William J. Keese, Chairman
California Energy Commission

S T A T E M E N T

Before The

Subcommittee on Interior and Related Agencies
Committee On Appropriations
U.S. House of Representatives

January 28, 1998

I. Challenges -- Challenges as the 20th Century comes to a close provide the impetus for the development of a National Energy Strategy, ensuring the United States' continued leadership in the new millennium. The challenges include:

• The move toward electric industry restructuring, already enacted in 15 states

• The increase of greenhouse gases in the atmosphere as emissions produced by
  developing nations in Asia, Africa and Latin America are added to the already
  sizable emissions produced by the industrialized countries

• The competition in the global market place threatening the economic strength of
  the United States

• The United States' continued dependence on foreign oil supplies, despite attempts
  to diversify

• An increase in energy demand in all sectors, with the attendant environmental
  consequences, and,

• The growing threat to national security from nuclear weapons proliferation.

The following set of strategies supports a national energy strategy:

• Seek market responsive answers (technology, science, and education) to achieve maximum benefits for consumers

• Ensure a reliable supply of energy commodities

• Achieve an efficient and effective use of energy commodities

• Maximize the use of low-cost energy commodities, and,

• Minimize the environmental consequences of resource use

III. The California Energy Commission's Energy Programs -- California bases its energy related programs and energy RD&D on the following principles:

• Ratepayer benefits are foremost. Our focus is to maximize the affordability,
  safety, and reliability of energy while minimizing risk and environmental and
  health costs.

• Goals and objectives are merit based -- there must be direct benefits to ratepayers.

• Bids for energy RD&D projects must include a commercialization plan which reflect estimates of what the project "should cost" in the competitive market.

• Project should be results driven, avoiding funding "sinkholes."

• Collaboration in RD&D is crucial to eliminate redundant programs, ensure adequate funding levels and share the benefits of research. The Energy Commission recognizes that neither California nor any other research entity can afford "to go it alone," particularly in a restructured market.

1. Business Plans and Portfolio Management. Strategies for market placement of the applied research project should be required as part of contractor bids. Moreover, the DOE should administer its programs in the same manner as private sector fund managers, guided by performance goals, expedient triage of "money sinks," and the resulting re-alignment of program priorities and redirection of budgets.

2. Targeted Funding. DOE has been criticized in the past for spreading program funds too thinly across the spectrum. Wide fund disbursal often results in individual awards which are inadequate to achieve effective results. Similarly, states and researchers have been criticized for large funding requests requiring significant portions of available funding.
   We suggest two principles should generally apply in determining program fund disbursement. First, preference should go to an entity with a proven track record. Second, the invested dollar should be targeted for the highest return. Entities with experience and proven leadership in research or infrastructure development should be targeted to receive the majority of funds. Some funds, however, should be reserved for innovative project proposals originating with small businesses.

   DOE should increase funding for information transfer to maximize "reaping of the benefits." Several states have conducted successful DOE funded collaborative programs. California can cite two examples. The first is the state's alternative fuel and vehicle technology development program, which has served as the test-bed for Flexible Fuel Vehicles and related fueling infrastructure. The second is the state's program for zero emission vehicles. Working with manufacturers of EV chargers, safety regulators, and the building industry, California has developed regulations for charging facilities at homes and other sites. The lessons learned would be valuable for other states. DOE-funded seminars that transfer this knowledge would be an effective tool.

3. Market acceptance through commercialization assistance. Product commercialization does not normally fall within the purview of government. Companies conduct market assessments, take their product to market and succeed or fail. The Energy Commission strongly embraces this view. Based on our experience, however, we recognize that in certain situations, government assistance, limited in cost and time, is required.
   1. Domestic markets: DOE funded RD&D should receive assistance to overcome market barriers resulting from government regulations or the lack of consumer education. Some technologies, even after successful RD&D, fail to make it into the market. Prime examples are distributed power technologies. Regulatory, institutional and market barriers to distributed power were recently examined by the California Alliance for Distributed Energy Resources (CADER). CADER identified a long list of these barriers. We support CADER's recommendations of government assistance to: (1) educate financial institutions on the low market risk of the technology, encouraging these institutions to develop financing options, and simplified or standardized procedures for loan acquisition; and (2) remove government regulations, rules, procedures or policies that unfairly or unintentionally block market entry.

   2. International markets: American energy firms compete with foreign companies that receive sizable subsidies from their governments. The United States and state governments are not in a position to provide substantial direct subsidies to our firms seeking a foothold overseas. Currently, DOE and many state governments conduct independent energy technology export programs. These programs assist American companies to position themselves in the global market, improving their opportunities for winning energy projects and service contracts. DOE should also assist in the coordination between DOE and the current state export programs as well as develop an export program for commercializing its RD&D-funded projects. Incorporating RD&D programs into this trade model ensures successful foreign market introduction of government-funded RD&D programs.

