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Before the Subcommittee on Energy and Resources, Committee on 
Government Reform, House of Representatives:

United States Government Accountability Office:


For Release on Delivery Expected at 2:00 p.m. EST:

Wednesday, March 16, 2005:

Meeting Energy Demand in the 21ST Century:

Many Challenges and Key Questions:

Statement of Jim Wells, Director, Natural Resources and Environment:


GAO Highlights:

Highlights of GAO-05-414T, a testimony to Darrell Issa, Chairman, 
Energy and Resources Subcommittee, Committee on Government Reform, 
House of Representatives

Why GAO Did This Study:

Plentiful, relatively inexpensive energy has been the backbone of much 
of modern America’s economic prosperity and the activities that 
essentially define our way of life. The energy systems that have made 
this possible, however, are showing increasing signs of strain and 
instability, and the consequences of our energy choices on the natural 
environment are becoming more apparent. The reliable energy mainstay of 
the 20th century seems less guaranteed in the 21st century. 

As a nation, we have witnessed profound growth in the use of energy 
over the past 50 years—nearly tripling our energy use in that time. 
Although the United States accounts for only 5 percent of the world’s 
population, we now consume about 25 percent of the energy used each 
year worldwide. Looking into the future, the Energy Information 
Administration (EIA) estimates that U.S. energy demand could increase 
by about another 30 percent over the next 20 years. 

To aid the subcommittee as it evaluates U.S. energy policies, GAO 
agreed to provide its views on energy supplies and energy demand as 
well as observations that have emerged from its energy work. 

This testimony is based on GAO’s published work in this area, conducted 
in accordance with generally accepted government auditing standards, 
and on EIA’s Annual Energy Review, 2003 and its Annual Energy Outlook, 

What GAO Found:

America’s demand for energy has, in recent decades, outpaced its 
ability to supply energy. As a result, the country has witnessed rapid 
price increases and volatility in some markets, such as gasoline, and 
reliability problems in others, such as electricity, where the blackout 
in 2003 left millions in the dark. Given these recent and sometimes 
persistent problems, as well as concerns about the impacts of energy 
consumption on air, water, and other natural resources, there is a 
growing sense that action is needed. 

Today, fossil fuels (coal, oil, and natural gas) provide about 86 
percent of our total energy consumption, with the rest coming from 
nonfossil sources such as nuclear (8 percent) and renewables, such as 
hydroelectric energy and wind power (6 percent). Overall, the majority 
of the nation’s energy consumption is met by domestic production. 
However, imports of some fuels have risen. For example, over the past 
20 years, imports—primarily oil and natural gas—have doubled, and in 
2003 these imports comprised about one-third of total domestic energy 
consumption. Imports are expected to increase still further in order to 
meet future domestic consumption. In light of the current and expected 
levels of imports, the United States is, and will increasingly be, 
subject to global market conditions, with the transportation sector 
especially affected. Global markets may face future difficulties in 
meeting the growing energy demands of developed nations while also 
meeting the demands of the developing world, particularly considering 
the explosive growth in some economies, such as China’s and India’s. If 
world supplies for some fuels do not keep pace with world demand, 
energy prices could rise sharply. 

GAO believes that a fundamental reexamination of the nation’s energy 
base and related policies is needed and that federal leadership will be 
important in this effort. To help frame such a reexamination, we offer 
three broad crosscutting observations. First, regarding demand, the 
amount of energy that needs to be supplied is not fate, but our choice. 
Consumers, whether businesses or individuals, choose to use energy 
because they want the services that energy provides, such as automated 
manufacturing and advanced computer technologies. Accordingly, 
consumers can play an important role in using energy wisely, if 
encouraged to adjust their usage in response to changes in prices or 
other factors. Second, all of the major fuel sources—traditional and 
renewable—face environmental, economic, or other constraints or trade-
offs in meeting projected demand. Consequently, all energy sources will 
be important in meeting expected consumer demand in the next 20 years 
and beyond. Third, whatever federal policies are chosen, providing 
clear and consistent signals to energy markets, including consumers, 
suppliers, and the investment community, will help them succeed. Such 
signals help consumers to make reasoned choices about energy purchases 
and give energy suppliers and the investment community confidence that 
policies will be sustained, reducing investment risk. 

[End of section]

Mr. Chairman and Members of the Subcommittee:

I am pleased to participate in the Subcommittee's hearing on the future 
direction of our nation's energy policies. Plentiful, reliable, 
inexpensive energy--in its various forms, including gasoline, natural 
gas, and electricity--has been the backbone of much of modern American 
economic prosperity and the activities that essentially define the 
American lifestyle. The United States accounts for only 5 percent of 
the world's population but consumes about 25 percent of the energy used 
each year worldwide. U.S. energy demand has increased over 25 percent 
since 1980, and in 2003 amounted to the equivalent of about 790 billion 
gallons of gasoline, or roughly 2,800 gallons for every man, woman, and 
child in the country. 

As shown in figure 1, energy consumption in the United States has 
grown. While energy demand across residential, commercial, and the 
industrial sectors includes demand for all types of energy sources, 
such as oil, coal, and natural gas, demand in the transportation sector 
is almost completely oil dependent. 

Figure 1: Energy Consumption by Sector, 1949-2003:

[See PDF for image]

Note: BTU stands for British thermal units and is a standard unit used 
to measure energy consumption. In 2001, the average household in the 
United States consumes about 92 million BTUs per year. 

[End of figure]

Increasing demand across our economy has, at times, strained our energy 
system. For example, in recent years, natural gas prices have nearly 
tripled and crude oil prices have more than doubled, and gasoline 
prices now exceed $2.00 per gallon in Washington, D.C., San Francisco, 
and other major cities. In addition, our energy supplies have also 
witnessed problems, most notably in 2003 when the largest blackout in 
U.S. history left as many as 50 million people in the dark. Further, 
there have been indications that our energy infrastructure has not kept 
up with changes in our demand for energy as illustrated by (1) the 
nation's refinery capacity not keeping pace with the increasing demand 
for gasoline, leading to increased imports of gasoline, and (2) the 
electricity sector's transmission constraints periodically limiting the 
flow of electricity in parts of the country. Lastly, our energy 
dependence on other countries has increased, raising greater concern 
about international turmoil in the Middle East, Russia, Venezuela, and 

As shown in figure 2, the United States has increased production 
(generally through the extraction and use of oil, coal, and other fuels 
from the land) of a wide range of fuels over the past 50 years to help 
meet consumer demand. Today, fossil fuels account for about 80 percent 
of our total domestic energy production, with the rest coming from 
nonfossil sources such as nuclear electric energy, hydroelectric 
energy, and nonhydroelectric renewable energy sources, such as wind 
power. Despite the fact that the United States produces most of its 
energy, imports of some fuels are rising to meet growing U.S. 

Figure 2: U.S. Energy Production, 1949-2003:

[See PDF for image]

[End of figure]

As shown in figure 3, over the past 50 years net imports of energy have 
increased. This increase has been most dramatic over the past 20 years, 
during which time energy net imports more than doubled, reaching 32 
percent of our total consumption in 2003. The vast bulk of these 
imports are oil and natural gas. 

Figure 3: Domestic Production and Net Imports Needed to Meet 
Consumption, 1949-2003:

[See PDF for image]

[End of figure]

Nearly all energy is supplied by private companies that also own the 
energy supply infrastructure. Some of these companies are multinational 
corporations with worldwide shareholders, while others operate only 
locally. Further, most of the fuels used in the energy sector-- 
including oil, coal, natural gas, and nuclear fuel--are sold at prices 
determined by competitive markets and, in some cases (such as crude 
oil), international markets. 

Over the years, the federal government has intervened in energy 
markets, providing tax credits and other benefits to suppliers and 
consumers of traditional and renewable energy. For example, the federal 
government has granted tax incentives, direct subsidies, and other 
support to the petroleum industry, as well as tax and other benefits to 
the ethanol industry, in an effort to increase U.S. energy supplies. 
Similarly, the federal government has also provided tax credits for the 
production of energy using renewable energy resources, such as wind 
turbines. While these tax incentives generally work to increase the 
production of energy, they also generally decrease revenues accruing to 
the U.S. Treasury. 

