D
Measuring the Benefits and Costs of the Department of Energy’s Energy Efficiency and Fossil Energy R&D Programs

SUMMARY OF THE GENERAL FRAMEWORK

It is necessary to have a consistent, comprehensive framework with which to assess retrospectively the past, current, and future benefits, costs, and results of the DOE fossil energy and energy efficiency R&D programs. The framework should allow all of the net benefits to the United States to be summarized, it should focus attention on the major types of benefits associated with the DOE mission, and it should differentiate benefits based on the degree of certainty that they will one day be realized. To accomplish this, the committee developed the matrix given in Figure D-1, and for each project or program for which it chose to prepare a case study (see Appendixes E and F), it attempted to fill in the nine cells.

Each cell is an economic net benefit, an environmental net benefit, or a security net benefit, and each cell is also either a realized net benefit, an options net benefit, or a knowledge benefit. Undesirable consequences would be quantified as negative components of net benefits, desirable consequences as positive components. Ideally, quantitative measures for each category of net benefits would be desirable, but in many cases only qualitative measures will be possible. Specifically, it is expected that most of the options, knowledge, and security benefits will be qualitative in nature.

The criteria for the cells of the matrix are discussed below.

The Rows: Economic Net Benefits, Environmental Net Benefits, and Security Net Benefits

The rows of the matrix are based on three fundamental objectives that have guided energy policy at least since the energy crisis of 1973–1974: economic improvement, environmental protection, and energy security. A complete assessment of total U.S. net benefits requires inclusion of each of these three types of benefits.

Although the three types could in principle be aggregated, using dollars as the common denominator, the committee believed that a better understanding of the nature of the benefits derived from DOE activities would be possible if the three benefit classes were assessed separately. Therefore, the three rows of the matrix correspond to these three objectives of U.S. energy policy. They will be discussed more fully in what follows.

 

Realized Benefits and Costs

Options Benefits and Costs

Knowledge Benefits and Costs

Economic benefits and costs

 

 

 

Environmental benefits and costs

 

 

 

Security benefits and costs

 

 

 

FIGURE D-1 Matrix for assessing benefits and costs.



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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 D Measuring the Benefits and Costs of the Department of Energy’s Energy Efficiency and Fossil Energy R&D Programs SUMMARY OF THE GENERAL FRAMEWORK It is necessary to have a consistent, comprehensive framework with which to assess retrospectively the past, current, and future benefits, costs, and results of the DOE fossil energy and energy efficiency R&D programs. The framework should allow all of the net benefits to the United States to be summarized, it should focus attention on the major types of benefits associated with the DOE mission, and it should differentiate benefits based on the degree of certainty that they will one day be realized. To accomplish this, the committee developed the matrix given in Figure D-1, and for each project or program for which it chose to prepare a case study (see Appendixes E and F), it attempted to fill in the nine cells. Each cell is an economic net benefit, an environmental net benefit, or a security net benefit, and each cell is also either a realized net benefit, an options net benefit, or a knowledge benefit. Undesirable consequences would be quantified as negative components of net benefits, desirable consequences as positive components. Ideally, quantitative measures for each category of net benefits would be desirable, but in many cases only qualitative measures will be possible. Specifically, it is expected that most of the options, knowledge, and security benefits will be qualitative in nature. The criteria for the cells of the matrix are discussed below. The Rows: Economic Net Benefits, Environmental Net Benefits, and Security Net Benefits The rows of the matrix are based on three fundamental objectives that have guided energy policy at least since the energy crisis of 1973–1974: economic improvement, environmental protection, and energy security. A complete assessment of total U.S. net benefits requires inclusion of each of these three types of benefits. Although the three types could in principle be aggregated, using dollars as the common denominator, the committee believed that a better understanding of the nature of the benefits derived from DOE activities would be possible if the three benefit classes were assessed separately. Therefore, the three rows of the matrix correspond to these three objectives of U.S. energy policy. They will be discussed more fully in what follows.   Realized Benefits and Costs Options Benefits and Costs Knowledge Benefits and Costs Economic benefits and costs       Environmental benefits and costs       Security benefits and costs       FIGURE D-1 Matrix for assessing benefits and costs.

