ENVIRONMENT & ENERGY

ALVIN M. WEINBERG

Energy Policy in an Age of Uncertainty

Future energy needs are impossible to predict, and the U.S. public resists large-scale power generation. An emerging strategy, incrementalism, solves both problems—at a price.

Before the nuclear era began, energy policy was not on most people's minds. After all, ours was a country blessed with enormous reserves of fossil fuel, and we could hardly conceive of a day when the United States would be importing 30 percent of its oil. The discovery of fission had a twofold effect: it sparked widespread euphoria over what appeared to be a boundless source of power, and it caused policymakers for the first time to think seriously about future energy needs. It was as though with the solution in hand, we finally became aware of the problem.

The problem, as articulated in documents such as the Paley Commission's 1952 report to the President and Palmer Putnam's Atomic Energy Commission (AEC) report of 1953, was that rapid increases in demand could result in serious energy shortages. But the solution seemed so obvious that the warnings went largely unheeded.

By the year 2000, according to the AEC's 1962 Report to the President on Civilian Nuclear Power, fission would be supplying about 30 percent of U.S. energy demand. Indeed, the Interdepartmental Energy Study Group reported in 1964 that there was “no ground for serious concern that the nation is using up any of its stocks of fossil fuel too rapidly; rather, there is the suspicion that we are using them up too slowly. We are concerned for the day when the value of untapped fossil-fuel resources might have tumbled and the nation will regret that it did not make greater use of these stocks when they were still precious.”

These rosy predictions belong to what I would call the “precambrian” period of energy policy, when government-sponsored energy R&D was dominated by the AEC and the Joint Committee on Atomic Energy. President Nixon's price freeze in 1971, followed by the Arab oil embargo in 1973, marked the beginning of the modern era of energy policy. The United States was importing 6 million barrels of oil per day, and independence soon became the aim of U.S. energy policy. This led to another round of forecasts by many energy analysts.

Dixy Lee Ray, chairman of the AEC, reported to the President in 1973 that we could achieve energy independence by 1985—but only if we reduced consumption for that year from an anticipated demand of 114 quads (quadrillion Btu) to 100 quads. And the Federal Energy Administration, in its 1974 summary of Project Independence, claimed we could achieve the same goal if we lopped 8 quads off an expected demand of 104 quads. Other energy analysts took as a rule of thumb that the number of quads consumed would equal the last two digits of the calendar year—78 quads in 1978, 79 in 1979, and so on.

As it turns out, they were all wide of the mark. Who, in 1973, would have predicted that U.S. energy consumption in 1986 would be only 74 quads, the same as in 1973? And who, in 1962, would have guessed that the nuclear-generated share of that energy would be less than 6 percent. Let energy forecasters practice their art with humility!

Today we are starting to accept two realities:

The future is much less knowable than we once thought. Even with benefit of hindsight, we cannot agree fully on where our predictions went wrong—and conflicting explanations carry conflicting implications for future energy policy.
Large, centralized energy projects often don't work, at least not in the United States. Ours has become a participatory polity—one where environmental concern is growing and citizens demand a voice in deciding on new energy projects.

In our energy planning for the next 10 years, we are evolving a strategy—incrementalism—that is resilient to surprises and that takes into account the trend toward decentralized power generation. At the same time, however, it is becoming apparent that our new, more flexible approach is not a permanent solution. As a result, we must continue to develop technical means of reducing demand, and of increasing supply in ways that are acceptable to the public.

Conflicting explanations

How did energy forecasters in the early 1970s go astray? Many of us were convinced that the ratio of energy to Gross National Product—or to Gross Domestic Product (GNP minus goods and services produced by investment abroad)—was a constant, as indeed it was from 1945 to 1975. But this 30-year period of uniform energy efficiency concealed a longer-term trend toward higher efficiency: In the 1970s, the E/GNP ratio resumed a downward slide that had begun in the 1920–40 period.

Although energy demand in the less developed and newly industrialized countries has continued to expand, Western industrialized countries have become considerably more energy efficient. For example, among the nations belonging to the Organization for Economic Cooperation and Development, annual GDP growth underwent a modest slowdown from 4.2 percent in 1966–70 to 2.1 percent in 1980–85. Over the same period, annual growth in energy demand slackened dramatically, finally going negative—from 6.0 percent to minus 0.2 percent.

Four different schools of thought have arisen to explain this phenomenon:

Energy economists. For this group, the reduction in energy demand simply reflects the lowered rate of economic growth and the increase in the price of energy. Even today, the average price of all energy is two or three times the price of energy 15 years ago. Little wonder that demand has abated!