Looking into the future, daunting challenges lie ahead. As shown in 
figure 4, the Energy Information Administration (EIA), within the 
Department of Energy (DOE), estimates that U.S. energy demand could 
increase by about another 30 percent over the next 20 years, if current 
trends hold. Meeting these projected increases could be more 
challenging in the natural gas and petroleum industries, because 
consumption of these fuels is forecast to increase by 37 percent and 33 
percent, respectively, during that period. In addition, forecast 
imports for these two fuels are expected to rise by over 140 percent 
and 60 percent, respectively. 

Figure 4: Forecast Energy Consumption, 2002-2025:

[See PDF for image]

[End of figure]

Unless changes are made, meeting the forecast increase in energy demand 
could further stress an already strained system. From a domestic 
perspective, the nation already faces energy supply constraints and 
higher prices for some important fuels, as well as environmental 
problems such as persistent air pollution in some cities. In addition, 
from an international perspective, the United States is increasingly 
subject to global markets for key energy sources, such as crude oil 
and, increasingly, for natural gas. Global markets may face 
difficulties in continuing to meet the growing energy demands of 
developed nations such as the United States, while also meeting the 
demands of the developing world, particularly in light of the explosive 
growth in some economies, such as China's and India's. If world 
supplies do not keep pace with world demand, energy prices could rise 

Just last month, as part of our 21st Century Challenges 
report,[Footnote 1] we identified two broad questions focused on 
reexamining the nation's energy base and related policies:

* To what extent are federal energy policies and incentive structures 
adequately preparing the nation to satisfy its energy needs over the 
long term?

* What is the appropriate balance between efforts to promote enhanced 
production of fossil fuels, alternative renewable energy sources, and 
the promotion of energy conservation?

* Given the importance of energy to our nation's economy and current 
lifestyle choices, it is generally recognized that a secure, 
affordable, reliable, and environmentally sound energy supply is 
needed. However, the reliable energy mainstay of the 20th century seems 
less guaranteed in the 21st century. In the context of developing our 
nation's energy policies, we are providing our views on energy supply 
and demand based on our published work in this area, conducted in 
accordance with generally accepted government auditing standards. In 
addition, we are providing information on forthcoming work, as GAO 
continues to report on a range of energy activities and policies of the 
federal government. 

In summary, based on past work and considering recent EIA forecasts, 
three broad crosscutting observations emerge that could help frame 
congressional efforts to develop the nation's energy policies:

* First, regarding demand, the amount of energy that needs to be 
supplied is not fate, but our choice. Consumers, whether businesses or 
individuals, choose to use energy because they want the services that 
energy provides, such as automated manufacturing, advanced computer 
technologies, and many high-technology household amenities. However, 
consumers can play an important role in using energy wisely by, among 
other things, choosing technologies that deliver the same services but 
that use less energy or reducing their energy usage when it is valuable 
to them to do so. For example, in electricity markets some utilities 
and system operators have created a variety of electricity pricing and 
other programs that encourage customers to adjust their usage in 
response to changes in prices or other factors. These "demand response" 
programs offer substantial benefits to participants and improve the 
functioning of these markets because they provide more accurate price 
signals to consumers and encourage more careful energy use while 
providing better incentives for conservation and/or energy efficiency. 

* Second, all of the major fuel sources--traditional and renewable-- 
face environmental, economic, or other constraints or trade-offs in 
meeting projected increases in demand. Consequently, all energy sources 
will be important in meeting expected consumer demand in the next 20 
years and beyond. Meeting future demand will be particularly 
challenging for the transportation sector, where the United States is 
almost completely dependent on oil--more than half of which is 
imported. With just 5 percent of world population, the United States 
consumes roughly 45 percent of world gasoline. Further, the same 
international markets that supply U.S. needs will also need to supply 
countries in the developing world, such as China and India, which are 
experiencing increases in demand that far exceed even our own 
increasing thirst for oil. 

* Third, whatever federal policies are chosen, providing clear and 
consistent signals to energy markets, including consumers, suppliers, 
and the investment community, will help them succeed. Energy consumers 
need clear and consistent signals so that they can make reasoned 
choices with regard to purchases of energy-consuming equipment that 
help to determine their long-term energy demand. Energy suppliers 
require clear signals regarding national policies and confidence that 
those policies will be sustained over time in order to undertake the 
substantial investment needed to support expected increases in 
consumption. The investment community also needs these clearly 
articulated policies to determine how much to invest in current and 
future infrastructure, new products, and new technologies. 

Specifically, our testimony presents an overall energy picture, 
discussing each of the major energy sources used in the United States, 
along with consumer demand. We end each fuel discussion with examples 
of key questions facing the Congress, the executive branch, states, 
industry, and consumers. 

Oil: Our Largest Energy Source, but Mostly Imported:

Oil is the largest single energy source used in the United States and 
remains perhaps the most visible energy source to most consumers. Oil, 
and the gasoline refined from it, provided the critical energy for the 
automobile that mobilized America. Oil remains at the center of the 
transportation sector and at the center of our national energy policy 

In 2003, oil accounted for about 40 percent of the total U.S. energy 
consumption and the United States consumed about 7.3 billion barrels of 
crude oil--about 20 million barrels per day. Most oil is used in the 
transportation sector as gasoline, diesel, and jet fuel, with oil-based 
products accounting for over 98 percent of the U.S. transportation 
sector's fuel consumption. In addition, oil is also used as a raw 
material in the manufacturing and industrial sectors; for heating in 
the residential and commercial sectors; and, in small amounts, for 
generating electric power. Although the United States accounts for 
about 5 percent of the world population, we consume about 25 percent of 
total world oil demand. Although today the United States and its 
industrialized counterparts currently account for the bulk of the world 
oil demand, demand is growing rapidly in the developing nations, 
especially those in Asia, such as China and India. 

The United States relies on imported oil for more than half of its 
supply and appears likely to increase its reliance in the future. 
Historically, the United States produced most of the oil it consumed. 
However, U.S. oil production began to decline in 1970 and has dropped 
by about 40 percent since then. Since 1970, imports of crude oil and 
other products have increased 255 percent, and imports now comprise 
nearly 56 percent of the U.S. oil supply. Part of the reason for the 
rising imports is cost; it has been less costly to purchase oil 
produced in other countries than it has been to produce it in the 
United States. 

Rising U.S. imports have increasingly been supplied by countries 
belonging to the Organization of Petroleum Exporting Countries (OPEC), 
which collectively provided about 42 percent of our total imports 
during 2003. Since about 20 percent of our imports came from the 
Persian Gulf region and 14 percent came from Saudi Arabia, our reliance 
on these imports has made the United States subject to the political 
instability of the Middle East witnessed in recent years. We also 
import a large amount of oil from our neighbors in North America; about 
30 percent of our imported oil came from Canada and Mexico. Going 
forward, the United States will increasingly rely on imported oil 
because although the United States is currently the world's third 
largest oil producer, U.S. proven oil reserves account for only about 2 
percent of total world reserves. In contrast, OPEC holds about 68 
percent of total world oil reserves. 

The prices of crude oil and refined petroleum products, such as 
gasoline and home heating oil, have been volatile over the years. Since 
the 1970s, the crude oil market has, at times, been heavily influenced 
by the OPEC cartel. Because the member countries control a large share 
of world production and total reserves, these countries have been able 
to influence crude oil prices by limiting supply through the use of 
country-by-country production quotas. These quotas have, at times, 
served to maintain a tight balance between world supply and world 
demand. However, because of the relative political instability in the 
Middle East and some of the other OPEC countries (such as Nigeria and 
Venezuela), occasional oil supply disruptions and price shocks have 
been a fact of life for about the past 30 years and may remain an issue 
for the foreseeable future. Although crude oil prices play a large role 
in determining the prices for gasoline and other refined petroleum 
products, other factors also influence the volatility of gasoline 
prices, including limited refinery capacity, low inventory levels 
relative to demand, supply disruptions, and regulatory factors--such as 
various gasoline formulations that are used to meet federal and state 
environmental laws. Federal and state taxes on gasoline and other 
products serve to raise the level of prices, but these taxes do not 
fluctuate often and so do not contribute to price volatility. 