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 Economic Net Benefits Economic net benefits are based on changes in the total market value of goods and services that can be produced in the U.S. economy under normal conditions, where “normal” refers to conditions absent energy disruptions or other energy shocks. The benefit must be measured net of all costs. The total market value can be increased as a result of technologies because a technology may cut the cost of producing a given output or allow additional valuable outputs to be produced by the economy. Economic benefits are characterized by changes in the valuations based on market prices. This estimation must be computed on the basis of comparison with the next best alternative, not some standard or average value. Environmental Net Benefits Environmental net benefits are based on changes in the quality of the environment that will (or may) occur as a result of the technology. These changes are possible because the technology may allow regulations to change or it may improve the environment under the existing regulations. Environmental net benefits are typically not directly measurable by market prices but instead by some measure of the valuation society is willing to place on changes in the quality of the environment. Security Net Benefits Security net benefits are based on changes in the probability or severity of abnormal energy-related events that would adversely impact the overall economy or the environment, although traditionally, economic impacts have been the primary security issue. Typically, the events would be transient energy disruptions or transient large price increases, but they might also be low-probability, nontransient events. Security net benefits are a special class of economic net benefits or environmental net benefits, differentiated from those categories of benefits by their low likelihood or their infrequency of occurrence. The Columns: Realized Net Benefits, Options Net Benefits, and Knowledge Benefits The three columns in the framework matrix (Figure D-1) reflect different degrees of uncertainty about whether the particular benefits will be realized or not. The committee derived them by considering two fundamental sources of uncertainty—technological uncertainties and uncertainties about economic and policy conditions (see Figure D-2). Technological uncertainties can be differentiated as follows: (1) the technology has been developed, (2) the technology development is still in progress, or (3) the technology development has terminated in failure. All else being equal, a technology still under development is less likely to result in benefits than a technology that has already been successfully developed. And until a technology is fully developed, there is some uncertainty about whether it will be successful. However, even if the technology is never successfully developed, the knowledge gained in the program could lead to another beneficial technology. Similarly, if a technology is fully developed and the economic and policy conditions are favorable for its commercialization, there is a reasonable degree of confidence that future benefits will be obtained. However, it may be that economic and policy conditions are not expected to be favorable but might become favorable under plausible circumstances. In this case, the benefits may come about, but the probability is lower. Finally, it may be virtually certain that the economic and policy conditions will never become favorable and that the technology itself will never be adopted but that the knowledge associated with the technology development can be applied in other ways, possibly resulting in benefits, but these future benefits are very uncertain. Rather than attempting to fully characterize the uncertainty of benefits, the committee used the two kinds of uncertainties—the state of technology development and the Economic/Policy Conditions\Technology Development Technology Developed Technology Development in Progress Technology Development Failed Will be favorable for commercialization Realized benefits Knowledge benefits Knowledge benefits Might become favorable for commercialization Options benefits Knowledge benefits Knowledge benefits Will not become favorable for commercialization Knowledge benefits Knowledge benefits Knowledge benefits FIGURE D-2 Derivation of columns for the benefits matrix.

