Federal Research: Changes in Electricity-Related R&D Funding (Letter
Report, 08/16/96, GAO/RCED-96-203).

Pursuant to a congressional request, GAO provided information on: (1)
changes in the amount of funding for electricity-related research and
development (R&D); and (2) the impact of these changes on the types of
R&D being funded.

GAO found that: (1) Department of Energy (DOE) funding for
electricity-related R&D increased between fiscal years (FY) 1993 and
1995, but began to decrease by FY 1996 due to budget constraints and
congressional appropriation committees' recommendations; (2) the
electric utility industry began to reduce R&D funding in 1993, and R&D
managers expect the decreases to continue as the industry prepares for
deregulation and increased competition; (3) some state programs are also
experiencing funding reductions, primarily due to decreases in
contributions from utilities, oil overcharge revenues, DOE funding, and
state appropriations; (4) proprietary data and industry restructuring
make it difficult to assess the current level or project future levels
of industry spending on electricity-related R&D (5) many utilities are
shifting their R&D focus from collaborative, long-term projects to
proprietary, short-term projects to gain a competitive edge; (6) some
R&D projects are being delayed, scaled down, or cancelled as a result of
the funding reductions; and (7) DOE, industry, and state government
officials who expressed concerns about electricity-related R&D funding
suggested such alternative funding sources as a state-administered
surcharge on all retail sales of electricity and a national wires charge
on all electricity entering the transmission grid.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  RCED-96-203
     TITLE:  Federal Research: Changes in Electricity-Related R&D Funding
      DATE:  08/16/96
   SUBJECT:  Energy research
             Budget cuts
             State programs
             Cost sharing (finance)
             Electric energy
             Electric utilities
             Energy industry
             Research and development costs
             Competition

             
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Cover
================================================================ COVER


Report to the Ranking Minority Member, Committee on Science, House of
Representatives

August 1996

FEDERAL RESEARCH - CHANGES IN
ELECTRICITY-RELATED R&D FUNDING

GAO/RCED-96-203

Federal Research

(307338)


Abbreviations
=============================================================== ABBREV

  DOE - Department of Energy
  EPRI - Electric Power Research Institute
  GAO - General Accounting Office
  R&D - research and development

Letter
=============================================================== LETTER


B-272317

August 16, 1996

The Honorable George E.  Brown, Jr.
Ranking Minority Member
Committee on Science
House of Representatives

Dear Mr.  Brown: 

In fiscal year 1996, the Congress appropriated to the Department of
Energy (DOE) about $1 billion for electricity-related research and
development (R&D).  Along with the electric utilities, states, and
manufacturers, the federal government has traditionally played a
major role in this R&D.  Electricity R&D includes such technologies
as solar energy, fossil-fueled generating systems, and electric
automobiles. 

The electric utility industry is being deregulated and moving toward
a more competitive market.  At the same time, reductions have
occurred in funding from the major sources of electricity-related
R&D.  Consequently, you asked us to determine (1) what changes have
occurred in the amount of electricity-related R&D funding and the
primary reasons for these changes and (2) what has been the impact of
these changes on the types of R&D being funded.  As agreed with your
office, we are providing information on the impact of reducing
funding for six technologies--fuel cells, coal gasification, advanced
gas turbines, wind power, photovoltaics, and electricity storage--in
which DOE participated.  You also wanted to know, given these
changes, what alternate funding sources R&D managers and others have
proposed.  We did not attempt to determine whether changes in funding
levels or proposals for alternate funding sources were appropriate. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

DOE's 1993 appropriation for electricity-related R&D was about $1
billion.\1 For fiscal year 1995, the appropriation had increased by
15 percent to $1.3 billion.  However, DOE's 1996 appropriation was
reduced to about the same level as 1993.  DOE's 1997 request is a
14-percent increase over its 1996 appropriation.  During calendar
years 1993 through 1996, however, funding by electric utilities
decreased about 33 percent to $476 million, and further reductions
are expected.  The state programs that we reviewed have also reduced
their funding.  Data on R&D spending by electric equipment
manufacturers are unavailable because the data are proprietary.  The
primary reason for DOE's reduction in fiscal year 1996 is the
Congress's overall effort to reduce the federal budget.  Utilities,
in an effort to cut costs in anticipation of a shift from a regulated
electric power industry to a deregulated environment, are also
reducing their R&D budgets, according to R&D managers, because of the
expected increase in competition in the electricity market.  The
declines in state programs are due to reductions in major funding
sources, including utilities' contributions. 

Concurrent with the reduction in funding, a shift in the types of R&D
funded by electric utilities has occurred, primarily resulting in a
decrease in collaborative and longer-term projects.  Many utilities
are shifting away from such projects, which may benefit all electric
utilities, to those they believe will help them competitively in the
near term, that is, proprietary R&D with a short-term payback. 
Utility R&D managers view this shift as part of the effort to recast
the utility companies as businesses rather than regulated providers
of public services.  The projects that we reviewed in six
technologies in which DOE participated were often delayed, scaled
down, or canceled.  Given the inherent difficulties in measuring the
benefits of R&D, the economic consequences of these program changes
are unclear. 

Utility R&D managers and industry and government officials who
expressed concerns about the funding levels of electricity-related
R&D suggested alternative funding sources.  These sources include a
(1) state surcharge on all in-state retail sales of electricity and
(2) nationwide charge on all electricity entering the transmission
system--a "wires" charge. 


--------------------
\1 References to dollars over multiple years are in 1995 constant
dollars throughout this report unless otherwise noted. 


   BACKGROUND
------------------------------------------------------------ Letter :2

Electricity-related R&D encompasses both basic and applied research
and includes all aspects of electricity generation, including
nuclear, fossil, and renewable energy technologies; transmission and
distribution technologies; energy storage technologies; and
environmental studies of electricity-related issues, according to
DOE's Deputy Assistant Secretary for Utility Technologies.\2

Electricity-related R&D is funded from several sources.  For the last
4 years, DOE has provided about $4.6 billion in funding at its
national laboratories, at universities, and in co-funded
collaborative research with utilities and manufacturers.  Over the
same period, electric utilities, primarily private and
investor-owned, have spent about $2.3 billion; over the last 3 years,
state programs have spent about $200 million.\3

Manufacturers of electric utility equipment have also funded
electricity-related R&D however, current estimates of such funding
are unavailable. 

As the electric power industry moves toward deregulation and
increased competition, utilities face significant changes. 
Historically, utilities have operated as monopolies in protected
geographic areas.  Many of these utilities were regulated by state
public utility commissions that approved the inclusion of electricity
R&D expenditures in the rate base.  By including these expenditures
in the rate base, the utilities have been allowed to earn a fixed
rate of return on these expenditures.  Driven by a combination of
factors, the move toward deregulation gained impetus with the Energy
Policy Act of 1992, which promotes increased competition in the
wholesale power market.  Other factors spurring the move toward
competition include large differences in electricity rates among
utilities; new low-cost electricity generation technologies; and
recent experiences in reduced regulation in other industries, such as
telecommunications and natural gas. 

In April 1996, as a result of the Energy Policy Act of 1992, the
Federal Energy Regulatory Commission issued a final rule that now
requires electric utilities to make their transmission lines
accessible to other utilities or power producers for the transmission
of wholesale power.  It requires that this open access be made
available at the same cost that these public utilities incur to
transmit their own power.  Regulatory commissions in 44 states and
the District of Columbia had adopted or were evaluating deregulation
alternatives as of June 30, 1996. 


--------------------
\2 Because DOE does not define electricity-related R&D but includes
it within energy R&D, we used this definition as the basis for the
information we present. 