Demand has pressed the limits of the production and delivery 
infrastructure in the oil industry in recent years. While U.S. crude 
oil production has fallen, rapidly rising imports have required more 
ocean tankers of crude oil to be off-loaded each year--forcing 
expansions of ocean crude oil terminals and coastal refineries. Because 
some refineries have closed, and no new ones have been built since 
1976, there are fewer refineries available to convert crude oil into 
gasoline and other products. Although increases in overall output have 
been achieved through expanding capacity at the remaining refineries 
and operating those refineries at very high production levels, the 
nation's domestic refining capacity has lagged overall demand growth 
for petroleum products. Further, the network of pipelines that delivers 
refined petroleum products also operates at high levels of capacity, 
sometimes limiting the amount of fuel that can be shipped. Finally, the 
capacity of gasoline terminals that distribute fuel to local gas 
stations is also limited in some parts of the country. 

Over the past 30 years, the federal government has undertaken many 
efforts designed to influence petroleum markets and demand for 
petroleum based fuels. For example, in the mid-1970s, the federal 
government developed the Strategic Petroleum Reserve, part of an 
international reserve effort designed to mitigate the economic impacts 
on world economies of any large, sustained disruption to the oil 
supply. In addition, the federal government has supported a number of 
research and development and regulatory efforts designed to reduce 
demand for petroleum fuels in transportation. For example, the federal 
government supported the Partnership for a New Generation of Vehicles 
in order to aid U.S. automobile manufacturers in developing gas- 
electric hybrid vehicles. In addition, the federal government has 
encouraged the development and deployment of technologies focused on 
identifying alternatives to petroleum-based fuels, such as the recent 
FreedomCAR initiative--a program to help develop fuel-cell technologies 
for vehicles. 

GAO has issued numerous reports on aspects of the petroleum sector, 
including gasoline markets and government efforts to reduce consumption 
of gasoline in vehicles among other areas. We also have reported on 
government efforts to improve gasoline vehicle efficiency through the 
use of gasoline-electric hybrid technologies and to shift vehicle fuel 
use to alternatives such as compressed natural gas or hydrogen-powered 
fuel cells. GAO has also noted that low gasoline prices do not reflect 
external costs associated with gasoline use, such as health and 
environmental impacts of air pollution or the economic cost that may 
result from the nation's vulnerability to oil price shocks. 
Consequently, low gasoline prices work to discourage energy efficiency 
and the use of alternative fuels. Most recently we reported on the 
effects of mergers and market concentration in the U.S. petroleum 
industry, noting that mergers and increased market concentration that 
occurred in the mid-to-late 1990s contributed to higher wholesale 
gasoline prices--averaging about 1 to 2 cents per gallon. Other factors 
such as changes in gasoline formulations and supply disruptions may 
have also contributed to higher gasoline prices during this period. 
Later this year, GAO will release a primer on how gasoline is made and 
distributed, what factors influence the price of gasoline, and why 
gasoline prices change, among other things. In forthcoming work 
requested by the Congress, GAO will report on the presence of multiple 
fuel formulation requirements in some parts of the country and how the 
expansion of these fuels have affected prices. 

Key Questions:

* What are the potential implications for the United States of 
increased world reliance on oil supplies from politically unstable 
sources, such as OPEC countries?

* To what extent can the United States increase refining capacity and 
other delivery infrastructure to meet growing demand for petroleum 

* What are the implications if there are further consolidations in the 
U.S. petroleum industry?

* Are there ways to better reflect the full societal cost of using 
gasoline in gasoline prices, and what are the trade-offs of doing so?

Coal: Balancing the Use of an Abundant Domestic Resource with Its 
Environmental Consequences:

Coal has been a key energy resource in the United States for over 100 
years. Over this time, the use of coal has provided low-cost 
electricity but has brought with it environmental consequences, such as 
air pollution. Choices regarding the use of coal revolve around 
balancing these consequences, in the light of new technologies to 
reduce them, with the energy benefits of using this plentiful domestic 

In 2003, coal accounted for about 23 percent of total U.S. energy 
consumption. Nearly all of the coal consumed in the United States, 92 
percent, was used in the production of electricity, with almost all the 
remaining 8 percent used directly by industries such as steel 
manufacturing. Coal-fired power plants provided about half of total 
electricity generation in the United States in 2003, with larger shares 
in some parts of the country such as the mountainous West and the 
Midwest. Coal is expected to remain a vital element in the country's 
energy supply; EIA's most recent forecast indicates that coal would 
continue to provide about 20 percent of the country's energy needs in 

The United States has substantial domestic coal resources, leading some 
to refer to the United States as "the Saudi Arabia of coal." Nearly all 
of the coal used in the country is produced domestically. In 2003, 
using EIA data, estimates of recoverable U.S. coal reserves could last 
over 250 years, based on current usage. Coal is generally extracted 
from either surface, or underground mines, however underground coal 
also contains combustible gas, called coal bed methane, that can be 
removed using wells and burned to produce usable energy similar to 
conventional natural gas. Coal reserves are located across the country, 
with large reserves in the West, the Midwest, and the Appalachian 
Mountains, but consumption of coal from the West has increased sharply 
in recent years. A large portion of the coal reserves are located on 
federal lands and are subject to direct federal controls, such as 
payment of royalties, limits on the amount of federal land an 
individual company may mine, and requirements that surface land be 
restored to conditions similar to natural conditions when mining ends. 
Partly owing to the abundance of coal and technological improvements in 
the mining industry, coal prices have been declining in real terms 
since the mid-1970s. 

The production and use of coal have a variety of environmental 
consequences, including those related to mining and those related to 
the pollution that is emitted when coal is burned. Surface mining has 
the most significant impacts on land resources, in some cases 
substantially altering the terrain. Both surface and underground mines 
can significantly affect water resources by introducing pollution or 
silt into groundwater or waterways. Regarding air quality, combustion 
of coal in power plants emits pollutants and contributors to pollutants 
such as nitrogen oxides (NOx), sulfur oxides (SOx), particulate matter 
(PM), and toxic chemicals, such as mercury. Although some older power 
plants emit high levels of these substances, significant advancements 
have been made in the development of new power plants, utilizing new 
technologies that substantially reduce emissions. In addition to these 
pollutants, coal plants release a substantial amount of carbon dioxide, 
a gas that is common in nature but has been linked with the "greenhouse 
effect," a greater-than-normal rise in the planet's temperature. 
Although some countries have agreed to attempt to reduce emissions of 
carbon dioxide and other "greenhouse" gases, the United States does not 
currently regulate the emissions of such gases. However, DOE has 
supported research focused on developing a zero-emission coal-fired 
power plant that would not emit any pollutants or carbon dioxide into 
the air. In 2005, according to an industry policy group, 100 or more 
power plants featuring advanced technologies that substantially reduce 
emissions of pollutants are being considered for development in the 
United States. 

We have issued reports and testified on two primary coal related 
issues: technologies supported under DOE's Clean Coal Technology 
program and the environmental consequences of using coal in power 
plants. Over the past several years, we have reported on the Clean Coal 
Technology program, noting that while DOE has reported successes in 
deploying new technologies, there have been management problems with 
the program and that there may be important lessons that should be 
considered in future similar efforts, such as the value of cost-sharing 
agreements and federal cost-sharing limits. We have also reported (1) 
that coal-fired power plants that have not been required to install 
modern pollution reducing equipment emit higher levels of pollutants 
such as NOx and SOx than plants where this equipment is present, and 
(2) that increased electricity generation in order to meet expected 
growth in demand may increase emissions of certain pollutants. In 
forthcoming work requested by the Congress, GAO will report on the 
effectiveness and cost of technologies to reduce mercury emissions, a 
toxic element present in coal that is emitted when coal is burned. 