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 favorability of economic and policy conditions—to derive the three columns of its matrix. The first column of the matrix (Figure D-1), “realized benefits,” is reserved for benefits that are almost certain: those for which the technology is developed and for which the economic and policy conditions are favorable for commercialization of the technology. The second column of the matrix, “options benefits,” is reserved for benefits that might be derived from technologies that are fully developed but for which economic and policy conditions are not likely to be, but might become, favorable for commercialization. All other benefits, to the extent they exist, the committee designated “knowledge benefits.” Knowledge benefits thus form a very broad category, including knowledge generated by programs still in progress, programs terminated as failures, and technological successes that will not be adopted because economic and policy conditions will never become favorable. Realized Net Benefits Realized net benefits are economic, environmental, or security net benefits that flow from technologies for which R&D has been completed, that have been or are ready to be commercialized on an economic basis, under current economic, regulatory, and tax conditions. Options Net Benefits Options net benefits are economic, environmental, or security net benefits that could come from technologies for which R&D has been completed and that are ready to be commercialized were they not constrained by current economics or other circumstances. These technologies could be adopted under some plausible future economic, regulatory, and tax conditions. Knowledge Benefits Knowledge benefits are economic, environmental, or security net benefits that flow from technology for which R&D has not been completed or that will not be commercialized. The benefits stem from possibilities for future uses of the knowledge. Figure D-2 shows the mapping from the status of technology development and from economic and policy conditions to the columns in Figure D-1. DISCUSSION OF THE ROWS Economic Net Benefits Estimating Economic Net Benefits Economic net benefits are based on changes in the total market value of goods and services that can be produced in the U.S. economy under normal conditions, where “normal” refers to conditions absent energy disruptions or other energy shocks. The total market value can be increased as a result of technologies because a technology may cut the cost of producing a given output or it may allow additional valuable outputs to be produced by the economy. Economic benefits are characterized by changes in the valuations based on market prices, relative to the next-best feasible alternative. These could either be changes in asset values (e.g., owing to increases in the amount of petroleum that could be economically recovered) or changes in life-cycle costs (e.g., owing to reductions in energy used for home lighting) reflecting market penetrations expected for the technologies. The benefit must be estimated net of costs in all cases: Implementing technologies has costs, and the measure of benefits must be net of these costs. Further, this estimation must be computed on the basis of comparison with the next-best alternative, not some standard or average value. For example, the benefit of a new coal power technology must be estimated on the basis of a comparison with a state-of-the-art coal plant or a natural gas combined-cycle plant, not on the basis of a comparison with an “average” existing coal plant. Thus, the economic benefits must be truly net, and all economic benefits and costs must be explicitly accounted for. This requires consideration of all impacts, desirable and undesirable. The net benefits are estimated using life-cycle costs or benefits, including the life-cycle costs or benefits over the entire future life of all installations. Typically, it may be easiest to estimate net benefits on a per-installation basis and multiply by the estimated number of new installations or to add up over these installations if they are of substantially different scales. In the discussion that follows it is assumed that such a procedure is used. The benefits include the following: Past and current benefits that are already in place—the benefits resulting from all capital stock installed through 2000. For the committee’s analysis, the estimates of this additional capital stock are obtained, when possible, from independent Energy Information Administration (EIA) forecasts, not from unsupported DOE program estimates or DOE contractor data. Although sources other than EIA could be used, it is important that a consistent set of reasonable, unbiased estimates is used, such as those developed through EIA. Future/forecast benefits—benefits resulting from capital stock expected to be put in place from 2001 through 2005. The committee used the year 2005 cutoff as a rough rule of thumb consistent with its belief that, absent DOE involvement, some private sector entity would have developed the economically attractive new technologies that were, in fact, aided by DOE research efforts. To that end, the committee also adopted a conservative 5-year rule presuming that the DOE R&D or demonstration program accelerated the introduction of the technology to the market. Thus, the commit-

