it was almost 30
    years ago. And, without dramatic change, the nation will become ever more
    reliant on imported oil and natural gas with attendant threats to national
    security. The nation has also become concerned about global warming, which
    has been linked to carbon dioxide emissions from burning coal and oil. To
    address these concerns, the Department of Energy (DOE) has funded research
    and development (R&D) on advanced renewable, fossil, and nuclear energy
    technologies. GAO examined the (1) R&D funding trends and strategies for
    developing advanced energy technologies, (2) key barriers to developing
    and deploying advanced energy technologies, and (3) efforts of the states
    and six selected countries to develop and deploy advanced energy
    technologies. GAO reviewed DOE R&D budget data and strategic plans and
    interviewed DOE officials and scientists, U.S. industry executives,
    independent experts, and state and foreign government officials.

    [59]What GAO Recommends

    GAO suggests that the Congress consider further stimulating the
    development and deployment of a diversified energy portfolio by focusing
    R&D funding on advanced energy technologies. DOE had no comment on this
    recommendation.

    DOE's total budget authority for energy R&D dropped by over 85 percent (in
    real terms) from 1978 to 2005, peaking in the late 1970s but falling
    sharply when oil prices returned to lower levels in the mid-1980s (see
    table). DOE's R&D efforts have resulted in steady incremental progress in
    reducing costs for renewable energy technologies, reducing harmful
    emissions of coal-fired power plants, and improving safety and efficiency
    for nuclear power plants.

    Further development and deployment of advanced renewable, fossil, and
    nuclear energy technologies face several key challenges. Challenges for
    renewable technologies include developing (1) cost-effective technologies
    to produce ethanol using agricultural residues and other biomass materials
    as well as the infrastructure for distributing ethanol, (2) new wind
    technologies to expand into low wind and offshore locations, and (3)
    improved solar technologies that can better compete with conventional
    technologies. Challenges for fossil technologies are primarily associated
    with developing advanced coal gasification technologies to further reduce
    harmful emissions and reducing their high capital costs. Challenges for
    advanced nuclear technologies include uncertainty about the Nuclear
    Regulatory Commission's revised licensing process, investor concerns about
    high capital costs, and the disposal of a legacy of spent nuclear fuel.

    Many states have successfully stimulated the deployment of renewable
    energy technologies by using standards, mandates, and financial incentives
    that require, for example, power companies to provide small producers with
    access to the power transmission grid and purchase their excess energy.
    Each of the six countries GAO reviewed has used mandates and/or financial
    incentives to deploy advanced energy technologies that are providing, or
    are expected in the future to provide, significant amounts of energy.

    Budget Authority for Renewable, Fossil, and Nuclear R&D, Fiscal Years
    1978-2005

    Note: Budget authority is in real terms, adjusted to fiscal year 2005
    dollars to account for inflation.

    References

    Visible links
      47. http://www.gao.gov/cgi-bin/getrpt?GAO-05-690
      48. http://www.gao.gov/cgi-bin/getrpt?GAO-06-629
      49. http://www.gao.gov/cgi-bin/getrpt?GAO-05-906
      50. http://www.gao.gov/
      51. http://www.gao.gov/
      52. http://www.gao.gov/
      53. http://www.gao.gov/fraudnet/fraudnet.htm
      54. file:///home/webmaster/infomgt/d07106.htm#mailto:fraudnet@gao.gov
      55. file:///home/webmaster/infomgt/d07106.htm#mailto:JarmonG@gao.gov
      56. file:///home/webmaster/infomgt/d07106.htm#mailto:AndersonP1@gao.gov
      57. http://www.gao.gov/cgi-bin/getrpt?GAO-07-106
      58. http://www.gao.gov/cgi-bin/getrpt?GAO-07-106
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