Key Questions:

* How can the federal government balance the use of this abundant 
domestic energy source with its regulated and unregulated environmental 

* Where will additional coal be mined, where will new power plants be 
located, and are additional infrastructure improvements needed?

* What is the potential role for coal bed methane, what are the trade- 
offs of extracting it, and what, if anything, should the federal 
government do to influence its development and production?

* What changes in controls, if any, should the federal government make 
to how coal can be mined on federal land and elsewhere?

* What role, if any, should the federal government play in providing 
incentives for using coal in ways that are safer for the environment?

Natural Gas: A Widely Used and Versatile Fossil Fuel:

Natural gas, the fuel of choice recently, is one of the most versatile 
and widely used fuels--significant amounts are used as a raw material 
in the fertilizer, chemical, and other industries; for space heating in 
the industrial, commercial, and residential sectors; and for 
electricity generation. Until recently, prices have been low and use of 
natural gas for space heating and for electricity generation has 
expanded rapidly. Meeting the projected future growth of natural gas 
demand through delivering additional supply poses challenges. 

Natural gas plays a vital role in meeting the country's national energy 
demand, accounting for about 23 percent of the total energy consumed in 
the United States. Use of natural gas has been growing rapidly since 
the mid-1980s, with consumption increasing by about 35 percent from 
1986 through 2003. Natural gas demand has been the greatest in the 
industrial sector, accounting for about 37 percent of total demand in 
2003; followed by the residential sector and electric power, each 
accounting for about 22 percent; then the commercial sector, at about 
14 percent. The rest, about 3 percent, is used in the transportation 
sector, mostly as fuel for pipelines. A significant share of the 
increased demand in recent years has resulted from increased use of 
natural gas to generate electricity. This use has increased by 79 
percent since the repeal of the Powerplant and Industrial Fuel Use Act 
in 1987, which had restricted construction of power plants using oil or 
natural gas as a primary fuel; natural gas is now the primary fuel in 
new power plants. EIA estimates that total natural gas demand could 
increase 50 percent in the next 25 years. 

Although natural gas prices remained low for many years, in recent 
years they have increased dramatically. From 1995 to 2004, average 
wellhead prices for natural gas increased nearly three-fold; rising 
from $1.55 per thousand cubic feet to $5.49 per thousand cubic feet. 
These higher prices for natural gas may have contributed to industrial 
companies reducing or ceasing U.S. operations. EIA data indicate that 
demand has fallen rapidly in the industrial sector, where consumption 
decreased by 16 percent from 1997 through 2003. 

Historically, almost all the natural gas used in the United States has 
been produced here, but a small and growing share is imported. Most 
natural gas production involves extracting gas from wells drilled into 
underground gas reservoirs, although some natural gas is generated as a 
by-product of oil production. In 2003, domestic sources provided about 
85 percent of total consumption. Historically, most of the country's 
natural gas came from Texas, Oklahoma, and Louisiana. However, the 
Rocky Mountain region, Alaska, and areas beneath the deeper waters of 
the Gulf of Mexico are becoming increasingly important in supplying 
natural gas. Overall, from 1994 through 2003, domestic annual 
production held steady at about 19 trillion cubic feet. In 2003, the 
United States imported about 15 percent of the total natural gas 
consumed, with nearly all of it coming from Canada via pipeline. 
However, a small share is shipped on special ocean tankers as liquefied 
natural gas (LNG) from countries such as Trinidad and Tobago, Nigeria, 
and others. Looking ahead, the Energy Information Administration 
estimates that U.S. consumption could increase to about 31 trillion 
cubic feet (TCF) by 2025, expanding the gap relative to U.S. production 
and requiring increasing imports to meet U.S. needs. 

The United States still has substantial undeveloped natural gas 
resources, but some of these resources are located under federal lands, 
and access to some of these resources is restricted. For example, about 
40 percent of the natural gas resources on federal land in the Rocky 
Mountain region are not available for development. Additional natural 
gas reserves are located in federally controlled offshore areas or 
other areas and are not available for development at this time. 
Extensive drilling for natural gas can substantially modify the 
surrounding landscape, and in some cases can adversely affect wildlife 
and its habitat, degrade air and water quality, and decrease the 
availability of groundwater to ranches and houses that may depend upon 
it. The federal government is required to consider these environmental 
consequences when determining if, and how, natural gas will be 
extracted from federal lands. In response, the natural gas industry has 
and continues to use more advanced drilling methods and processes to 
mitigate future adverse impacts. 

Meeting the sharp increases forecast for natural gas demand could also 
require substantial increases in infrastructure, such as new pipelines 
and LNG terminals. In particular, increasing natural gas supplies may 
require greater pipeline capacity and new pipelines. For example, over 
the past 20 years the federal government has considered a variety of 
issues with financing and building a new pipeline across federal and 
state lands to deliver natural gas from Alaska. The federal government 
is involved in the regulation and permitting of natural gas pipelines, 
particularly those that must traverse federal lands. To meet the need 
for sharply higher imports of natural gas, some experts believe that 
the United States may need to build more LNG terminals. To date, 
however, such facilities have not been built due to economic, safety, 
and security concerns. Consequently, it is not clear whether the United 
States can effectively compete with other countries for these supplies. 

Over the last several years, we have issued a number of reports on 
natural gas, including reports on the natural gas markets and their 
oversight, various approaches for compensating the federal government 
when natural gas is removed from federal land, and the impacts of 
higher natural gas prices on certain industries. In 2002 and 2003, for 
example, we issued reports analyzing natural gas markets and their 
oversight. We noted that (1) prices generally increase because limited 
supplies have not been able to react quickly enough to changes in 
demand; (2) the federal government (e.g., the Federal Energy Regulatory 
Commission and EIA) faces significant challenges in overseeing natural 
gas markets and ensuring that prices are determined in a competitive 
and informed marketplace, minimizing unnecessary price volatility; and 
(3) buyers of natural gas have options to reduce their exposure to 
volatile prices through the use of long-term contracts and financial 
hedging instruments. In forthcoming work requested by the Congress, GAO 
will report on federal efforts to understand and manage risks 
associated with potential terrorist attacks on LNG shipments and other 

Key Questions:

* Should the federal government encourage further development of 
domestic natural gas on federal lands, and can it ensure that 
environmental impacts are adequately mitigated?

* What are the infrastructure needs of the natural gas industry, 
including natural gas pipelines generally and in Alaska in particular, 
and what role, if any, should the government play in facilitating the 
development of this infrastructure?

* What are the implications for consumers (residential, commercial, 
industrial, and electric power) of the increasing reliance on natural 
gas to generate electricity?

* What are the economic and other barriers and/or trade-offs to 
developing an infrastructure to support increases in LNG shipments, and 
what role, if any, should the federal government play?

* To what extent is the federal government positioned to ensure that 
natural gas prices are determined competitively?

Nuclear Energy: Emission-Free Energy Source, but with Waste Storage 
Problems and Safety/Security Concerns:

Nuclear energy was once heralded as the single answer to all of the 
country's energy woes, with predictions that electricity would soon be 
"too cheap to meter." While these enormous expectations have not been 
met, nuclear energy has become an important part of the country's 
current energy picture and may remain that way for years to come. 
Whether we can continue to rely on, or expand our use of, nuclear 
energy in the future at existing plants or at new plants based on new 
designs, hinges on solving the long-term waste storage problem as well 
as resolving concerns over safety and security. 

Nuclear energy currently accounts for about 8 percent of U.S. national 
energy consumption. Nearly all nuclear energy is used to generate 
electricity, and nuclear plants are important contributors to total 
U.S. electricity production, providing about 20 percent in 2003. The 
first commercial nuclear power plant came on line in 1957, and the 
country witnessed a flurry of construction from the late 1960s through 
the 1980s. Many nuclear plants operating today were initially licensed 
for 40 years, and many are now approaching the end of their licenses. 
Since an accident at the Three Mile Island nuclear plant in 1979 raised 
concerns regarding the safety of nuclear plants, no new plants have 
been ordered in the United States, and none has been brought on line 
since 1996. In addition, many of the plants that were completed 
witnessed multibillion dollar cost overruns. 