Structuralists. For these analysts, the main reason energy has uncoupled from GNP is a change in the structure of our economic activity—the shift from manufacturing, mining, and agriculture to service—combined with a saturation in some end uses (such as television sets and refrigerators). Since service by and large is less energy-intensive than manufacturing, energy demand has flattened.

Conservationists. These include the doctrinal conservationists, who regard conservation of energy as a transcendent human purpose, and the technical conservationists, who simply insist that the technology of efficiency, both in end use and in energy production, has improved greatly and can be further improved. For both camps, much of the reduced ratio of E/GNP reflects the adoption of more efficient technologies—prompted in part by the rise in energy prices, in part by the widespread acceptance of a conservation ethic.

“Electro-niks.” Unlike energy demand in general, electrification over the past 40 years has kept fairly constant pace with GNP growth. In 1968 some 18 percent of primary energy in the United States was converted to electricity; by 1987 this fraction had doubled. And the figures for other noncommunist countries are similar. According to the electro-niks, the increase in electrification and the reduction in E/GNP are not coincidental. As industry electrifies, whether or not the generation of electricity is itself energy-efficient, manufacturing becomes more productive. Electrification increases the denominator of the E/GNP ratio rather than diminishing the numerator—but the result is the same: a decoupling of energy growth and economic growth.

The vision of a nuclear-electrified America has given way to a vision in which conservation is primary and energy is supplied by small, decentralized units.

In the eyes of the energy economists, lower energy consumption has resulted from the operation of the market. By and large, this group supports nonintervention as our basic energy policy: The market has worked, so let it continue to work. From the structuralists comes this advice: Encourage a further shift to service—energy will then take care of itself. For conservationists, energy policy must stress increased technical efficiency; in addition, doctrinal conservationists want the government to mandate more efficiency standards, as well as to promote broad acceptance of the idea that conservation per se is ethically superior to any alternative. For the electro-niks, energy policy means encouraging electrification, since an electrified society is an energy-efficient society.

There is truth in all four views. Unfortunately, the prescriptions for policy that emerge from each school of thought are somewhat conflicting, and it would be difficult to fuse them into a consistent energy strategy. In addition, each of these prescriptions is marked by uncertainty. We are still confronted with the necessity of formulating energy policy despite our inability to predict future energy demand—or, for that matter, to predict the public's reaction to changing energy needs.

Second-guessing the public

Energy analysts' misreading of public attitudes began with a basic error in our assumptions about supply and demand. Balancing of supply and demand is, of course, automatic; the issue is how to achieve this balance without causing unacceptable economic and social dislocations. Most of us old-time energy people assumed that demand was virtually uncontrollable. We responded to the oil embargo of the 1970s by emphasizing increased supply: Develop nuclear fission and fusion, oil shale, synfuels, geothermal—even solar and wind.

What a shock when we discovered that demand could be controlled, and that the political and social climate was not amenable to solutions based on huge new supply projects.

Why did so many engineers gravitate toward supply enhancement rather than demand management? First, designing nuclear reactors seemed to be more glamorous than improving car efficiencies. Second, and perhaps more important, demand management usually requires millions of people to change their ways of doing things. In some cases, as in lowering the thermostat, the change affects personal comfort; in other cases, as in replacing a power-hungry refrigerator with a more efficient one, it requires laying out additional money. In a broad sense, demand management, even when based on clever new technologies, is a social fix: It requires lots of individual decisions. By contrast, increasing supply was regarded—naively, it turns out—as a purely technical fix: Only a few people would have to be convinced to build a nuclear reactor or a synfuel plant. The technical fix seemed to be simpler than the social fix.

But we were wrong. We neglected the public antagonism to all sorts of large, centralized energy systems—whether nuclear reactors, coal-fired power stations, or synfuel plants. And we underestimated the public's acceptance of conservation—whether price-induced or resulting from a widespread belief in a conservation ethic reinforced by government-mandated efficiency standards.

These phenomena clearly reflect our underlying political structure. Ours is a Jeffersonian democracy: decentralized, open, and sometimes chaotic. Large-scale interventions that are perceived as threatening by a determined group can be, and often are, blocked. Under the circumstances, we have much incentive to avoid big, threatening energy supply projects in favor of demand management and much smaller, decentralized supply options.