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 tee typically assumed not that the technology would never have been developed absent DOE efforts but simply that the technology would have been developed at a later time by another entity. In rare cases it is very reasonable to believe that the technology would never have been developed absent DOE involvement. In those cases, a cutoff date later than 2005 is used, and the reasons for the later cutoff date are documented. Thus, total benefits consist of the life-cycle benefits resulting from all capital stock installed through 2005, except in a limited number of cases in which later installations are also included. When quantified in monetary terms, all estimates of costs and benefits are expressed in constant 1999 dollars, and the deflators used are gross domestic product (GDP) deflators as calculated by the Bureau of Economic Analysis of the Department of Commerce. The same deflators are applied to the historical R&D expenditures for each program as are applied to other costs and benefits. All estimates of future benefits are based on conditions forecast at the time of writing, as indicated in the EIA base case scenario.1 Examples of economic net benefits are discussed next. The Increased Value of Economically Recoverable Natural Resources. A technology that increases the ability of the United States to find and extract natural resources from deep deposits would have net benefits measured by the value of the additional resources net of the costs of the exploratory, development, and production activities needed to find and extract those resources. Reduced Costs of Finding and Extracting Natural Resources. A technology that reduces the costs of secondary or tertiary recovery of oil or gas would have net benefits measured by the reduced costs of the recovery that are expected to occur with the technology. A technology that increases drilling efficiency, thereby reducing the costs of developing resources, would have net benefits measured by the reduction in cost of the drilling activity using that technology. Reduced Economic Costs of Energy Services. A technology that reduces the cost of producing a given amount of electricity, gasoline, or other fuel would have benefits measured by the cost per unit reduction multiplied by number of units of energy produced. A technology that reduces the amount of electricity, gasoline, or other fuel required to produce a given amount of energy services (cooling or heating of a home, miles driven, etc.) would have benefits measured by the reduction in the amount of required energy multiplied by the market value of that energy. The appropriate market value should directly reflect the change in economic resources that are used. This issue is particularly important for electricity, whose delivered price typically includes a portion of the fixed costs of local distribution services. Since the fixed costs are not changed by changes in the use of electricity, the delivered (retail) price of electricity is not the relevant market value. Rather, the wholesale price of electricity, which includes both incremental generating costs plus the costs of additional line losses but excludes the fixed distribution costs, is a more appropriate price. Changes in the unit costs of providing energy service could create incentives for consumers to purchase more of those energy services. This “rebound” effect has been widely discussed in the energy economics literature, but the committee has chosen not to include any estimates for it. A consumer who chooses to buy more of the energy service as a result of a reduction in its price obtains a benefit from the additional services and faces a cost from the additional expenditures. For the rational consumer, the additional cost and benefit should be roughly equal and the net additional benefits from the rebound effect should therefore be very small or zero. Even if the prices of the energy services the consumer faces do not fully capture all costs of that service, the committee expected that the net benefits of the rebound effect would be relatively small and could be reasonably ignored in the estimations. Thus, benefits would be ascribed as follows: A technology that leads to reduced capital costs of equipment to convert energy to energy services would have benefits measured by the market value of the reduction in capital costs. A technology that reduces the amount of energy required to produce a given amount of energy services but requires more costly capital equipment would have net benefits measured by the difference in the changes in these two components of life-cycle costs. A technology that reduces the operating costs of energy-using industrial processes would have benefits measured by the reduction in these operating costs for each industrial process, summed across all the processes to which the technology is applied. Increased or Decreased Productivity of Workers. An energy-using technology that, when implemented, either increases or decreases the productivity of workers would have benefits or costs measured by the economic value of this increased productivity or, equivalently, by the decreased amount of labor required to produce the same output. For example, such impacts could be associated with changes in 1   This research was conducted between May 2000 and December 2000, and for most of this period the Annual Energy Outlook (AEO) 2000 was the latest forecast base case available. This was therefore the base case scenario used.