Over the past several years, a number of nuclear generating units have 
been retired, but because the remaining 104 units have increased their 
productivity, the output actually increased by about 13 percent from 
1998 through 2003. This increase in productivity has been impressive; 
the average annual capacity factor[Footnote 2] has increased from 71 
percent in 1997 to 90 percent in 2004. These increases in productivity 
and other improvements have led some plant operators to seek to operate 
some plants at somewhat higher capacity. 

There appears to be renewed interest in extending the licenses of some 
existing plants and even building new plants. Interest in nuclear power 
plants has increased, in part, because they do not emit regulated air 
pollutants such as nitrogen oxides, sulfur dioxides, and particulate 
matter that can be costly to control, or carbon dioxide, a greenhouse 
gas, that many in the electricity industry believe might be regulated 
in the future. Given the improved performance, limited air emissions, 
and production cost advantages of nuclear power plants, some companies 
operating existing nuclear plants have already had them relicensed 
through the Nuclear Regulatory Commission (NRC) to operate for up to 
another 20 years, and others have started similar efforts. In addition, 
there have been trade industry reports that a number of utilities and 
other energy companies are actively considering submitting applications 
to build new plants. Over the past 20 years, plants have continued to 
be built overseas. New designs have emerged and foreign manufacturers 
have gained significant experience building them. Nuclear energy plays 
a large role in supplying energy in France, Germany, Canada, Japan, and 
other developed nations. Although nuclear plants remain very costly to 
build compared to some other plant types, they have lower fuel and 
other operating costs and can produce electricity at a lower cost than 
new plants that use fuels such as coal or natural gas--the primary 
energy source used in new U.S. power plants. In this country, NRC has 
approved new reactor designs and NRC and the Department of Energy are 
working to reduce the approval and construction lead times for 
potential new plants. 

Although the United States has a large domestic supply of uranium, the 
nation increasingly relies on international markets to obtain the 
nuclear fuel used here. Historically, the fuel used at U.S. reactors 
has been produced here. However, several factors have combined to 
reduce the competitiveness and capacity to domestically supply reactor 
fuel, including falling prices for reactor fuel on international 
markets and factors surrounding the 1998 privatization of the United 
States Enrichment Corporation (USEC). In response to the changes in the 
market, USEC closed the Portsmouth, Ohio, fuel plant leaving only the 
facility at Paducah, Kentucky, as the domestic source. Both France and 
Japan have advanced facilities that produce nuclear plant fuel, and 
these provide a large and growing share of international supplies, 
including those used in the United States. 

Although nuclear plants do not emit pollutants, they produce 
radioactive waste, including the highly radioactive waste that must be 
stored in isolation for thousands of years. The federal government 
committed to develop a permanent storage facility that would receive 
this waste by 1998, but delays have pushed the potential opening of the 
facility to the 2012 to 2015 time frame. Efforts to develop the 
facility have focused on storing the waste deep under Yucca Mountain in 
the desert north of Las Vegas, Nevada. In 2002, NRC reported that about 
45,000 tons of spent fuel from nuclear plants was stored in the United 
States. Because the permanent repository has not been completed, the 
highly radioactive waste remains stored at power plants and other 
facilities and has been the subject of several lawsuits. 

Nuclear power plants have been operated safely, largely without 
incident. Nuclear power plants contain radioactive materials that if 
released could pose catastrophic risks to human health over an 
expansive area, but are designed and operated to avoid such an event 
and incorporate measures to protect the plant from attack. The Nuclear 
Regulatory Commission, among other things, oversees these plants, 
conducting periodic inspections of the plant equipment and evaluating 
security. However, since the terrorist attacks of September 11, 2001, 
nuclear plants have emerged as a key security concern and attention on 
these plants has increased. Industry expects that new plant designs 
will further reduce safety and security risks, incorporating features 
that, among other things, automatically cool the nuclear reaction. 

We have issued a number of reports dealing with aspects of nuclear 
energy covering three key areas: NRC's oversight of safety issues at 
the existing nuclear plants; the development of a permanent storage 
facility for the highly radioactive waste produced by nuclear plants; 
and the potential vulnerability of these plants in light of the 
terrorist attacks of September 11. In May 2004, we issued a report on 
the discovery that corrosion had eaten a pineapple-sized hole in the 
nuclear reactor vessel head at the Davis-Besse power plant in Ohio that 
did not result in a radioactive release but highlighted problems with 
NRC's inspections and oversight. We have issued a series of reports, 
spanning more than 20 years, that focus on various aspects of 
developing of a permanent nuclear waste storage facility. In 2002, we 
reported (1) that it would be premature for DOE to recommend the 
facility at Yucca Mountain to the President as a suitable repository 
for nuclear waste; (2) that DOE was unlikely to achieve its goal of 
opening a permanent storage repository at Yucca Mountain by 2010; and 
(3) that DOE did not have a reliable estimate of when, and at what 
cost, such a repository could be opened. We have also issued reports 
concerning the vulnerability of nuclear power plants to terrorist 
attacks. In September 2004, we testified that NRC was generally 
approving plants' new security plans on the basis of limited details in 
the plans and without visiting the plants. In forthcoming work 
requested by the Congress, GAO will undertake a comprehensive review of 
NRC's reactor oversight process and how NRC ensures that plants operate 
safely. GAO will continue to examine homeland security issues related 
to protecting commercial nuclear power plants from terrorist attacks. 

Key Questions:

* What role should nuclear energy continue to play in providing the 
nation's energy needs in view of the aging of existing plants?

* Should new nuclear power plants be built in the United States, and 
can their design and construction make sense from a business standpoint 
while providing the safety and security assurances important to 
surrounding communities?

* How can existing and future nuclear waste generated by power plants 
be managed in an appropriate and timely manner?

* Are changes needed in how the industry and NRC ensure that plants are 
operated safely and securely, and is enough being done to protect 
nuclear plants from terrorist attacks?

Electricity: In the Midst of Change:

Electricity has emerged as one of the essential elements in modern 
life. Today, electricity lights our homes, enables our businesses to be 
more productive through the use of computers, and creates the basis for 
our modern quality of life, providing power for everything from our 
morning coffee to our nightly television news. Unlike the other types 
of energy that we have discussed--so-called primary sources of energy-
-electricity is generated through the use of the other energy sources 
(such as when natural gas is burned in power plants to generate 
electricity). Encouraged by the federal government, the electricity 
industry is in the midst of historic changes. Assessing that transition 
and determining whether the federal government can improve how 
electricity markets function remains a focus for federal policy. 

Electricity use has grown steadily in recent years. From 1980 through 
2003, the quantity of electricity sold increased by 75 percent, with 
the largest increases coming in the residential and commercial sectors. 
Electricity is used in these sectors for space heating and for cooling, 
lighting, and operating small appliances, such as computers and 
refrigerators. Industrial consumption declined slightly over this 
period, reflecting the contraction of manufacturing, including some 
large industrial users of electricity such as the aluminum and steel 

In 2003, over 70 percent of electricity was generated using fossil 
fuels, with over 50 percent coming from coal-fired power plants, about 
16 percent from natural gas, and small amounts from petroleum and other 
fossil fuels. In recent years, new power plants have predominantly 
relied on natural gas. Nuclear energy provides about 20 percent of 
electricity generation, hydroelectric energy provides about 7 percent, 
and a variety of renewable resources, such as wind turbines, provide 
the remainder. 

The federal government has a direct role in supplying electricity, 
through the federally controlled Power Marketing Administrations, which 
market electricity produced by federally owned dams and other power 
plants and which own an extensive transmission network to deliver that 
electricity. These entities initially aided in the federal mission to 
bring electricity to rural areas; however, most now serve major 
metropolitan areas, in addition to some rural customers. 