      As an example, the California Energy Commission's successful energy technology export program, based on government-to-government relationships at the ministry and utility levels, opens doors for energy and environmental businesses. The Energy Commission's investment in its export program has resulted in $400 million in sales by California energy companies, a 37 to 1 ratio for every government dollar spent. In many cases, creating international markets prepares products and technologies for successful introduction in the competitive domestic market. The federal governments has assisted the Commission in funding these endeavors. With modest financial assistance, we believe federal-state partnering can leverage sizable returns and maximize the results of the initial RD&D.

Program priority should be given to end-use efficiency, environmental protection and energy RD&D. End-use efficiency includes: building and appliance efficiency, transportation technologies, alternative fuels and travel reduction strategies. Environmental protection includes development of policy, science and technology. The energy RD&D component covers generation, transmission (reliability) and distribution science and technology.

• End-Use Efficiency

  DOE's buildings program has been remarkably successful in reducing energy use in homes and businesses, while making them more comfortable and affordable. DOE's State Energy Plan has funded retrofits of institutional buildings by local governments and schools that otherwise could not have afforded the improvements.

  DOE's research program has dramatically reduced the energy used in buildings and appliances. Advanced window coatings, electronic ballasts, and the DOE-2 computer model are a result of this program. DOE's technical support for California's appliance standards was the impetus for the state's standards being adopted as national standards in 1988. The efforts of the California Energy Commission and other state energy offices have complemented DOE's efforts. In light of our past collaborative efforts, DOE and state energy offices can build on our success. The California Energy Commission supports DOE's efforts to achieve more efficient appliances, and to promote the availability of efficient appliances currently available.

  The Energy Commission has learned that efficiency measures need to connect market players: manufacturers, retailers, builders, building officials and building designers, as well as building owners and occupants. We had found that many conservation measures were installed incorrectly, resulting in reduced energy savings. At the same time, builders realized they faced home owners irked with high utility bills and improperly ventilated homes. Using DOE funding, we trained building officials, builders, construction superintendents and subcontractors. This integrated training program reduced energy use, builder costs and pollution while increasing homeowner comfort. Programs like this "close the loop" between technology development through successful acceptance in the market. The California Energy Commission looks forward to integrating the products of DOE's research efforts with the lessons we have learned working with builders and building owners.

  DOE also plays a critical role in setting energy efficiency standards for new buildings. The 1992 Energy Policy Act established the American Society of Heating, Refrigerating, and Air Conditioning Engineers (ASHRAE) standard 90.1 as the target for new nonresidential buildings. States are to adopt state energy codes that meet or exceed that standard. Unfortunately, there have been years of delay and that target has not been achieved. DOE should establish its leadership role and set goals that link the ASHRAE process to efficiency levels which can contribute to achieving national and international climate change objectives.

  On a technical note, building and appliance efficiency programs should account for total energy when making inter-fuel comparison. DOE policy on specific programs is inconsistent on this issue. The Schools and Hospitals Program uses a total energy or "source" energy approach while building standards, appliance standards and home energy rating systems use a "site" energy approach. The site energy approach is inappropriate because it ignores the significant energy losses inherent in the generation, transmission and distribution of electricity. It is also incompatible with restructured markets where competition focuses on differentiation in the delivery of energy services. DOE should take a leadership role to have all federal programs based on total energy or "source" energy.

  Shifting focus, we wish to make the Subcommittee aware of one effect of restructuring on end-use efficiency. In California, energy will be bid into a Power Exchange on an hourly basis. Current interval meters and communication systems (capable of "responding" to hourly pricing and automatically matching load to lowest prices or shifting load off of peak periods) can only be afforded by large customers. RD&D is needed to bring down the cost of this "smart" equipment so it can be installed or retrofitted economically into new and existing small businesses and homes.

  Hourly pricing allows for further cost-effective savings through a wide variety of approaches and end-uses. These include more efficient commercial lighting; advanced heating, ventilation and cooling (HVAC) systems; duct sealing and insulation; and, high technology windows and weatherization. Commercial lighting and HVAC systems operate during the high cost periods. DOE support of RD&D should definitely continue in these areas.

  The transportation sector is by far the largest consumer of energy and a major contributor of air pollutants and greenhouse gases. Transportation management (electronic vehicle readers at toll stops and automated speed control lanes) and vehicle travel reduction strategies (mass transit, and cheaper, faster equipment for telecommuting) are still fertile grounds for research.