\3 Comparable funding estimates are difficult to compile because the
states use different time frames for their data. 


   ELECTRICITY-RELATED R&D FUNDING
   IS DECLINING DUE TO BUDGET
   REDUCTIONS AND DEREGULATION
   PROSPECTS
------------------------------------------------------------ Letter :3

Electricity-related R&D funding was generally reduced in 1996 by the
federal government, the electric utility industry, and most states
that we reviewed.  Since fiscal year 1993, DOE's electricity-related
R&D budget has increased, except for fiscal year 1996 when it was
reduced to near its 1993 level.  Meanwhile, the electric utilities
began making reductions 3 years ago.  Most state programs we reviewed
are also experiencing reductions.  The primary reasons for the
funding declines are overall reductions in federal and state funding
and the increased competition expected from the deregulation of the
utilities.  Current data on the manufacturers' R&D spending were
unavailable. 

Figure 1 shows the funding for the two largest sources of R&D for
which we have data for the last 4 years.  DOE's 1993 and 1996 budget
amounts are similar, while the 1994 and 1995 budgets experienced
increases.  Meanwhile, the utilities' investments have decreased each
year. 

   Figure 1:  DOE's and
   Investor-Owned Utilities'
   Investments in Electricity R&D,
   1993-96

   (See figure in printed
   edition.)

DOE time periods are fiscal years; utility time periods are calendar
years. 

Note:  Millions of 1995 constant dollars

Source:  GAO's presentation of data from DOE's budgets, the Federal
Energy Regulatory Commission, and selected electric utility
companies. 


   DOE'S R&D BUDGET REDUCED
------------------------------------------------------------ Letter :4

After approving increases in previous years, the Congress reduced
DOE's electricity-related R&D budget by about 20 percent in fiscal
year 1996 compared to 1995.  The reductions occurred in
electricity-related R&D activities under both of DOE's
appropriations--Energy and Water Development and Interior and Related
Agencies.  DOE's 1997 budget request for electricity-related R&D is
about 14 percent higher than the 1996 appropriation.  Table 1
presents the major R&D program budgets over 5 years. 



                                         Table 1
                         
                          Appropriations for Major Electricity-
                         Related R&D Programs (Fiscal Years 1993-
                                           97)

                           (Millions of 1995 constant dollars)

                                                                                     1997
Budget item                  1993          1994          1995          1996       request
-------------------  ------------  ------------  ------------  ------------  ------------
Renewable & energy       $380,968      $460,483      $533,441      $415,806      $562,217
 efficiency
Nuclear                   129,813        97,838       106,978        67,157        75,441
Fossil                    372,528       364,824       353,300       304,293       272,452
Energy research,          100,084        95,930       181,957       138,510       153,268
 including fusion\a
Biological &              129,653       128,562       102,852        99,622       100,330
 environmental
 R&D\b
Policy office\c             3,559             -         6,070         3,922         4,831
=========================================================================================
Total                  $1,116,605    $1,147,637    $1,284,598    $1,029,309    $1,168,539
-----------------------------------------------------------------------------------------
Note:  DOE's Office of Energy Efficiency and Renewable Energy
developed an estimate of DOE's budget for utility- related activities
for fiscal year 1993, which we used together with other budget data
to estimate DOE's budget for electricity-related R&D activities. 

\a DOE's Office of Energy Research noted that fusion energy had a
goal of energy production through fiscal year 1995 and was oriented
toward a technology program; however, for fiscal years 1996 and 1997,
the program's goal was reoriented to a science program.  Reflecting
this reorientation, the Deputy Associate Director of the Fusion
Energy Sciences program provided us with estimates of about $83
million for fiscal year 1996 and about $84 million for the fiscal
1997 request. 

\b Includes R&D on the effect of carbon dioxide on the earth's
atmosphere and on people. 

\c Includes environmental policy studies, analysis of DOE's R&D
activities, and evaluation of the proposed regulations' effect on the
energy system. 

Source:  GAO's presentation of data from DOE's budgets. 

According to the House and Senate Appropriations Committees' reports
on DOE's fiscal year 1996 appropriations, the primary reason for the
decline was to meet overall budget constraints.  For example, the
House and Senate Appropriations Committees' reports on Energy and
Water Appropriations made repeated references to budget constraints
and budget realities in their reports on DOE's fiscal year 1996
budget for energy supply R&D activities.  Compared to DOE's request,
the House Committee recommended a 24-percent decrease, and the Senate
Committee recommended an 18-percent decrease. 

In separate reports, the House and Senate Appropriations Committees
responsible for the Interior and Related Agencies Appropriations
recommended reducing DOE's fiscal year 1996 appropriation for fossil
energy R&D programs by about 10 percent below the fiscal year 1995
level and stated their intent to continue reducing this program by a
similar percentage each year for the next several years.  According
to these reports, the reductions will permit the agency to gradually
phase down to a funding level more in line with the recommendations
of the legislative committee of jurisdiction in the House. 

DOE's fiscal year 1997 overall budget request for electricity-related
R&D is greater than the 1996 appropriations; however, the budget
request for some technologies decreased.  For example, the request
for the renewable energy and energy-efficiency programs is $146.4
million (or 35 percent) greater, whereas the request for the fossil
energy programs is $31.8 million (or 10 percent) less.  DOE's budget
attributes the reductions in the fossil energy programs to
congressional guidance to reduce these programs by 10 percent per
year. 


      UTILITIES ARE REDUCING R&D
      TO PREPARE FOR INCREASED
      COMPETITION
---------------------------------------------------------- Letter :4.1

R&D spending by the nation's investor-owned utilities has declined by
nearly one-third in 3 years (from 1993 to 1996) after being level in
real dollars for the previous 10 years.  We gathered data from 80
companies representing the 112 largest operating utilities\4 from a
total of 3,000 utilities.\5 These 112 investor-owned utilities, which
are privately owned, account for over 93 percent of all nonfederal\6
utility R&D spending and are responsible for about three-quarters of
all electricity sales.  They reduced their spending for R&D from
about $708 million in 1993 to about $476 million in 1996. 

In 1992, the National Association of Regulatory Utility Commissioners
recommended that utilities devote 1 percent of their revenues to R&D. 
In 1993, 6 of the 112 investor-owned utilities met that target, but
since then all 6 have substantially cut back their R&D spending.  In
1994, utilities on average devoted about 0.3 percent of their
revenues to R&D. 

Utility R&D managers told us that this average will most likely
continue to decline.  Of the 80 companies we contacted, the R&D
managers of 38 companies predicted cutbacks in R&D spending after
1996, while the managers of only 2 companies predicted increases. 
The managers from the remaining 40 companies were either unsure,
thought their expenditures would remain about the same, or did not
provide the information. 

According to utility R&D managers who were asked why their budgets
were being reduced, the main reason was that their companies are
preparing for deregulation and competition by cutting costs wherever
they can.  In the past, utilities were allowed to earn a fixed rate
of return on all R&D projects that the public utility commission
allowed in the rate base.  In a more competitive marketplace,
utilities will be forced to price electricity to compete with other
utilities and independent power producers.  As a result, R&D managers
evaluate potential R&D projects on the basis of their likelihood of
providing a near-term return to the utility that will allow them to
reduce electricity rates. 

Increased competition was cited as the primary reason for the biggest
cutbacks to date by utilities in California, New York, and Florida. 
The 13 investor-owned utilities in these states have been among the
leaders in R&D investments, accounting for 39 percent of the R&D
funded by investor-owned utilities in 1993.  But they have reduced
their R&D spending by 52 percent since 1993.  According to utility
R&D managers in New York and California, they currently charge
customers considerably more than the average price for electricity,
and they are under pressure to cut costs in order to be able to
compete in a deregulated market.  Florida's major utilities have
eliminated nearly all of their R&D funding in order to be
cost-competitive with each other and with other electricity suppliers
in the region. 