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 commercial lighting that made workers more productive and less productive. Marketed Intellectual Capital (e.g., Licensing Revenue). One of the benefits of a technology that can be licensed would be measured by the net revenue earned by the licensing activity. This benefit would be in addition to any other net benefits discussed above. Exported Technology. A technology embodied in equipment that is exported from the United States would have a component of benefits equal to the incremental profits from the increased exports of the equipment, net of the reductions in incremental profits from the resulting reduction in exports of other equipment. For example, an increase in labor productivity due to more efficient lighting could make U.S. technology more competitive internationally. However, it would have to be determined that the increased labor productivity resulted from the changed lighting and not some other factor (one such is the Hawthorne effect, whereby labor productivity changes when the working environment is altered in any way simply because of the departure from the norm). Retrofitted Plants. Changes in the costs of retrofitting existing plants when the retrofit could be expected, should be compared to the cost of the next-best alternative. However, it must be recognized that the next-best alternative may be not to retrofit—that is, to shut down the plant and build a new one. The Sources of Economic Net Benefits Net benefits can accrue for at least two reasons. First, DOE R&D activity can change the timing of a technology advance. This would be measured by estimating how much earlier the technology would have moved into the realized category if there had been no DOE involvement. In general, the committee assumed that if an R&D program was successful, it accelerated commercialization of the technology by 5 years, except in rare cases, as was discussed above. Second, DOE R&D activity can increase the market penetration of a technology by improving the product and making it more attractive to customers. All of the net benefits must be measured relative to what would have happened absent the DOE R&D program. This assessment requires careful judgment and analysis, and assumptions must be stated explicitly and justified as well as possible. Factors That Will Not Be Considered in Estimating Economic Benefits The committee did not include certain factors sometimes incorporated into benefits calculations because, in its opinion, they do not constitute benefits legitimately attributable to energy R&D programs. First, macroeconomic stimulation—the creation of jobs under normal, full-employment conditions—are not considered to be an economic benefit stemming from the R&D program. The U.S. economy is controlled at the macroeconomic level by monetary and fiscal policy. A policy that creates jobs or that stimulates the economy would result in compensating changes in monetary or fiscal instruments in order to keep the economy as close as possible to the macroeconomic policy targets. As a result, the apparent macroeconomic stimulation or job creation would not in fact lead to additional economic output or additional employment. However, the macroeconomic costs of energy disruptions can be counted as economic costs, since they can be controlled only very imperfectly through the existing economic institutions. This issue is discussed more fully in the section describing security benefits. Further, even if the millions (or billions) of dollars expended on an energy R&D program can have significant macroeconomic stimulation and jobs creation effects, an equivalent amount of money expended on other types of programs will have similar effects. Thus, these effects are not uniquely attributable to the energy R&D program. Second, regional redistributions of wealth or earnings cannot be included as benefits. Net benefits should be measured at the national level. Activities that simply redistribute wealth or earnings across regions of the United States would have positive benefits in some regions and negative benefits elsewhere, all summing to zero for the United States as a whole. They thus do not constitute net economic benefits. Third, total sales, except as input to the calculations above, are not included as economic benefits. Fourth, unintended improvements of unrelated technologies should not be included as benefits, unless a strong case can be made that in a particular line of R&D there is a much greater likelihood of such unintended improvements than in the other areas in which R&D can be conducted. In that case, the measure of benefits is only the net increase in such unintended improvements over and above the improvements that could be expected were the R&D to be conducted in other typical lines of R&D. This net increase is highly subjective and difficult to estimate. Finally, the Hawthorne effect, whereby labor productivity changes due to the introduction of any change in the working environment simply because it represents a change from the norm, will not be included as an economic benefit attributable to an energy R&D program. Tax revenues are not counted as economic benefits because they are tranfer payments and represent both a benefit and an equal offsetting cost. However, if the data underlying the calculation include taxes as a cost, then the same amount of taxes must be included as a benefit in order to correctly include the net benefits. This might happen, for example, when royalties and severance taxes for oil and gas produc-