Historically, electricity has been produced and delivered by local 
monopoly utilities within a specific area, but this has been changing. 
The electricity sector is restructuring to foster more competition and 
provide an increased role for open markets. Competition is already 
under way for the wholesale markets that the federal government 
regulates. To facilitate fair wholesale competition, the federal 
government has also pressed for change in what entities control 
transmission lines--by approving the creation of independent 
transmission operators to take the place of utilities in performing 
this function. Some states, such as California and Pennsylvania, had 
also moved to introduce competition to state-regulated retail markets, 
where most consumers obtain their electricity. Although the electricity 
industry is restructuring to include a greater role for competition, 
the federal government still oversees wholesale electricity markets 
through the Federal Energy Regulatory Commission (FERC). Because 
federal actions have restructured wholesale markets nationwide and 
states have variously chosen to restructure the markets that they 
oversee, the national electricity market is currently a hybrid, 
somewhere between competitive and regulated. 

Unlike the other forms of energy, the amount of electricity supplied by 
power plants must be balanced, on a second-to-second basis, with the 
amount of electricity consumed in homes and businesses. To do this, 
utilities or independent entities direct the production of electricity 
and its movement over transmission lines to avoid blackouts. In some 
cases, such as in California in 2000 and 2001 and more recently in the 
Northeast in 2003, the balance between supply and demand was disrupted 
and blackouts occur. 

Electricity demand is projected to increase by at least 36 percent by 
2025, and the industry may require significant investment in power 
plants and transmission lines to reach those levels. The National 
Energy Policy Development report estimated that the United States may 
need to add as many as 1,900 power plants to meet forecasted demand 
growth. In addition, because the existing network of power lines 
frequently experiences congestion, the capacity of many key 
transmission lines may need to be increased to move electricity from 
these new plants and improve the reliability of the existing system. 

We have reported on the development of competition in the electricity 
industry and evaluated the oversight of electricity markets. For 
example, in one report we found that the way the market was structured 
in California enabled some electricity sellers to manipulate prices. We 
also reported on the ability to add new power plants in three states, 
concluding that the success of restructured markets hinged on private 
investment in power plants and that this investment was reduced by 
higher levels of perceived risk in some markets, such as in California. 
Further, we recently reported on the potential value of empowering 
consumers to manage their own electricity energy demand in order to 
save money and improve the functioning of these markets. Allowing 
consumers to see electricity prices enables them to reduce their usage 
when prices are high--reducing their energy bills and improving the 
functioning of the markets. Following the 2003 blackout, we issued a 
report that highlighted challenges and opportunities in the electricity 
industry, including whether reliability standards should be made 
mandatory and whether control systems critical to the electricity 
industry have adequate security. Regarding oversight of electricity 
markets, we reported that while the Federal Energy Regulatory 
Commission has made progress in revising its oversight strategy, it 
still faced challenges in better regulating these markets. In 
forthcoming work requested by the Congress, GAO will assess progress in 
reporting electricity market transactions for use in developing market 
indexes and the adequacy of controls over this reporting. 

Key Questions:

* To what extent does the division of regulatory authority between the 
federal government and the states limit the electricity industry's 
ability to achieve the benefits expected from the introduction of 
competition in electricity markets?

* What changes are necessary to federal and state monitoring and 
oversight of electricity markets to ensure that they are adequately 

* Will FERC's actions to promote reliability be sufficient, or will 
additional actions be needed to improve compliance with reliability 

* How does continued uncertainty about how the future of electricity 
restructuring and electricity markets affect electricity companies, 
investment in new plants and transmission lines, and consumer prices?

* What role should the federal Power Marketing Administrations play in 
restructured electricity markets?

* To what extent are homeland security principles being integrated into 
new electricity infrastructure and business processes?

Renewable and Alternative Energy Sources: What Role Will They Play in 
the Future?

Renewable energy sources, such as hydroelectric dams, ethanol, wind 
turbines, and geothermal and solar applications, currently comprise a 
small percentage of the total energy resources consumed in the United 
States. Several alternative sources, such as hydrogen and fusion power, 
may offer potential long-term promise, but research remains at an early 
stage. While these renewable and alternative energy sources have a 
nearly unlimited domestic supply, are perceived as relatively clean, 
and help diversify the U.S. energy supply, technical problems and high 
costs relative to other options have limited their use. 

According to EIA, in 2003 renewable and alternative energy sources 
accounted for slightly more than 6 percent of the total U.S. energy 
consumption. Hydropower is the largest single source in this category 
and makes up over 45 percent of all renewable and alternative energy 
consumed. Hydropower generation, which varies due to weather 
conditions, has fluctuated at about the same level since the 1970s. 
Wood accounts for about 34 percent of total renewable energy, although 
its use has declined since 1989. Waste and other byproducts, such as 
municipal solid waste, landfill gas, and biomass, account for about 9 
percent and their use has been relatively flat since the mid-1990s. 
Geothermal energy use has decreased slightly since it peaked in 1993 
and now accounts for about 5 percent of the total. Alcohol fuels, such 
as ethanol, make up about 4 percent of the total, but their use has 
increased rapidly in recent years, almost doubling from 1999 through 
2003. Wind energy accounted for about 2 percent of the total renewable 
energy consumed in 2003 but has witnessed substantial and persistent 
growth in recent years, more than tripling from 1998 through 2003. 
Solar energy accounts for about 1 percent of all renewable and 
alternative energy consumed, and its use has declined slightly but 
steadily since 1997, although use of some specific solar technologies 
such as photovoltaic solar cells that convert sunlight directly into 
electricity has grown in recent years. 

Renewable energy technologies are increasingly becoming part of global 
markets and are, in some cases, owned by large multinational energy 
companies such as oil companies. Solar and wind energy have grown 
substantially in these markets, but remain at relatively low levels in 
the United States. Growth in wind power has benefited from improvements 
in wind turbine technology and the availability of government tax 
credits here and overseas, both of which have improved the 
competitiveness of wind power technologies with more traditional forms 
of energy. EIA estimates, however, that if the federal government 
removes the tax credit, the U.S. growth in the generation of wind power 
will almost stop. However, EIA estimates that if the government 
maintains the tax credit, wind power generation in the United States is 
expected to grow nearly seven-fold over the next 20 years. Solar 
technologies, especially solar cell technologies that produce 
electricity, have supplanted traditional technologies, such as 
generators for some remote applications, and sales of solar cells have 
expanded rapidly worldwide, albeit from a small base. 

Several alternative sources may offer long-term promise, although they 
are not ready for widespread application. Technologies such as hydrogen 
power and fusion are currently being developed as new sources of 
energy. While these technologies have the potential to deliver large 
amounts of energy with fewer environmental impacts than traditional 
energy sources, they cannot be counted upon to deliver significant 
amounts of energy in the near future due to significantly higher costs 
and technical challenges. To date, use of hydrogen fuel cells still 
requires the extraction of hydrogen from another fuel source, such as 
natural gas, and currently this extraction is too costly to compete 
with other sources of energy. In addition, the infrastructure to 
support hydrogen power has not been built. While fusion also may have 
the ability to provide an abundant and clean energy source, research on 
this technology remains at a very early stage. 

We have issued several reports describing the viability and technical 
progress of several renewable and alternative energy sources supported 
by the federal government. A continuing theme of these reports has been 
that when the government invests money into research and development 
initiatives, it is important to keep one eye on the technical goals and 
one eye on the marketplace. We have noted that the success of the 
investment should be measured by its contribution to increasing the use 
and feasibility of an energy source, rather than reaching specific 
technical research and development goals. In forthcoming work requested 
by the Congress, GAO will report on the impact of wind turbines on 
birds and other aspects of the environment, as well as geothermal 
energy development in the United States. 

Key Questions:

* Should the federal government establish clear and measurable goals 
for the development and use of renewable and alternative energy 
sources, and, if so, how should progress toward these goals be measured?

* What should the federal government's role be in researching and 
developing existing and future sources of renewable and alternative 
energy sources?

* What are the costs and benefits of increasing our use of renewable 
and alternative energy sources?

* What are the implications of renewable energy mandates for deploying 
renewable energy technologies and for electricity markets?