   Figure 2:  R&D Spending by
   Major California, New York, and
   Florida Investor-Owned
   Utilities (1993 and 1996)

   (See figure in printed
   edition.)

Note:  Millions of constant 1995 dollars

Source:  GAO's presentation of data from the Federal Energy
Regulatory Commission and selected utilities. 

Other reasons given by 10 companies' R&D managers for reductions in
their R&D were that no new DOE co-funded projects were being
initiated and ongoing projects were either reaching completion or
being cut back.  These projects included coal technology development,
renewable energy, and other projects for advanced electricity
generation technology. 


--------------------
\4 Some companies own more than one utility. 

\5 The remaining utilities consist primarily of municipal utilities
and rural cooperatives, and the combined total of their R&D spending
last fiscal year was about $5 million. 

\6 Federally owned utilities include TVA and DOE's five power
marketing administrations. 


      SOME STATE R&D PROGRAMS ARE
      BEING REDUCED BECAUSE OF
      FUNDING CONSTRAINTS
---------------------------------------------------------- Letter :4.2

The electricity-related R&D programs that we reviewed at the state
level are also experiencing reductions.  Of the 11 large programs in
the nine states that we reviewed, 7 have been reduced in the past 3
years.\7 Overall the programs have seen a 30-percent reduction in
funding, from $83 million to $58 million, since 1993.  Most of these
programs involved energy-efficiency R&D, and some involved generation
technologies of particular interest to that state, such as coal power
and renewable energy. 

The state program officials attributed the declines in these programs
to the decreases in major funding sources:  (1) utilities'
contributions; (2) oil overcharge revenues;\8 (3) co-funding
available for R&D projects from DOE, the Electric Power Research
Institute\9 (EPRI), utilities, and industry; and (4) state
appropriations.  For example, the budget of the Empire State Electric
Energy Research Corporation, funded by voluntary contributions from
New York utilities, was cut nearly in half, from $19 million to $10
million, between 1993 and 1996. 

The California Institute for Energy Efficiency, which has funded
energy-efficiency R&D at Lawrence Berkeley National Laboratory and
various California universities, has also been affected by
cost-cutting.  The Institute's primary source of funding was about $4
million per year from California utilities.  By late 1994, the
utilities no longer provided funding.  The Institute is maintaining a
skeleton operation using carryover funds but will be unable to
continue if another source of funding is not found by the end of
1996. 


--------------------
\7 The 11 programs represent the major state programs involved in
electricity-related R&D, according to the available data and
discussions with key state program officials.  The states and their
programs are identified in appendix I. 

\8 These funds were allocated to the federal government by courts as
a result of lawsuits in which oil companies were found to have
overcharged for oil. 

\9 EPRI was founded by the utility industry in 1972 to do R&D.  It is
funded by the utilities' contributions. 


      AMOUNT OF MANUFACTURERS' R&D
      SPENDING IS UNAVAILABLE
---------------------------------------------------------- Letter :4.3

Information on spending on electricity-related R&D by the
manufacturers of electric utility equipment is unavailable.  Data
from manufacturers are considered proprietary and therefore difficult
for organizations that collect and analyze R&D financial information
to obtain.  The organizations, which include the National Science
Foundation and DOE's Energy Information Administration, said that
they had data on the manufacturers' energy R&D but could not isolate
the electricity-related R&D spending.  The most recent such
information available was an EPRI study that estimated a 1988 total
for all U.S.  manufacturers of $200 million.\10

In a restructured industry in which other companies are reducing R&D
spending, manufacturers may take on the development of new products. 
In the absence of current data, the degree to which this is
occurring, if at all, is uncertain.  Utility, EPRI, and DOE officials
told us that on the one hand, the manufacturers are increasingly
being relied on to meet technology needs, especially by independent
power producers, which are producing a growing portion of the
nation's electricity but are generally not investing in R&D
themselves because they operate on a thin profit margin.  On the
other hand, officials from these organizations told us that
electricity-related manufacturers may not invest in new technology
R&D for the following reasons:  (1) the cutbacks in the availability
of co-funding to help support projects; (2) the restructuring of the
electricity industry, which has created uncertainties in the domestic
market; and (3) the difficulty of competing in international markets
where foreign competitors have the strong backing of their
governments. 


--------------------
\10 Research and Development in the 1980s:  An Overview, Electric
Power Research Institute, June 1990. 


   COLLABORATIVE AND LONGER-TERM
   PROJECTS ARE BEING REDUCED
------------------------------------------------------------ Letter :5

Concurrent with the declines in funding, a shift in the types of R&D
being funded has also occurred, primarily resulting in a decrease in
collaborative and longer-term projects.  Many utilities are shifting
their R&D from such projects to proprietary R&D and to projects with
a short-term payback.  In addition, as a result of these changes and
last year's reductions in DOE's funding, advanced technology projects
in the six technology areas we reviewed were often delayed, scaled
back, or canceled.  Given the inherent difficulties in measuring the
benefits of R&D, the economic consequences of these program changes
are unclear. 


      UTILITIES ARE SHIFTING AWAY
      FROM COLLABORATIVE R&D
---------------------------------------------------------- Letter :5.1

According to many utility R&D managers, their companies have been
shifting the focus of their R&D from collaborative projects
benefiting all utilities, to proprietary R&D, giving their individual
companies a competitive edge.  R&D managers at more than half of the
80 utilities we contacted reported reducing funding for collaborative
R&D.  Some R&D managers said they believe that continued investment
in R&D that could benefit all companies would put their company at a
competitive disadvantage in comparison with other utilities and with
independent power producers that are not making such investments. 

This shift is reflected in the declining support for EPRI, which is
the utilities' main vehicle for collaborative R&D.  According to a
National Rural Electric Cooperative Association official, many of his
members belong to EPRI and look to it for larger, industrywide
innovations.  Traditionally amounting to more that half of the
utilities' R&D dollars, the utilities' contributions to EPRI over the
last few years have declined faster than the utilities' R&D spending
overall.  Between 1994 and 1996, membership contributions to EPRI
declined by nearly 30 percent, from $424 million to $300 million, and
EPRI officials expect a further decline in 1997 (see fig.  3).  Of
the 80 utility companies we contacted, 12 dropped out of EPRI between
1994 and 1996, but most remained members and simply decreased their
contributions.\11

   Figure 3:  Decline in
   Utilities' Contributions to
   EPRI (1994-96)

   (See figure in printed
   edition.)

Note:  Millions of dollars

Source:  GAO's presentation of EPRI's data. 

To address the changes that are occurring, EPRI has tried to
encourage membership for independent power producers--which an EPRI
official estimates will account for more than 35 percent of future
generating capacity--but such efforts have been unsuccessful.  In
addition, EPRI plans to establish a taxable subsidiary that can
participate in proprietary R&D. 


--------------------
\11 In addition, four of the six utilities that dropped out of EPRI
prior to 1994 rejoined. 


      UTILITIES ARE SHIFTING AWAY
      FROM LONG-TERM,
      ADVANCED-TECHNOLOGY R&D
---------------------------------------------------------- Letter :5.2

According to many utility R&D managers, their companies are also
shifting the focus of their R&D away from long-term,
advanced-technology R&D, like the advanced gas turbine and new fuel
cells, to short-term projects that will be profitable and provide a
competitive edge in the near term.  The R&D managers at about half of
the 80 utility companies we contacted reported such a change.  In
fact, the R&D managers at the nation's two largest utilities, Pacific
Gas & Electric and Southern California Edison, said that their
advanced-technology R&D programs have been eliminated. 