  Advanced engines, hybrid engines, and alternative fuels will offer diversity of options and lower polluting vehicles. Substitution of alternative fuels lessens our dependence on foreign oil. An excellent example is the Energy Commission co-funding of the research for the conversion of medium-duty diesel engines to natural gas. United Parcel Service participated in a successful demonstration of the technology and then converted van fleets operating in selected California air quality non-attainment areas. Another example is the Commission's merging of these engine technologies and alternative fuels in new school buses. Replacement of older, polluting school buses demonstrated new vehicle technologies while improving safety and public health. DOE-funded research in transportation technologies holds the promise of high rewards.

  
  

• Renewable Energy Technologies

  The high cost of renewable technologies make it difficult for existing and new renewable projects to compete in restructured electricity markets. RD&D is needed to significantly improve the efficiency, reliability and costs of these technologies. Serious attention also needs to be devoted to valuation of non-energy benefits. For example, the non-energy benefits of biomass include: volume reduction of removing biomass and municipal solid waste from landfills; improved forest health, water quality, air quality, and fire suppression management. The value of these multiple societal benefits and the assignment of these non-energy benefits to non-energy sectors must be considered when evaluating the cost of renewable technologies. DOE-backed research on renewable energy technologies would help address a national problem.

  
  

• Environmental Protection Technologies

  Electro-technology is using electricity cost-effectively in place of conventional fuel technologies. Electro-technologies offer considerable potential benefits by reducing or eliminating pollution. Examples such as electrically driven ultra-violet (blue-light) curers are now being used as substitutes for solvent-based evaporatives in varnishes and urethanes. Another example is using microwaves to dry agricultural products such as nuts rather than using natural gas dryers. Electro-technologies are promising and should be a key DOE RD&D focus.

  
  

• Advanced Generation and Distributed Power

  Prior to restructuring, older electricity generation units were generally retained for emergency or backup purposes. With the introduction of new, low-cost, highly efficient facilities, these older units will either close or be retrofitted.

  Alternatives to these facilities, principally distributed power technologies, will be in demand as many communities opt for small, dispersed power facilities over large, central station power plants. DOE's continued funding of advanced generation technologies and its leadership, exemplified by the Coordination Council for Power Generation RD&D, will be critical elements to the success of efficient competitive markets.

  
  

• Transmission Grid Reliability

  A reliable and efficient transmission grid is required for public health, safety, and economic well-being. The major electrical outages of July and August 1996 in the western United States became a key driver of California's restructuring law. The outages exposed the lack of smart, fast control and communication systems to maintain reliability. Some are concerned that the grid reliability may degrade in the transition to a fully competitive market. This results from the integrated utilities no longer being responsible for the coordination of transmission, generation and distribution in their service territories. Advanced communication and control systems that maintain the grid or minimize or prevent cascading outages are critical. These systems should be a critical target for federal RD&D.

  Another facet of the transmission system is congestion in the delivery of power. This can be thought of as electron highway gridlock. Congestion threatens to limit the access of least cost power to the marketplace. While congestion bids and pricing are now being developed to alleviate these transmission constraints, the RD&D of the "next" generation of directional power flow equipment, phase shifters, thyristors and related technologies may offer more efficient solutions.

  
  

• Global Climate Change Science

  The Global Climate Change phenomenon, because of its national impact, is an area of research that is best led at the federal level. USDOE, USEPA, and other agencies should continue their coordinated comprehensive research program. This program should include development of scientific data and models that can simulate the relationships and interactions of the atmosphere, oceans and land masses and the effect of their interaction on global climate over time. To ensure that funds are meaningfully spent, DOE and EPA should facilitate world peer review of research results.

  Understanding the science of global climate change and having an updated and accurate database are prerequisites for the development of any emissions trading program. Creation of a national or international emissions trading program would require a full understanding of the inter-relationship between the price of tradable permits and carbon reduction mechanisms. This information would be essential as regulatory agencies and policy makers decide the efficacy of such mechanisms. DOE should be a major player in this development.

  
  

• Energy Information Administration (EIA)

  The EIA collects, analyzes, and disseminates information on energy activities conducted throughout the US. No other source of information is as comprehensive as that provided by the EIA. This function should be maintained. We would also recommend a new activity be undertaken by the EIA -- an on-going examination of national and international trends in the electric industry's changing growth patterns, energy uses, and technology changes. As electricity deregulation spreads across the United States and around the world, this information will enable scenario development of energy futures and better forecasts of energy use and fuel consumption. This information is essential to market efficiency. Government is charged with providing unbiased and credible information. This is the responsibility of the EIA.

Long-term energy research and technology development requires a national commitment. In the states, demand for short and mid-term research activities will limit available funds for long-term research. Restructuring in California adds uncertainty to the continued existence and direction of public interest research. Private industry's required return on investment limits their financial commitment and relegates them to an advisory role. Research on long-term programs and projects is a stewardship that naturally falls to the federal government.