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 tion have been included in the costs in the data set used for the calculations. In that case, the two transfer payments—royalties and severance taxes—must be added back into the benefits to compensate for their initial inclusion as costs. Environmental Benefits and Costs Estimating Environmental Benefits Environmental net benefits are based on changes, not already internalized, in the quality of the environment that will (or may) occur as a result of the technology. These changes can occur because the technology allows regulations to change or because the environmental consequences will be improved voluntarily under existing regulations. Environmental net benefits are often not directly measurable by market prices but by the value society is willing to place on changes in quality of the environment. These valuations are often qualitative in nature and may be controversial. Thus, it is very important that the assumptions that underlie the valuations are stated explicitly and justified. Examples of changes in environmental impacts are discussed below. Changed Releases of Harmful Materials into the Air, Water, or Land. A technology that reduces the release of harmful materials into the air, water, or land has environmental benefits equal to the reduction in the amount of the materials released, multiplied by some measure of the value society is willing to place on a unit reduction of those emissions. Examples include toxics, acid rain or smog precursors, or greenhouse gases. Here again, the committee included only those installations expected prior to the year 2005, except in rare cases, as discussed above. A technology that increases some emissions and decreases others has net environmental benefits amounting to the difference between the benefits of the emissions reductions and the costs of the emissions increases (e.g., when emissions into the air are reduced by converting the materials to solid waste). Cost Saving on Remediation Leading to More Complete Remediation. Cost savings on remediation constitute an environmental benefit: The improvement in the degree of remediation would result in an environmental benefit, measured by the social valuation of the improvement. However, there is no good method for measuring such costs. The savings in cost for a given amount of remediation would be included as an economic benefit, not as an environmental benefit. For example, the Office of Fossil Energy says that some of its technologies strengthen the scientific basis of environmental regulations and policy, enhance environmental management, and facilitate the development of more efficient and cost-effective environmental regulations. These types of benefits from fossil energy R&D are classified as environmental benefits, whereas any cost savings attributable to them are classified as economic benefits. Possible Impacts on Biodiversity. Increased biodiversity is counted as an environmental benefit, and decreased biodiversity is counted as an environmental cost. The value of these benefits and costs is difficult to measure. Replacing Toxic or Other Environmentally Damaging Materials with More Benign Materials. The net benefit of substituting more benign materials for toxic or other environmentally damaging materials is the difference between the environmental damage attributable to the more environmentally degrading materials and the damage to the environment attributable to the more benign materials. Changes in Indoor Environmental Quality. Benefits should be based on the value placed on changes in human health and confort, and the perceived health benefits must be made explicit. This is especially relevant, since some energy efficiency improvements, by limiting indoor air flow and circulation, can decrease indoor air quality. Impact on Environmental Emissions That May Impact Operating Costs. Reduction of certain types of environmental emissions may cause an increase in other types of environmental emissions as well as an increase in operating costs. For example, reducing SOx and NOx emissions may increase carbon and mercury emissions and decrease plant operating efficiency. These costs, to be correct, should be separated, although their causative linkage needs to be made clear. The increases in emissions of other environmentally damaging materials must be taken into account in estimating the overall net environmental benefits achieved. Increases in operating costs also must be taken into account. However, because these changes directly impact the goods and services that can be produced in the economy, these must appear as an economic cost. The Sources of Environmental Benefits Environmental benefits accrue for the same reasons as economic benefits. In addition, however, a technology may allow stricter environmental standards to be adopted and met. The calculation of environmental benefits of that technology would then include an evaluation of the environmental consequences of the stricter standards, and the calculation of its economic benefits would include the cost of meeting those standards. In principle, the expected estimated environmental benefits can exceed the estimated economic costs, if such