R&D managers from 52 of the 80 utility companies we contacted
expressed concern that if the trend in funding decreases continued,
it would result in slowing technology development, sacrificing future
prosperity to meet short-term goals, and failing to meet national
energy goals.\12

In addition, DOE officials said that the reductions in the renewable
and fossil energy programs will delay penetration of technologies
into the market and change the way that some projects are being
carried out. 

With the move toward deregulation, some R&D managers said that they
are more concerned with whether their companies will continue to
exist in the face of widespread restructuring and mergers than with
the potential long-term benefits from advanced technology that may
take 8 or more years to develop and market.  They also said that they
view the shift to short-term R&D as part of the recasting of utility
companies as businesses rather than regulated public-service
providers.  A 1996 DOE study\13 found that private industry in
general is shifting its R&D priorities away from the longer-term
benefits of basic and applied research to an emphasis on product
development and process enhancements supporting shorter-term market
strategies and "bottom lines."

The R&D managers at some utilities told us that their companies are
shifting from R&D activities related to long-term,
advanced-technology power generation R&D because, under
restructuring, they will become transmission and distribution
companies and will no longer be involved in power generation.  Thus,
some utilities see themselves purchasing new power rather than adding
generating facilities.  Additional reasons for the shift mentioned by
some utilities' R&D officials were that there is no immediate need
for additional electricity supplies, the available gas-turbine
technology is adequate as long as natural gas is plentiful and
relatively inexpensive, and market uncertainties are associated with
deregulation. 

EPRI's R&D programs for advanced power generation have also been
affected by cutbacks in the utilities' contributions.  For example,
the budgets for fuel cells, coal gasification, advanced gas turbines,
and wind and solar power have declined by a total of 66 percent, from
$40.7 million to $13.9 million, within the past 3 years.  EPRI
program managers said that they no longer have funds to initiate new
projects; instead, their role is increasingly one of information
transfer rather than R&D funding. 


--------------------
\12 Only two R&D managers said they were not concerned; the rest did
not comment. 

\13 Corporate R&D in Transition, DOE, Mar.  1996. 


      SOME DOE PROJECTS ARE BEING
      DELAYED, SCALED DOWN, OR
      CANCELED
---------------------------------------------------------- Letter :5.3

The projects that we reviewed in six technologies in which DOE
participated were beginning to be delayed, scaled down, or canceled
as a result of funding reductions, according to DOE, state, and
industry officials that we contacted.  We chose to review these areas
because, according to the 1995 DOE Task Force study,\14 the projects
in these areas have a high or medium long-term potential for meeting
the national energy goals and because they were significantly reduced
in the utilities' budgets.  The technologies reviewed were fuel
cells, coal gasification, advanced gas turbines, wind power,
photovoltaics, and electricity storage (see app.  II for details). 

The reductions in DOE's funding are delaying the development of
several technologies, according to DOE officials.  For example, the
unavailability of DOE and EPRI co-funding is delaying the development
of a fuel-cell system--whose goal is the highly efficient,
environmentally benign conversion of fossil fuel to electricity. 
Funding reductions are also delaying the development of one of DOE's
fuel-cell vehicle programs and a demonstration of superconducting
magnetic energy storage, whose goal is a highly efficient new
technology for storing electricity. 

The funding reductions by DOE, utilities, and EPRI are resulting in
the scaling down of collaborative projects with industry for the
development of cost-efficient photovoltaic systems, which convert
sunlight directly to electricity.  Several projects are being scaled
down, such as (1) a program to reduce the cost of photovoltaic
manufacturing and (2) a center that aids in designing new
photovoltaic applications. 

The funding reductions are also resulting in the cancellation of two
programs to encourage wind-power development.  A collaborative
program involving DOE, utilities, and EPRI to test new wind turbines
in utility settings will be terminated following the completion of
the three projects currently under way.  A program to support
utilities' wind turbine purchases to reduce the utilities' perceived
risk of introducing a new and unfamiliar technology has also been
eliminated. 


--------------------
\14 Energy R&D:  Shaping our Nation's Future in a Competitive World,
Final Report of the Task Force on Strategic Energy Research and
Development, Secretary of Energy Advisory Board, June 1995. 


   R&D MANAGERS PROPOSE
   ALTERNATIVE FUNDING MECHANISMS
------------------------------------------------------------ Letter :6

Utility R&D managers and industry, DOE, and state government
officials who expressed concerns about the funding of
electricity-related R&D suggested alternative funding sources.  They
are (1) a state-administered surcharge on all retail sales of
electricity within the state and (2) a nationwide non-bypassable
wires charge that could provide an alternative funding source for
EPRI. 


      STATE SURCHARGE PROPOSALS
---------------------------------------------------------- Letter :6.1

Several states that are considering deregulating their utilities have
proposed surcharges to fund public-benefit R&D the states include
California, New York, Massachusetts, and Rhode Island.  For example,
in January 1996 the California Public Utilities Commission published
its deregulation proposal.  It recognized that California utilities'
R&D budgets have decreased significantly in the transition to a
competitive market.  The Commission's proposal calls for a
non-bypassable surcharge to be instituted no later than January 1,
1998, on all retail electricity sales to fund public-benefit R&D and
energy-efficiency activities.  The surcharge would fund R&D that
served a broad public interest which might otherwise be lost in the
transition to a more competitive market place.  The proposal calls
for establishing a consortium or public authority to administer the
funds but does not specify a funding level. 

However, some utility R&D managers and state and EPRI officials
pointed out weaknesses in the state-by-state administration of
surcharges.  These officials believe that although surcharges may be
suitable for programs that focus on locally available natural
resources, local conditions, and partnerships with local industries,
the states' administration of more broadly based programs would
likely be inefficient, uncoordinated, and duplicative and not achieve
the critical mass necessary for projects of nationwide scope.  Also,
they are concerned that if some states implemented a surcharge and
others did not, the problem of "free riders" would continue, where
some would receive the benefits without helping to pay for the R&D,
putting states that did pay at a competitive disadvantage. 


      NATIONWIDE WIRES CHARGE
      PROPOSAL
---------------------------------------------------------- Letter :6.2

Some utility R&D managers and state and EPRI officials suggested that
a non-bypassable national wires charge could provide an alternative
funding mechanism for EPRI and longer-term collaborative R&D.  It
would ensure that those who do not fund R&D do not achieve a
competitive advantage over those who do.  Under this proposal, a
small charge would be assessed on all electricity entering the
transmission grid, whether it be interstate or intrastate. 

Furthermore, the National Association of Regulatory Commissioners in
November 1994 adopted a resolution recognizing the need for a system
of support for public benefits, which include electricity-related R&D
in the restructured electricity industry.  Subsequently, an
Association official told us that in commenting on the Federal Energy
Regulatory Commission's open-access rulemaking, the Association
recognized that a nationwide wires charge was one possible technique
to fund public benefits. 

The Gas Research Institute, the R&D counterpart to EPRI for the
natural gas industry, is funded by a somewhat similar charge on gas
flowing through interstate pipelines.  This pipeline charge has
enabled funding for the Institute to be maintained despite reduced
regulation.  Recently, the Institute has encountered problems with
this funding mechanism because individual pipeline companies are
allowed to reduce their payments to the Institute if their rates are
discounted due to competition from other pipeline companies.  As a
result, the Institute experienced a 21-percent shortfall in its 1996
R&D budget.  In an order issued on May 3, 1996, the Federal Energy
Regulatory Commission approved an amended R&D program for the
Institute. 