Reducing Energy Demand through Efficiency and Consumer Choice: the 
Often-Overlooked Energy Option:

Experts have long contended that energy strategies that reduce demand 
can cost less, be brought on line faster, and provide greater 
environmental benefits compared to strategies that increase the amount 
of energy supplied--particularly if demand reductions decrease fossil 
fuel consumption and related pollution. Such strategies include 
improving the efficiency of energy we already use and allowing 
consumers to choose when it makes the most sense to conserve energy. 
Despite their advantages, however, opportunities to improve efficiency 
and consumer choice are often overlooked. 

Overall, energy demand in the United States has trended steadily upward 
for the last 50 years. While demand has increased, the amount of energy 
the country uses relative to its economic output has fallen. The amount 
of energy used for each dollar of gross domestic product has dropped by 
about half from 1970 through 2003. The reduction has been even more 
striking when examining the industrial sector, where energy used per 
dollar of GDP has fallen by over 60 percent since 1970. It is not clear 
whether this reduction reflects a decrease in energy intensive 
industries, such as aluminum and steel manufacturing, improvements in 
energy efficiency, or some combination of the two. 

The federal government has, periodically, made efforts to reduce 
demand, encourage energy efficiency, or both. To reduce demand, the 
federal government has, among other things, encouraged consumers to 
voluntarily limit excessive heating and cooling of homes and to reduce 
the number of miles that they drive. To encourage energy efficiency, 
the federal government has established energy efficiency standards for 
such things as home appliances, air conditioners, and furnaces, as well 
as provided incentives for purchasing energy-efficient equipment. In 
the transportation sector, the federal government has required 
automakers to meet overall efficiency standards--known as Corporate 
Average Fuel Economy (CAFÉ) standards--for the vehicles they sell. The 
federal government has also made investments to improve energy 
efficiency and save money on energy at its own buildings through the 
Federal Energy Management Program and utilizing energy savings 
performance contracts. 

Federal efforts have met with some success. According to the American 
Council for an Energy Efficient Economy and the Alliance to Save 
Energy, energy efficiency investments made from 1973 through 2003 saved 
the equivalent of 40 to 50 quadrillion BTUs of energy in 2003, equal to 
about 40 to 50 percent of total energy consumption and more than any 
single fuel provided. Several organizations, including a panel of 
several national laboratories, estimate that many opportunities for 
additional improvements in energy efficiency remain untapped. 

At times, however, federal efforts to reduce energy demand and improve 
energy efficiency have had to compete with efforts to keep energy 
prices low. For example, residential and commercial sectors of the 
economy have until recently been somewhat protected from price 
volatility by regulated prices for electricity and natural gas and thus 
have been less likely to reduce their consumption of these sources. 
Moreover, inflation-adjusted energy prices have generally declined, 
until recently. Reducing demand when prices are falling has been 
difficult for several reasons. For example, because energy-consuming 
equipment, such as air conditioners, furnaces, and lighting systems, is 
generally costly to purchase and lasts many years, consumers do not 
want to replace it unnecessarily. In addition, consumers are often not 
aware of the energy inefficiency of their homes and businesses. Falling 
energy prices have also made it more difficult to demonstrate the cost- 
effectiveness of spending money to replace aging and inefficient 
equipment, particularly for residential and commercial customers. In 
contrast, when consumers face prolonged period of higher energy prices, 
they are more likely to identify and adopt cost-effective strategies 
for reducing their energy demand. For example, following prolonged 
supply disruptions and price increases for gasoline in the 1970s, 
consumers in the 1980s chose to purchase more fuel-efficient vehicles, 
pushing up overall fuel efficiency averages nationwide. In the late 
1990s the opposite has been true; relatively low prices for gasoline 
have encouraged consumers to choose to purchase larger and less fuel- 
efficient vehicles. 

GAO has examined policies designed to reduce demand in electricity 
markets, as well as efforts to develop more fuel-efficient automobiles. 
In August 2004, we issued a report finding that electricity demand 
programs that better link the electricity prices consumers pay with the 
actual cost of generating electricity offer significant financial 
benefits to consumers, improve the functioning of electricity markets, 
and benefit the federal government by lowering its utility bills. In 
March 2000, we reported on the Partnership for a New Generation of 
Vehicles (which sought to develop a family sedan that could drive about 
80 miles on a gallon of fuel) and found that the vehicle being 
developed did not match consumer vehicle preferences and that 
automakers would not be manufacturing such a vehicle for U.S. markets. 
In forthcoming work requested by the Congress, GAO will evaluate the 
Department of Energy's program for setting energy efficiency standards 
for appliances. 

Key Questions:

* What are the benefits and costs of potential federal efforts to 
reduce energy demand?

* Are there economic, regulatory, or other barriers preventing the 
adoption of cost-effective, energy-efficient technologies that could 
meet consumer needs?

* Are there promising energy-saving technologies that are nearly cost- 
effective that the federal government should consider encouraging 
through the use of consumer incentives?

* Are there emerging energy-efficiency technologies that are past basic 
research but that could benefit from federal and industry collaboration?

* Which technologies offer the greatest long-term potential for 
reducing demand, and should they be considered for intensive federal 

* To what extent are retail price structures impeding the deployment of 
cost-effective and energy-efficiency technologies?


Given the increasing signs of strain on our energy systems and our 
growing awareness of how our energy choices impact our environment, 
there is a growing sense that federal leadership could provide the 
first step in a fundamental reexamination of our nation's energy 
policies. As the Congress, executive agencies, states and regions, 
industry, and consumers weigh such a reexamination, we believe that it 
makes sense to consider all energy sources together, along with options 
to encourage more efficient energy use and consumer choices to save 
energy. While a balanced energy portfolio is needed, striking that 
balance is difficult because of sometimes competing energy, 
environmental, economic, and national security needs. 

Clearly none of the nation's energy options are without problems or 
trade-offs. Current U.S. energy supplies remain highly dependent on 
fossil energy sources that are either costly, imported, potentially 
harmful to the environment, or some combination of these three, while 
many renewable energy options still remain more costly than traditional 
options. On the other hand, past efforts to reduce energy demand appear 
to have lost some of their effectiveness in recent years. Striking a 
balance between efforts to boost supplies from these various energy 
sources and those focused on reducing demand presents challenges as 
well as opportunities. 

In the end, the nation's energy policies come down to choices. Just as 
they did some 30 years ago in the aftermath of the major energy crises 
of the 1970s, congressional choices will strongly influence the 
direction that this country takes regarding energy issues--affecting 
consumer, supplier, and investor choices for years to come. Consumer 
choices made from today forward will determine to a great extent how 
much energy will be needed in the future. In the same way, energy 
suppliers have choices about how much of each type of energy to 
provide, based increasingly on their interaction with competitive 
domestic and sometimes global markets for energy. Choices made by 
consumers and suppliers will be influenced by state and local entities, 
along with regional stakeholders in some areas of the country, which 
have authority over key decisions that affect such things as the siting 
of generation and transmission facilities as well as access to their 
lands. Similarly, investors have choices regarding where to invest 
their money, whether in new power plants, refineries, research and 
development for new technologies, or outside the energy sector all 
together. Yet, many of these choices may be significantly influenced, 
or even overshadowed, by broader forces that are beyond our control, 
such as expected energy demand growth in the developing world. 

In closing, providing the American consumer with secure, affordable, 
reliable, and environmentally sound energy choices will be a challenge. 
I would like to note that more than 30 years ago, during the first 
energy crisis, our nation faced many of the same choices that we are 
confronting today. How far have we come? Have we charted a course that 
can be sustained in the 21st century? In 30 years, will we again come 
full circle and ask ourselves these same questions about our energy 
future? The answer to this final question lies in our collective 
ability to develop and sustain a strategic plan, with supporting 
incentives, along with a means to measure our progress and periodically 
adjust our path to meet future energy challenges. 

I would be pleased to respond to any questions that you, or other 
Members of the Subcommittee, may have at this time. 

Contact and Acknowledgments:

For further information about this testimony, please contact me, Jim 
Wells, at (202) 512-3841. Contributors to this testimony included 
Godwin Agbara, Dennis Carroll, Mark Gaffigan, Dan Haas, Mike Kaufman, 
Bill Lanouette, Jon Ludwigson, Cynthia Norris, Paul Pansini, Ilene 
Pollack, Melissa Roye, Frank Rusco, and Ray Smith. 