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 a procedure is completed consistently. However, in practice, it is often easier to quantify economic costs than to quantify, in monetary terms, environmental benefits, and this may lead to an estimating inconsistency. Therefore, in those cases where the technology has led to stricter environmental standards, it is particularly important to make the environmental and economic estimates in a consistent manner. Factors That Will Not Be Considered in Estimating Environmental Benefits A reduction in the cost of a fixed, regulated amount of environmental improvement is included among the economic benefits. Only a reduction in adverse impacts on the environment is included as an environmental benefit. (A technology that merely reduces the cost of meeting an environmental standard does not produce an environmental benefit, in and of itself. Only environmental benefits beyond what is required by regulation count as such. The cost reduction does not improve the environment but increases the quantity of goods and services that can be produced in the economy. Therefore, counting the cost reduction as an environmental benefit would result in “double-counting.”) Guidance on Measuring Environmental Benefits All impacts should be measured relative to what would have happened absent DOE. In doing so, if the technology allowed another agency (such as EPA) to promulgate and enforce stricter environmental standards, then the technology should be credited with the environmental improvement. It is also important to do the following: Use incremental, or marginal, impacts whenever possible. However, where the incremental impacts cannot be identified, the national fuel-use mix should be used for calculating net benefits. Identify significant international environmental impacts of the technological changes, particularly those expected to have important ramifications for the United States. Security Benefits Security benefits are based on changes in the probability or severity of events that would adversely impact the overall economy or the environment. They can be considered as impacts under extraordinary conditions. Typically, they would be transient events, but they might also be low-probability, nontransient events. They can be disaggregated into short-run and long-run benefits. Short-Run Security Benefits Short-run security benefits are created by the reduced costs of relatively short-duration impacts of sudden changes in the cost or availability of energy. These would include the following: Changes in the economic impact of a given magnitude of international oil shock. The impact would be less severe if oil use can be made to account for a small proportion of overall economic activity, as measured by GDP. Changes in the probability of large international oil shocks. The probability may be reduced by extracting a smaller fraction of world oil from unstable regions of the world or by increasing excess producing capacity in stable regions of the world. Increased reliability of energy infrastructure. Increased reliability would translate into a reduced probability of widespread blackouts and of losses due to interruptions in electricity or natural gas service. Increased protection for end users against shortages of electricity. Such protection reduces the cost to the economy of such shortages and reduces the cost of increasing supply-side reliability. Long-Run Security Benefits Long-run security benefits reduce costs in the long run and have a low probability of changing the cost or availability of energy. These benefits would be an option benefit not a realized benefit. They would come from an increased ability to substitute energy sources in response to a long-term, but relatively low-probability, change in the cost of energy, or in the negative environmental impacts of energy use. DISCUSSION OF THE COLUMNS Realized Benefits and Costs Realized benefits and costs are the positive and negative consequences of technologies for which R&D has been completed, that have been or are likely to be commercialized soon, under currently projected economic, regulatory, and tax conditions. There are two categories of realized benefit: Benefits seen already—that is, benefits resulting from the life-cycle value of all capital stock installed through 2000. Benefits expected under normal situations—that is, benefits resulting from the life-cycle value of capital stock expected to be put in place from 2001 to 2005. Realized costs are expressed in constant 1999 dollars, and realized benefits are estimated on a life-cycle basis using the EIA base case forecast assumptions. Further, and importantly, realized benefits must be computed taking into account all economic effects, positive and negative. Discounting for future and past benefits and costs is a

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 difficult issue, since standard discounting procedures are likely to distort the value of programs implemented in early years relative to that of the more recent programs. Therefore, estimates of the time path of benefits and costs are desirable (all expressed in 1999 dollars) whenever possible. Several different approaches to summing benefits and costs across programs and across time periods are possible, including the approach that reports undiscounted aggregates of future and past benefits and costs. Options Benefits Options benefits are the positive and negative consequences of technologies for which R&D has been completed, that are ready to be commercialized but are constrained by current economics or other circumstances, and that could be adopted under some plausible future economic, regulatory, and tax conditions. The types of technologies classified as yielding options benefits include the following: Deployable technologies not likely to be commercialized under the most likely economic, policy, and tax condition but likely to be commercialized under some set of reasonably plausible conditions. Technologies for which the technological challenge has been met but for which the normal costs of improving a technology in the course of its commercialization have not yet been expended and for which the commercialization process can be expected under some set of reasonably plausible conditions. An options benefit is closely associated with a technology that is “on the shelf” and is not commercially viable under current economic conditions. Thus, for example, indirect coal liquefaction may have significant options value because it has been developed and may become commercially viable if oil prices reach and remain well above $30 or $40 per barrel. On the other hand, magnetohydrodynamics may not have options value because the R&D program was terminated before the technology was fully developed. Knowledge Benefits Knowledge benefits are defined as scientific knowledge arising from a technology for which R&D has not been completed but that holds promise for future application, perhaps in completely unforeseen ways. These benefits are qualitative descriptions of advances in knowledge based on research over and above the research that developed specific technologies. The advances could lead to other technologies, but at this time those technologies have not been developed. Knowledge benefits include unanticipated and not-closely-related technological spin-offs that are made possible by research programs. For example, the Office of Fossil Energy’s coal R&D programs have had many significant technological spin-offs. These spin-offs represent knowledge benefits. The category “knowledge benefits” probably has by far the greatest diversity of economic, environmental, and security benefits and is, accordingly, probably the hardest to evaluate with any confidence. For some classes of knowledge benefits, it will be impossible to quantify in any manner that would allow an objective overall assessment of importance. For example, improvements in our knowledge of basic physical processes would fall into this category. However, other knowledge benefits do allow some quantification. This is particularly true for some well-defined technology development programs currently under way. The Partnership for a New Generation of Vehicles may fall into this category. INTERPRETATION AND APPROPRIATE USE OF THE FRAMEWORK The matrix approach developed here is useful for placing the benefits and costs of energy R&D programs in a consistent and comprehensive framework that will permit objective comparison across programs and technologies. However, several caveats are in order with respect to the use of this approach. First, there may be a tendency to concentrate on the information contained in the northwest cell of the matrix—realized economic benefits and costs—because it is often the simplest to identify and quantify. Nevertheless, when evaluating federal R&D, it would be shortsighted to concentrate excessively on the data in this cell of the matrix. The other criteria developed here are also meaningful and important in assessing the costs and benefits of the DOE R&D programs and must be objectively valued in context of the national interest. In addition, technology developments promising to provide short-run economic benefits are more likely than technology development providing only environmental or security benefits to be pursued by private sector corporations. Therefore, it is programs that promise those environmental or security benefits that are most likely to need government support. There is another problem with concentrating on realized economic net benefits: doing so tends to favor R&D programs that were successfully completed many years ago and had time to produce substantial realized economic benefits, at the expense of more recent or current programs. Thus, the energy efficiency R&D program to develop electronic ballasts for fluorescent lights, conducted in the late 1970s and the early 1980s, had produced substantial realized net economic benefits by 2000, whereas the PNGV program, which began in the late 1990s, is not expected to begin generating economic benefits until after 2005. Focusing on realized economic benefits alone would inappropriately bias the assessment in favor of R&D on electronic ballasts and against R&D through the PNGV program. In other words, estimates orga-