Many utility R&D managers with whom we spoke, although generally
reluctant to support any additional charges for electricity, said
that a non-bypassable wires charge would be a more equitable way to
provide funding than the current system, to which some utilities and
independent power producers were not contributing.  The managers also
said that if there were a wires charge, they would like to have
considerable say over how the money was spent. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :7

We transmitted a draft of this report to the Secretary of Energy for
review and comment.  We received written comments from DOE's
Assistant Secretary, Energy Efficiency and Renewable Energy, who
stated that the agency had only minor editorial comments on the
draft.  We incorporated these suggestions where appropriate. 


---------------------------------------------------------- Letter :7.1

We conducted our work from October 1995 through July 1996 in
accordance with generally accepted government auditing standards. 
Appendix I describes the objectives, scope, and methodology of our
review in detail.  Appendix III lists the major contributors to this
report. 

As arranged with your office, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days after the date of this letter.  At that time, we will
send copies to the appropriate congressional committees, federal
agencies, and other interested parties.  We will also make copies
available to others on request. 

If you have any questions about this report, call me at (202)
512-3841. 

Sincerely yours,

Victor S.  Rezendes
Director, Energy, Resources,
 and Science Issues


OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix I

Our objectives were to determine (1) what changes have occurred in
the amount of electricity-related research and development (R&D)
funding and the primary reasons for these changes and (2) what has
been the impact of these changes on the types of R&D being funded. 
For the impact of changes to the Department of Energy's (DOE) R&D, we
agreed to provide information on six technologies.  You also wanted
to know, given these changes, what alternate funding approaches R&D
managers and others have proposed. 

To obtain information on the federal electricity-related R&D
programs, we contacted DOE officials and program managers and
extracted electricity-related R&D data from DOE's budget documents. 
Because DOE does not separately identify electricity-related R&D, we
relied heavily on an analysis of utility-related activities for
fiscal year 1993 performed by DOE's Office of Energy Efficiency and
Renewable Energy.  We used this analysis together with other budget
data to estimate DOE's budget for electricity-related R&D activities
for fiscal years 1993 through 1997.  We did not gather data on
possible electricity-related R&D funding by other federal agencies,
such as the Department of Defense, National Aeronautics and Space
Administration, and Department of Commerce. 

To determine changes in electric utilities' R&D spending, we analyzed
data on R&D expenditures collected by the Federal Energy Regulatory
Commission from investor-owned utilities through 1994.  These
utilities accounted for about 93 percent of nonfederal utilities' R&D
spending.  For information for 1994 through 1996, future trends, and
other responses, we interviewed and obtained data from utility R&D
managers or other corporate officials at 80 companies representing
112 investor-owned electric utilities, which accounted for over 99
percent of investor-owned utilities' R&D.  We also interviewed and
collected information from corporate officials, program managers, and
officials of the Electric Power Research Institute (EPRI), and
officials of trade associations representing municipal utilities and
rural electric cooperatives. 

To gather information on state-sponsored electricity-related R&D
programs, we interviewed and obtained data from officials involved
with 11 state programs of significant size from 9 states--California,
Florida, Illinois, Iowa, New York, North Carolina, North Dakota,
Ohio, and Wisconsin.  The 11 programs include the Empire State
Electric Energy Research Corporation, New York State Energy Research
and Development Authority, Florida Solar Energy Center, Ohio Coal
Development Office, California Energy Commission's Energy Technology
Advancement Program, California Institute for Energy Efficiency,
Energy Center of Wisconsin, North Carolina Alternative Energy
Corporation, North Dakota Lignite Energy Council, Illinois Clean Coal
Institute, and Iowa Energy Center. 

To obtain information on industry spending on electricity-related
R&D, we contacted manufacturers' trade associations and private
nonprofit research organizations, including EPRI.  We also
interviewed officials from several companies involved with specific
technologies we selected to examine.  In addition, we reviewed
studies published by and contacted officials at other organizations,
including DOE, the National Science Foundation, the Industrial
Research Institute, and the Energy Information Administration. 

To determine the effects of the changes on the types of R&D being
funded, we interviewed and obtained information from EPRI and DOE
program managers, utility R&D managers, and industry and state
officials.  To determine the impact of changes to DOE's R&D, we
selected six technologies--fuel cells, coal gasification, advanced
gas turbines, wind power, photovoltaic, and electricity storage.  We
selected these technologies because the Secretary's 1995 Task Force
study designated them as having high and medium long-term potential
for meeting national energy goals and they have experienced funding
reductions by utilities and EPRI.  These technologies are advanced
electricity generation technologies, except for electricity storage,
which EPRI officials predict will be of increasing importance in an
era of deregulation. 

To obtain information on alternative funding approaches, we relied on
interviews and documents from utility R&D managers and state, DOE,
EPRI, and industry officials, as well as the National Association of
Regulatory Utility Commissioners.  We also discussed the Gas Research
Institute's fuel line charge with Institute and Federal Energy
Regulatory Commission officials.  We did not determine whether the
changes and trends in funding levels are appropriate and therefore
whether the alternative funding proposals are necessary. 

We conducted our work from October 1995 through July 1996 in
accordance with generally accepted government auditing standards. 


IMPACT OF CHANGES ON SIX DOE
TECHNOLOGIES
========================================================== Appendix II

We reviewed the following six technologies--fuel cells, coal
gasification, advanced gas turbines, wind power, photovoltaic, and
electricity storage.  Projects in these six technologies are
beginning to be delayed, scaled down, or canceled as a result of
funding reductions, according to DOE, state, and industry officials
that we contacted. 


   FUEL CELLS
-------------------------------------------------------- Appendix II:1

Fuel cells is a new generating technology that converts the energy of
chemical reactions directly into electricity.  It is intended to be
the most efficient, environmentally benign of the fossil-fueled
technologies.  As fuel cell applications are being tested, developers
are seeking ways to bring down the cost so that the systems can
compete with other technologies.  The various fuel cell
technologies--phosphoric acid, molten carbonate, solid oxide, and
proton exchange membrane fuel cells--are at different stages of
development. 

Phosphoric acid fuel cell technology is on the market as relatively
small power plants in hospitals, research laboratories, and remote
sites.  Neither EPRI nor DOE is any longer involved with this R&D. 
However, DOE is cooperating with the Department of Defense on a
buy-down program aimed at decreasing the unit cost by increasing
production and sales.  Defense is providing $15 million to reduce the
purchase price, with preference given to Defense sites. 

For molten carbonate fuel cells, two manufacturers are currently
building and testing demonstration plants.  The demonstrations
involve scaling up the technology into commercial-size powerplant
systems.  The projects were co-funded by DOE, EPRI, the Gas Research
Institute, and several utility companies.  Both manufacturers have
experienced significant problems in scaling up their systems to
demonstration plant size.  Because extensive system modifications are
being made, another generation of demonstration plants will likely be
needed before the systems are market ready.  The availability of
funding for a second round of demonstration plants is questionable. 

Solid oxide fuel cell systems are currently being developed by
several companies.  DOE is co-funding the development by Westinghouse
Electric Corporation of a tubular system, while several smaller
companies are working on developing planar systems.  While
Westinghouse's tubular system is more fully developed, planar
technology may prove simpler and cheaper.  The developers, along with
EPRI, are seeking funding to scale up the technology into larger
systems. 