[End of section]

Related GAO Products:


Energy Markets: Effects of Mergers and Market Concentration in the U.S. 
Petroleum Industry. GAO-04-96. Washington, D.C. May 17, 2004. 

Research and Development: Lessons Learned from Previous Research Could 
Benefit FreedomCAR Initiative. GAO-02-810T. Washington, D.C.: June 6, 

U.S. Ethanol Market: MTBE Ban in California. GAO-02-440R. Washington, 
D.C.: February 27, 2002. 

Motor Fuels: Gasoline Prices in the West Coast Market. GAO-01-608T. 
Washington, D.C.: April 25, 2001. 

Motor Fuels: Gasoline Prices in Oregon. GAO-01-433R. Washington, D.C.: 
February 23, 2001. 

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO Work. RCED- 
00-301R. Washington, D.C.: September 25, 2000. 

Cooperative Research: Results of U.S.-Industry Partnership to Develop a 
New Generation of Vehicles. RCED-00-81. Washington, D.C.: March 30, 

Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil 
and Shipping Industries and Consumers. RCED-99-191. Washington, D.C.: 
July 1, 1999. 

International Energy Agency: How the Agency Prepares Its World Oil 
Market Statistics. RCED-99-142. Washington, D.C.: May 7, 1999. 

Energy Security and Policy: Analysis of the Pricing of Crude Oil and 
Petroleum Products. RCED-93-17. Washington, D.C.: March 19, 1993. 

Energy Policy: Options to Reduce Environmental and Other Costs of 
Gasoline Consumption. T-RCED-92-94. Washington, D.C.: September 17, 

Energy Policy: Options to Reduce Environmental and Other Costs of 
Gasoline Consumption. RCED-92-260. Washington, D.C.: September 17, 

Alaskan Crude Oil Exports. T-RCED-90-59. Washington, D.C.: April 5, 

Energy Security: An Overview of Changes in the World Oil Market. RCED- 
88-170. Washington, D.C.: August 31, 1988. 


Clean Air Act: Observations on EPA's Cost-Benefit Analysis of Its 
Mercury Control Options. GAO-05-252. Washington, D.C.: February 28, 

Fossil Fuel R&D: Lessons Learned in the Clean Coal Technology Program. 
GAO-01-854T. Washington, D.C.: June 12, 2001. 

Clean Coal Technology: Status of Projects and Sales of Demonstrated 
Technology. RCED-00-86R. Washington, D.C.: March 9, 2000. 

Natural Gas:

Natural Gas: Domestic Nitrogen Fertilizer Production Depends on Natural 
Gas Availability and Prices. GAO-03-1148. Washington, D.C.: September 
30, 2003. 

Natural Gas Flaring and Venting: Opportunities to Improve Data and 
Reduce Emissions. GAO-04-809. Washington, D.C.: July 14, 2004. 

Natural Gas: Analysis of Changes in Market Price. GAO-03- 46. 
Washington, D.C.: December 18, 2002. 

Energy Deregulation: Status of Natural Gas Customer Choice Programs. 
RCED-99-30. Washington, D.C.: December 15, 1998. 


Nuclear Regulation: NRC's Assurances of Decommissioning Funding During 
Utility Restructuring Could Be Improved. GAO-02-48. Washington, D.C.: 
December 3, 2001. 

Nuclear Waste: Technical, Schedule, and Cost Uncertainties of the Yucca 
Mountain Repository Project. GAO-02-191. Washington, D.C.: December 21, 

Nuclear Nonproliferation: Implications of the U.S. Purchase of Russian 
Highly Enriched Uranium. GAO-01-148. Washington, D.C.: December 15, 

Nuclear Regulation: Better Oversight Needed to Ensure Accumulation of 
Funds to Decommission Nuclear Power Plants. RCED-99-75. Washington, 
D.C.: May 3, 1999. 

Nuclear Waste: Impediments to Completing the Yucca Mountain Repository 
Project. RCED-97-30. Washington, D.C.: January 17, 1997. 

Renewable/ Alternative:

Renewable Energy: Wind Power's Contribution to Electric Power 
Generation and Impact on Farms and Rural Communities. GAO-04- 756. 
Washington, D.C.: September 3, 2004. 

Geothermal Energy: Information on the Navy's Geothermal Program. GAO- 
04-513. Washington, D.C.: June 4, 2004. 

Department of Energy: Solar and Renewable Resources Technologies 
Program. RCED-97-188. Washington, D.C.: July 11, 1997. 

Energy Policy: DOE's Policy, Programs, and Issues Related to 
Electricity Conservation. RCED-97-107R. Washington, D.C.: April 9, 

Multiple Fuel:

Energy Markets: Additional Actions Would Help Ensure That FERC's 
Oversight and Enforcement Capability Is Comprehensive and Systematic. 
GAO-03-845. Washington, D.C.: August 15, 2003. 

Energy Markets: Concerted Actions Needed by FERC to Confront Challenges 
That Impede Effective Oversight. GAO-02-656. Washington, D.C.: June 14, 

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO Work. RCED- 
00-301R. Washington, D.C.: September 25, 2000. 


Electricity Markets: Consumers Could Benefit from Demand Programs, but 
Challenges Remain. GAO-04-844. Washington, D.C.: August 13, 2004. 

Electricity Restructuring: 2003 Blackout Identifies Crisis and 
Opportunity for the Electricity Sector. GAO-04-204. Washington, D.C.: 
November 18, 2003. 

Air Pollution: Meeting Future Electricity Demand Will Increase Emission 
of Some Harmful Substances. GAO-03-49. Washington, D.C.: October 30, 

Electricity Markets: FERC's Role in Protecting Consumers. GAO-03- 726R. 
Washington, D.C.: June 6, 2003. 

Electricity Restructuring: Action Needed to Address Emerging Gaps in 
Federal Information Collection. GAO-03-586. Washington, D.C.: June 30, 

Lessons Learned From Electricity Restructuring: Transition to 
Competitive Markets Underway, but Full Benefits Will Take Time and 
Effort to Achieve. GAO-03-271. Washington, D.C.: December 17, 2002. 

Restructured Electricity Markets: California Market Design Enabled 
Exercise of Market Power. GAO-02-828. Washington, D.C.: June 21, 2002. 

Air Pollution: Emissions from Older Electricity Generating Units. GAO- 
02-709. Washington, D.C.: June 12, 2002. 

Energy Markets: Concerted Actions Needed by FERC to Confront Challenges 
That Impede Effective Oversight. GAO-02-656. Washington, D.C.: June 14, 

Restructured Electricity Markets: Three States' Experiences in Adding 
Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002. 

California Electricity Market: Outlook for Summer 2001. GAO-01-870R. 
Washington, D.C.: June 29, 2001. 

California Electricity Market Options for 2001: Military Generation and 
Private Backup Possibilities. GAO-01-865R. Washington, D.C.: June 29, 

Energy Markets: Results of Studies Assessing High Electricity Prices in 
California. GAO-01-857. Washington, D.C.: June 29, 2001. 

Electric Utility Restructuring: Implications for Electricity R&D. T- 
RCED-98-144. Washington, D.C.: March 31, 1998. 

Energy Production on Federal Lands:

Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind 
Pilots Is Needed. GAO-03-296. Washington, D.C.: January 9, 2003. 

Alaska's North Slope: Requirements for Restoring Lands After Oil 
Production Ceases. GAO-02-357. Washington, D.C.: June 5, 2002. 

Royalty Payments for Natural Gas From Federal Leases in the Outer- 
Continental Shelf. GAO-01-101R. Washington, D.C.: October 24, 2000. 


[1] GAO, 21st Century Challenges: Reexamining the Base of the Federal 
Government, GAO-05-325SP (Washington, D.C.: February 2005). 

[2] Capacity factor is the ratio of electricity generated to the amount 
of energy that could have been generated if the plant ran every hour of 
every day in the year.