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Energy Research at DOE was it Worth it?: Energy Efficiency and Fossil Energy Research 1978 to 2000 nized within the framework matrix must consider R&D work in progress as well as R&D programs that are largely or entirely complete in order to avoid inadvertently biasing the results against the former classes of programs. Second, and closely related, placing the benefits or costs of a DOE R&D program in a particular row or column of the matrix does not constitute a judgment on the value of the program. It is not desirable to have the benefits of DOE’s R&D programs concentrated disproportionately in any rows or columns. For example, while realized benefits are of obvious importance, options values are also important. In fact, a strong argument can be made that a major goal of the DOE R&D programs should be to provide options benefits for the nation relating to technology availability, potential fuel diversity, and future energy choices. Similarly (but row-wise), while economic benefits are important, environmental and security benefits are too. Indeed, for federal government programs, a strong case can be made for emphasizing them: Environmental benefits, while often difficult to estimate precisely and quantitatively, have become increasingly significant in recent decades and are not generally accounted for in private market transactions. National security benefits are also significant and are not accounted for in the private market. Both types of benefit represent externalities and public goods that are often not accounted for in the private market and may require government intervention in the market. In general, therefore, it is probably not advisable to have the benefits and/or costs of the DOE’s energy efficiency and fossil energy R&D programs concentrated in any particular cell or cells of the matrix. An appropriate evaluation of the programs must take into account the entire benefits/costs framework. Finally, it must be recognized that the decision to place a cost or benefit of an R&D program in a particular cell of the matrix can be somewhat subjective and can change depending on circumstances. For example, the reliability of our nation’s energy infrastructure—especially of the electricity grid and the natural gas transmission system—has become of increasing concern in recent years and has recently been given higher priority at DOE. However, energy reliability has aspects that apply to most cells in the matrix: The reliability of the energy infrastructure has obvious security implications, but, especially in the new high-tech information and manufacturing economy, even very short interruptions in energy supplies can have enormous economic costs. Another example of the potential fluidity of the matrix criteria relates to R&D programs designed to address greenhouse gas emissions. At present, the costs and benefits of these programs should be placed in the environmental row of the matrix. However, if stringent international controls are instituted and greenhouse gas emissions are taxed and priced, then the costs and benefits of the R&D programs addressing greenhouse gases would shift from the environmental benefits and costs row to the economic benefits and costs row. Of course, in this case, the benefits themselves would not have changed only their position within the matrix. This shows, once again, the importance of looking at the entire matrix framework when evaluating energy R&D programs.