Proton exchange membrane fuel cells operate at low temperatures and
thus can be turned on and off readily, making them suitable for
transportation vehicles.  Several auto makers, with DOE co-funding,
are investigating whether this technology can meet the cost and
performance standards under the Partnership for a New Generation of
Vehicles program, an effort to spur the development of more efficient
and lower emission vehicles. 

The stationary fuel cell budget for 1995 was $48.2 million, which
according to DOE's program manager was more than two-thirds of total
U.S.  fuel cell R&D expenditures.  In fiscal year 1996, the program
operated at a reduced level under a continuing resolution for most of
the year.  The program manager expects that the Congress will reduce
the budget by about $5 million per year for the next 4 years, which
would reduce DOE's ability to co-fund demonstration projects.  Even
without these cuts, DOE lacks the funds to support the development of
planar solid oxide systems unless it were to drop funding for other
on-going projects, according to the program manager.  EPRI is trying
to get a consortium of utilities to invest in the development of a
planar solid oxide system but is finding it difficult.  The program
manager also said that the lack of DOE or EPRI/utility support will
delay efforts by the developer, a small company, to scale up its
technology into a marketable system. 

DOE's transportation fuel cell budget for fiscal year 1995 was $25
million.  The program manager expects the fiscal year 1996 budget to
be reduced by 14 percent and expects additional reductions in 1997. 
For 1996, DOE eliminated programs for the transportation applications
of phosphoric acid fuel cells, such as in buses and locomotives.  For
proton exchange membrane fuel cells, DOE reduced by 50 percent its
support for General Motors' fuel cell vehicle program, which
according to DOE's program manager will delay the program.  DOE is
maintaining its support for the Ford and Chrysler fuel cell vehicle
programs, which are not as far along. 

The program manager said that further budget cuts in the
transportation fuel cell program will jeopardize advanced concept
research, such as work at Los Alamos National Laboratory to develop
direct methanol oxidation, which could potentially eliminate the need
for a heavy on-vehicle fuel reformer.  He is also concerned that
delays due to budget cutbacks could keep fuel cell vehicle
development from meeting the time frames for selection under the
Partnership for a New Generation of Vehicles program. 

EPRI's fuel cell budget has dropped 67 percent, from $9 million to $3
million, in the past 2 years and is likely to decrease further in the
future.  EPRI officials are concerned that they will no longer be
able to support fuel cell demonstration projects and that fewer funds
will be available for exploratory research on advanced fuel cell
concepts.  In addition, the largest California utilities, which have
supported fuel cell development, have discontinued funding for the
advanced generation technologies. 


   COAL GASIFICATION
-------------------------------------------------------- Appendix II:2

Coal gasification is an advanced electricity generation technology
that converts coal into gaseous fuel and cleans the fuel of
pollutants in certain powerplants.  Three powerplants to demonstrate
the currently available technology are under construction as a part
of another DOE program. 

The program was to consist of the Gasification Product Improvement
Facility in West Virginia and the Power System Development Facility
in Alabama.  The West Virginia facility was designed to do R&D on
advanced concepts to increase efficiency and lower costs.  The
Alabama facility, for which DOE provides 80 percent of the funding,
was designed to test high-temperature particulate filters, but it has
the potential to do some of the advanced concept R&D work planned for
the West Virginia facility. 

DOE's budget for coal gasification-related R&D was reduced by 23
percent from $26.7 million in fiscal year 1995 to about $20.6 million
in fiscal year 1996.  To achieve this cutback, DOE has decided to
eliminate the Gasification Product Improvement Facility.  DOE,
however, is preserving funding for the Power System Development
Facility.  For fiscal year 1996, DOE's funding for the project is $12
million.  Also contributing funding are EPRI and the Southern
Company, the host utility.  DOE expects some cost sharing from filter
manufacturers and developers and more participation from industry
once the facility is in operation.  DOE is also funding related
research projects at the Morgantown Energy Technology Center and
other locations. 

EPRI's budget for advanced coal technology has dropped 71 percent,
from $8.7 million in 1993 to $2.5 million in 1996, of which $1.6
million is for the Alabama facility.  The EPRI program manager said
that if funding keeps shrinking, EPRI may not be able to continue
funding the facility.  Although EPRI has supported the three
demonstration projects, EPRI's continued support is jeopardized
because one of the host utilities, Tampa Electric, has dropped out of
EPRI and another, Cinergy, has stopped funding EPRI's advanced fossil
business unit. 

The outlook for industry's potential contribution, according to EPRI
and DOE officials, is mixed.  Many of the companies are small and not
capable of doing much R&D on their own.  However, some of the large
oil and gas companies, which have more resources, may become more
involved, especially in international markets. 


   ADVANCED GAS TURBINES
-------------------------------------------------------- Appendix II:3

The potential benefits of advanced gas turbines, another electricity
generating technology, is greater energy efficiency and economy and
reduced emissions.  The turbines can be fueled by natural gas, oil
fuels, coal-derived gas, or biomass gas.  Gas turbines for utility
applications are typically combined with steam turbines to form a
combined-cycle system.  The waste heat from the gas turbine is used
to generate steam, which is converted into additional electricity. 

DOE is cost-sharing with industry, developing both large and small
advanced gas turbines.  DOE is to fund no more than 65 percent of the
$700 million, 8-year program to develop advanced turbines by the year
2000; industrial participants will contribute at least 35 percent. 
DOE's Fossil Energy Office is responsible for developing the
large-scale turbine, while DOE's Office of Energy Efficiency and
Renewable Energy is responsible for the small-scale turbine for
distributed, industrial, and co-generation applications.  On a
four-phase schedule, both programs are now in phase III, which
involves full-scale component development and a steep increase in
expenditures, according to DOE officials.  Two manufacturers are
independently developing turbine systems under each program--General
Electric and Westinghouse are the developers of the large turbine
systems and Allison Engines and Solar Turbines are the developers of
the small turbine systems. 

Meanwhile a collaborative initiative, including several utilities and
EPRI, is seeking to develop a mid-sized (about 100 megawatt) advanced
turbine using aeroderivative technology developed for jet aircraft,
such as the wide-bodied Boeing 777.  Organized in 1991 by Pacific Gas
& Electric, other California utilities, and the state of California,
the collaborative has been managed by EPRI and supported by the Gas
Research Institute since 1994 when Pacific Gas & Electric dropped
out.  Now, more than 50 percent of its funding comes from overseas
members, including Canadian, British, French, Danish, Dutch, and
Italian power companies.  Although DOE was an early participant in
the collaborative, DOE officials believe that more of a market,
albeit overseas, exists for the big plants and may provide benefits
to the United States in terms of exports and job creation. 

The collaborative is seeking to encourage a manufacturer to develop a
mid-sized system by getting potential customers to step forward and
ensure a sufficient initial market.  The collaborative has requested
federal seed money for this marketing activity, which, if successful,
would result in a largely private-sector system development effort. 
The collaborative has received no response from DOE or the White
House Office of Science and Technology Policy.  If such federal funds
are not forthcoming, a program official said the collaborative will
try to raise the funds from other sources, such as from utilities or
independent power producers. 

DOE's budget requests for big and small turbines increased from
fiscal year 1995, but approval for smaller increases is expected. 
DOE's fiscal year 1995 budget for the big turbine project was $36.6
million.  DOE requested $44 million for fiscal year 1996, but $36.7
million was approved.  While the projects may be slowed somewhat as a
result, they were delayed about 9 months in the solicitation process;
therefore, the budget impact will likely occur in fiscal year 1997. 
According to the DOE program manager, General Electric is
cost-sharing at 65 percent and Westinghouse at 40 percent, both above
the minimum 35 percent for phase III called for in the program plan. 
The program manager also said that if future federal funds are not
available for the program, the manufacturers will likely forgo the
development of machines for the domestic market and participate with
international partners in developing machines for overseas markets. 