The Federal Government energy research and energy related programs need to be focused on the nation's priorities. Collaboratives which leverage the funds of the federal government, states and industry, and public-private partnerships in cooperative ventures should be the foundations for implementing national energy research strategies.

The national laboratories perform a valuable service in technology transfer and possess incomparable physical facilities and intellectual capabilities. Their outreach is vital to developing successful partnerships with states and industry. The labs are striving to be more responsive to the states and industry. Improvement is needed, however, in streamlining their contracting process and reducing overhead.

DOE should set advanced generation efficiency targets in collaboration with states and industry. We view goals that go beyond best practice as critical components of successful targeted RD&D programs. The California Energy Commission is developing such goals in its Public Interest Energy Research Program for its upcoming first general solicitation. The Commission looks forward to sharing its Public Interest Energy Research Program (PIER) experiences with DOE.

Distributed power technologies include photovoltaics, wind, battery and other storage technologies, reciprocating engines, advanced gas or bifuel turbines, and microturbines. States, having jurisdiction over the distribution system, have the responsibility for removing or minimizing state regulatory and market barriers to distributed power technologies. In the technological arena, DOE could facilitate the development of minimum national standards for grid interface of these units. Existing standards for large main-frame power plants are not suitable for these smaller units. Industry, standards setting associations, and states will need to work closely with DOE.

VII. Conclusions

The federal government must continue to be a pivotal player in promoting and advancing energy RD&D and energy-related programs. Congress cannot assume that the states will institute or continue RD&D programs as utilities cut back or eliminate RD&D programs. In California, the law that vested the Energy Commission with administration of the PIER program does not have a provision extending program funding beyond four years. After averaging about $135 million a year for both electricity and gas RD&D prior to restructuring, California's PIER Program is funded at $62 million per year. Similarly, energy efficiency programs averaged $450 million a year prior to restructuring and now are funded at $240 million.

DOE is moving effectively to meet the challenges of the future and continues to improve its way of conducting business. DOE is becoming less a funding spigot where wide disbursement of funds limits program effectiveness. It is becoming an "integrator" of technology development, bringing together industry partners and states as appropriate. DOE's Industries of the Future program is a shining example and a model for California.

DOE should focus more on programs that benefit the ratepayers and continue to improve program administration. Program administration suggestions include the requirement that bids contain business plans detailing commercialization plans. Further, DOE should administer its program like a private sector fund manager responsible for cutting losers and redirecting funds appropriately. Some DOE programs are being administered this way. These activities should not require additional budget augmentation and the rewards in terms of successes could be substantial.

We recommend that preference should go to entities with proven track records and that the government's investor dollar should be targeted for the highest rate of return. Entities with experience and proven leadership in research or infrastructure development should be targeted to receive the majority of funds. The results should then be shared with other states to save the time and money of the nation's taxpayers. California's experience in alternative fuel vehicles, engine development, and fueling infrastructure is an example. The knowledge and lessons learned from California's development of a photovoltaic (PV) industrial base and our roof-top PV potential would also greatly enhance the success of the federal government's "Million Solar Roof" Program. Structured correctly, targeted funding could translate to more effective program results at lower funding levels.

DOE should remain the leader, collaborating with states and industry, to devise and achieve RD&D that meets the needs of the market and positions US companies to effectively complete in global markets. DOE should continue to be involved in pre-competitive energy activities. For example, DOE's Industries of the Future program and its Coordination Council for Power Generation RD&D are excellent examples of coordinated work and collaborative funding of DOE, EPRI, GRI and several states including New York, Wisconsin, Florida, and California.

Industry, for its part, should be encouraged to partner with states and DOE and to cost-share public interest RD&D. When competitive pressures result in broad industry RD&D programs, government RD&D funding may be inappropriate or counter-productive. Rather, funds should be directed to other promising technology RD&D not pursued by the private sector. It may be appropriate, however, for government to reduce barriers which hinder these privately developed technologies from advancing to the market place.

Funding priority should be given to the following programs: end-use efficiency, including transportation; renewable resources; environmental technologies, including global climate change science; advanced power generation, distributed energy resources, and grid interface technologies; and transmission and distribution reliability technologies.

Finally, the California Energy Commission offers its assistance to the Subcommittee and DOE in reviewing in more detail the role of the federal government in RD&D. With restructuring and the passage of significant time since enactment of earlier energy acts and the Energy Policy Act of1992, this is an appropriate time for an expansive review of energy policy. The California Energy Commission looks forward to working with you in that review. I am happy to respond to any questions the subcommittee may have.