DOE's fiscal year 1995 budget for the small turbine project was $18.8
million.  DOE requested $27.5 million for fiscal year 1996, but $22.1
million was received.  According to the DOE program manager, Allison
Engines and its partners and subcontractors, which include EPRI and
Indianapolis Power & Light, are cost-sharing 40 percent, and Solar
Turbines and its partners and subcontractors, which include the
California Energy Commission and the Gas Research Institute, are
cost-sharing 60 percent.  The DOE manager does not believe either
group can afford a bigger share and that budget reductions are likely
to delay by 2 years the completion of the projects. 

In the past 3 years, EPRI's budget for advanced gas turbines has been
cut 67 percent, from $15 million to $5 million.  As a result, EPRI
has started no new innovations and is forgoing several areas of
research.  For example, EPRI is no longer doing any control or
balance of plant R&D.  According to the program manager, EPRI's
ability to monitor the performance of new technology in utility
settings and identify problems has been reduced, and no one is
picking up the slack from the cutbacks in EPRI's program. 

The Department of Defense and the National Aeronautics and Space
Administration are continuing to be involved in turbine R&D. 
However, according to DOE, EPRI, and industry officials, cutbacks in
these R&D programs and the shifting of funds from turbine R&D to
other activities will mean that less turbine technology will flow
from these programs to the U.S.  turbine industry than in the past. 


   WIND POWER R&D
-------------------------------------------------------- Appendix II:4

DOE's wind program seeks to assist the wind industry in designing,
developing, and testing technologically advanced wind turbines that
can compete with conventional electricity generation.  Wind energy is
a renewable resource that does not use fossil energy supplies; has no
air pollutant emissions; and is compatible with other land uses, such
as farming and recreation.  While good wind resources exist in many
areas of the country, over 90 percent of the usable wind resource is
in the Great Plains, stretching from Montana, North Dakota, and
Minnesota south to Texas.  Over 1,700 megawatts of wind power
capacity are currently installed in the United States, mostly in
California. 

DOE is providing funds for several wind power projects.  Since 1992,
DOE has provided funds under its near-term product development and
prototype testing program to three companies to develop turbines
capable of generating electricity at a cost of 5 cents per
kilowatt-hour (kwh).  Also, in 1994 DOE began co-funding R&D projects
by five companies on subsystems that could be incorporated into
advanced turbine systems capable of generating electricity at a cost
of 4 cents per kwh from 13-mile-per-hour winds.  In addition, DOE is
negotiating contracts with two companies to develop advanced turbine
systems over the next 3 to 5 years.  Scheduled to commence in
September 1996, the contracts are expected to total $33.7 million;
DOE's share will be approximately $19.7 million.  One developer is
covering 50 percent of the cost and the other is covering 30 percent. 

In 1993, DOE and EPRI began the Utility Wind Turbine Performance
Verification Program to promote utilities' participation in wind
power projects and evaluate the latest commercial prototype wind
turbines in typical utility operating environments.  The program also
provides a limited market for newly designed wind turbines prior to
their achieving fully commercial status and documents and
communicates the project's experiences and lessons learned to
interested U.S.  utilities and turbine manufacturers.  DOE has
provided $2.75 million of the total program cost of $22.4 million. 
The two utility companies involved in the program (Central &
SouthWest in Texas and Green Mountain Power in Vermont) are covering
50 percent and 65 percent of the cost, respectively, and EPRI is
contributing the balance.  The Texas project has been built and plant
performance evaluation is under way.  Construction of the Vermont
project is scheduled for summer 1996. 

To further encourage the utilities' involvement, in 1994 DOE
initiated the Wind Energy Deployment Project under which DOE would
contribute up to 20 percent of the cost of constructing 25-megawatt
wind powerplants.  In fiscal year 1995, DOE selected one project in
Wyoming and two projects in Iowa under this program. 

DOE's wind program budget was reduced 34 percent, from $45.4 million
in fiscal year 1995 to $30 million in fiscal year 1996.  The previous
year's budget was increased from the fiscal year 1994 level of $28.6
million, primarily to fund the Wind Energy Deployment Project.  As a
result of the reduction in 1996, DOE canceled further funding of the
project.  In addition, because of DOE's, EPRI's, and utilities'
budget reductions, no further funding in fiscal year 1996 was
provided for the Turbine Verification Program, beyond the two
projects already under way.  DOE, however, is sustaining funding for
the advanced turbine contracts, which DOE officials believe are of
increased importance because the industry needs outside support to
ride out the current domestic utility market stagnation and continue
developing new technology.  Because the projects require multiyear
funding, however, the budget reductions in fiscal year 1997 would
require cutbacks, potentially not allowing completion of the turbine
development program. 

According to EPRI's program manager for wind and solar projects, the
wind budget has declined from $2.3 million to $2 million since 1993. 
The 1996 budget will be used primarily to complete the two turbine
verification projects under way. 

According to DOE and EPRI officials, the domestic market for wind
turbines is currently depressed because of utilities' uncertainty
about electric power market restructuring.  Additionally, even though
the cost of wind power is coming down, the target price for power
generation has declined further due to the availability of cheap
natural gas and turbines.  A further setback occurred in 1995 when
the Federal Energy Regulatory Commission nullified a California
set-aside plan under which California utilities would have purchased
over 1,000 megawatts of additional wind power.  According to DOE, the
U.S.  wind industry is badly lagging in sales and behind in
technology development compared to European competitors, who have
expanded R&D funding for wind energy since 1985, much faster than any
other renewable technology.  These countries are currently spending
over $150 million annually, according to DOE. 


   PHOTOVOLTAIC R&D
-------------------------------------------------------- Appendix II:5

Photovoltaic technology uses various devices to convert sunlight
directly into electricity without any moving parts.  Photovoltaic
systems are aimed at providing an alternative to fossil fuel-based
electricity generation and its residual environmental impacts. 
Hundreds of photovoltaic applications are currently cost-effective
for off-grid electric power needs, and research is directed at making
more applications cost-effective. 

DOE has several programs to assist the photovoltaic industry.  DOE's
Photovoltaic Manufacturing Technology Project, a DOE-industry
partnership, is aimed at reducing manufacturing costs and increasing
production capacity.  DOE also provides U.S.  manufacturers with some
international marketing assistance.  Another research program that
DOE funds is in advanced materials and devices, the major focus of
which is developing more efficient and durable thin-film photovoltaic
technology, which is cheaper to manufacture.  Under this program, DOE
funds research at national laboratories and universities and co-funds
selected industry research projects. 

DOE also has several programs to encourage utilities to use
photovoltaics.  DOE provides funds to operate Photovoltaics for
Utility Scale Applications, which tests the performance of new
systems in a utility setting.  Through another program, DOE helps to
buy down the cost for utilities purchasing photovoltaic systems.  DOE
also funds the Design Assistance Center at Sandia National
Laboratory, which provides information and technical assistance to
utilities and other entities to design photovoltaic projects. 

DOE's budget for photovoltaics was reduced by 29 percent, from $84.6
million in fiscal year 1995 to $60.1 million in fiscal year 1996. 
Specific reductions include (1) 57 percent, from $14 million to $6
million, to buy down the cost for utilities purchasing photovoltaic
systems; (2) 57 percent, from $10 million to $4.3 million, to provide
information and technical assistance to federal agencies, utilities,
and other entities to design photovoltaic projects; (3) 49 percent,
from $5 million to $2.6 million, to support the development and
testing of new equipment designs and applications; (4) 33 percent,
from $3 million to $2 million, to support international marketing;
and (5) 23 percent, from $11 million to $8.5 million, to fund the
Photovoltaic Manufacturing Technology Project. 

According to DOE officials, the effect of these reductions on market
expansion programs will be magnified because in most cases the
cost-shared contributions from utilities and industry will also be
reduced.  Furthermore, according to the DOE program manager, the
result of this reduction is that efforts to improve
cost-effectiveness in manufacturing are slowing down and the goals
are being extended. 

EPRI's solar budget has declined 75 percent, from $5.7 million in
1993 to $1.4 million in 1996.  EPRI is continuing to fund some
thin-film research and is assisting a manufacturer in the marketing
of its photovoltaic concentrator technology that was developed with
past EPRI assistance. 

DOE officials do not believe that industry will pick up the slack
from DOE's reductions, since only a few of the 19 U.S.  photovoltaic
manufacturers are profitable or close to making a profit. 
Furthermore, according to an industry spokesperson, DOE's 23- percent
reduction in the Photovoltaic Manufacturing Technology Project will
affect the manufacturers' initiatives.  Some of the manufacturers
have reinvested their revenues and have been able to attract venture
capital to develop new automated processes and equipment for
manufacturing photovoltaic modules on the expectation that the
government would follow through in assuming some of the technology
development risk. 


   ELECTRICITY STORAGE
   TECHNOLOGIES
-------------------------------------------------------- Appendix II:6

Electricity storage technologies store electrical energy for
stationary or transportation applications and can absorb or release
energy upon demand.  Advanced batteries for electric vehicles and
superconducting magnetic energy storage are examples of such
technologies that could provide economic and environmental benefits. 
EPRI officials believe that electricity storage will become
increasingly important as utilities are deregulated and more entities
are involved in electric power. 

The U.S.  Advanced Battery Consortium, which includes DOE,
automakers, battery manufacturers, EPRI, and several utility
companies, is spearheading efforts in this country to develop
advanced batteries whose performance, weight, durability, and cost
will enable electric vehicles to compete in the marketplace.  Begun
in 1991, the consortium has funded the development of several
batteries expected to be in production in 2000 and beyond.  For
stationary applications, DOE and EPRI have agreed to each sponsor the
development of a transportable battery storage system that could be
moved to utility sites to demonstrate and quantify the extent of
reliability improvements, network stability enhancements, and other
system benefits.  Several companies have bid on the development
contract.  Planned completion of the project is scheduled for
mid-1997.  According to DOE, completion of the project is
questionable if funds are cut further. 

Superconducting magnetic energy storage is the only storage
technology that stores electricity as electricity.  It is about 90
percent efficient, compared to other storage systems that are about
70 percent efficient.  It uses a large coil of conductor maintained
at a superconducting low temperature.  DOE and EPRI funded early
research in the 1980s.  DOE-funded Los Alamos National Laboratory was
involved in the research.  Several U.S.  companies have also pursued
the technology.  EPRI has proposed the construction of a pilot plant
for a system that would enable greater utilization of existing
transmission capacity and forgo the need for the construction of
additional transmission lines.  The estimated cost of the project is
$80 million, but funding for this project has not been found.  EPRI's
only active project is a cooperative program with the Navy under
which the Navy is seeking to identify potential applications in the
military and EPRI is doing the same for utilities and private
industry. 

The Department of Defense has provided some funds for a smaller
project designed to show how superconducting magnetic energy storage
can meet the specific needs of a utility.  The project would provide
stored power to Anchorage Municipal Power & Light for a short period
if a turbine plant went down until the utility got backup power going
from its reserve.  Full funding for this project has not yet been
secured, and continued Defense funding is unlikely unless a concrete
military application is identified. 

A limited amount of research is ongoing at several national
laboratories and universities to develop flywheels and
ultracapacitors.  The Department of Defense and DOE are funding these
efforts.  Flywheels, which involve storing energy in a heavy wheel
spun very fast, potentially have both stationary and transportation
applications.  Ultracapacitors also enable the rapid storage and
release of large amounts of energy.  Ultracapacitors are
electrochemical double-layer energy storage devices that use
electrodes with a very high surface area per unit volume; they have
potential transportation applications. 

DOE's budgets for transportation and stationary applications have
declined 17 percent, from $34.5 million to $28.6 million. 
Specifically, DOE's budget for transportation applications declined 7
percent, from $28.7 million in fiscal year 1995 to $26.6 million in
fiscal year 1996.  However, some major shifts were made within the
program, specifically shifting funding from the advanced battery
program to high-power energy storage for vehicles.  For example,
DOE's funding for high-power energy storage for hybrid vehicles was
increased from $470,000 to $9.6 million.  Hybrid vehicles use piston
engines, gas turbines, or fuel cells to produce electricity that is
stored and used to run the vehicle.  Meanwhile, DOE's funding for the
advanced battery consortium was reduced 43 percent, from $26.4
million to $15.1 million.  Several utility consortium members have
also dropped out or are considering dropping out because of cutbacks
in their R&D programs.  To accommodate these cuts, the program is
narrowing to funding only one mid-term and one advanced battery
technology, deemed the most promising for meeting the consortium's
goals.  According to the DOE program manager, steady funding at this
level will be needed for the next 3 to 4 years to continue developing
these technologies. 

Finally, the program continues to fund nearly $1.9 million in
exploratory and applied research, most of which is at the national
laboratories and universities.  According to the head of the
exploratory research program, the program has been cut back
significantly because the cooperative R&D agreements have been
eliminated. 

DOE's stationary energy storage program budget has decreased 66
percent, from $5.8 million in fiscal year 1995 to $2 million in
fiscal year 1996, and EPRI's budget has decreased 67 percent in the
past 2 years, from $6 million to $2 million.  As a result, neither
EPRI nor DOE is funding pilot projects to demonstrate newly developed
superconducting magnetic energy storage technology.  EPRI and DOE
have funded separate stationary battery storage projects, but neither
has funds to explore the demonstration and testing of new advanced
batteries in stationary utility applications.  DOE focuses on
benefits to the nation's utility networks that can result from
storage systems employing currently available batteries. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

RESOURCES, COMMUNITY, AND ECONOMIC
DEVELOPMENT DIVISION, WASHINGTON,
D.C. 

Bernice Steinhardt, Associate Director
Peg Reese, Assistant Director
James M.  Kennedy, Evaluator-in-Charge
Casandra D.  Joseph, Adviser

SAN FRANCISCO REGIONAL OFFICE

Donald J.  Porteous, Senior Evaluator
Margie K.  Shields, Senior Evaluator

RELATED GAO PRODUCTS

Electric Vehicles:  Efforts to Complete Advanced Battery Development
Will Require More Time and Funding (GAO/RCED-95-234, Aug.  17, 1995). 

Electricity Supply:  Consideration of Environmental Costs in
Selecting Fuel Sources (GAO/RCED-95-187, May 19, 1995). 

Electric Vehicles:  Likely Consequences of U.S.  and Other Nations'
Programs and Policies (GAO/PEMD-95-7, Dec.  30, 1994). 

Fossil Fuels:  Lessons Learned in DOE's Clean Coal Technology Program
(GAO/RCED-94-174, May 26, 1994). 

Electricity Supply:  Efforts Under Way to Develop Solar and Wind
Energy (GAO/RCED-93-118, Apr.  16, 1993). 

Energy R&D:  DOE's Prioritization and Budgeting Process for Renewable
Energy Research (GAO/RCED-92-155, Apr.  29, 1992). 


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