Through no coincidence, the electric power market in the United States is much more fragmented than in countries with a more centralized political structure. The United States has about one generating company per million people. By contrast, Japan has one per 10 million and France one per 50 million. In France, with its Jacobin political tradition, large, centralized supply options remain viable. The country has managed to reduce oil imports (and incidentally, reduce the CO₂ it throws into the atmosphere) largely by its steadfast commitment to nuclear electrification—a path that is currently unavailable to us. Thus the American energy dream of the 1950s is coming to pass, but not in America.

A piecemeal solution

Instead, what seems to be unfolding in the United States is a grand strategy that I would describe as incrementalism: Since we cannot really predict what our energy demand will be in 10 years, don't build anything that is very large. Thousand-megawatt power plants or 100,000-barrel-per-day synfuel plants are much too risky. If you need more electricity, build a 50- or 100-megawatt gas turbine, or buy electricity from small independent producers or from Canada—and don't shut down old plants; or else reduce demand by offering incentives to customers for using more efficient devices.

Incrementalism finesses the uncertainties of the future. And it shields generating companies from the risk of bankruptcy, which has engulfed unlucky utilities saddled with ridiculously overpriced nuclear reactors. Incrementalism also evokes little antagonism from politically sensitive, and often powerful, conservationists. In short, the 1950s' vision of a nuclear-electrified America has given way to a vision of America in which conservation is primary, and in which energy is increasingly supplied by small, decentralized units, as well as by older units that have been coaxed into a few more years of operation.

Despite its benefits, incrementalism presents certain dangers in the long run. First of all, many of the new electrical supply increments use turbines fired by oil or gas. The reliance on oil will increase, not decrease, our dependence on imported energy. And the use of gas will require us to depend on some unproven sources. The Gas Research Institute has recently estimated that there will be enough gas through 2010. But out of the total gas supply projected for 2010–19.9 quads—some 8.4 quads must come from new initiatives, such as advanced technologies of extraction, Alaskan pipeline, and synthetics. Here, too, imports are projected to increase, from less than 1 quad today to 3.6 quads in 2010.

Another danger of incrementalism is that it does not take advantage of economies of scale. The catastrophic escalation of capital costs for nuclear plants has shaken America's faith in the notion that bigger is cheaper; people now seem to believe that the economic scaling laws have been repealed. But even if capital costs of small units are favorable, few would deny that operating costs will be higher than in countries such as France and Japan—not to mention the Communist bloc—where large plants continue to dominate.

Does incrementalism mean that electricity will always be more expensive in the United States? I am not optimistic on this score over the next decade if our energy system depends too heavily on small devices with high operating costs. But for the longer term, I see some hope for cheap energy in the trend toward extending the life of power plants and other supply devices that have low operating costs. The 30-year licensing lifetime of nuclear power plants was a relic of fossil-fuel tradition: Fuel efficiency increased at a rate that made power from 30-year-old plants more expensive than from new plants. But with efficiencies plateauing, or being rather irrelevant in the case of nuclear power plants, the incentive to shut down old plants is weakening. Extending the life of an old plant, whether nuclear or fossil, is often cheaper than building a new one. And if our energy system is dominated by plants that have already been paid off and have low operating and fuel costs, we may once more begin to see the price of energy fall.

I have speculated (in a 1985 Energy Policy article) that this phenomenon is not confined to standard electric generators, but may be applicable to synfuel plants or even solar electric systems, provided operating costs are low. Thus a synfuel plant that has a capital cost of $100,000 per daily barrel ($330 per annual barrel), and that uses coal at $40 a ton, will produce fuel at about $92 a barrel; of this, $66 a barrel is capital cost. But if the plant lasts, say, a century, rather than the 30 years over which it is amortized, and if its maintenance costs can be kept low, the cost of the synfuel falls to around $25 a barrel once the plant has been amortized.

In constructing and modifying our energy system, we must recognize that we are dealing with one of society's most basic infrastructures—and that therefore we are building not only for our own generation but for future generations as well. Perhaps the moral to be drawn is that power plant design ought to place greater emphasis on longevity. Though we may not succeed in giving the gift of cheap energy to our own generation, perhaps we can give it to our children's children.

The government's role

Our experience with energy since 1973 seems to bear out the views of economist Frederick Hayek, who insisted in the 1930s that government intervention in the economy was doomed to failure. The government would never be able to respond quickly enough, he said, to the intricate information signals that control the market. U.S. government intervention in energy over the past 15 years has not been very effective; because of our fragmented, participatory political structure, strong government intervention simply does not work here as it does in France and Japan.

But does that mean our best policy with respect to energy is to have no policy? That we should dismantle the Department of Energy, stop all tax and direct subsidies, and get the government out of energy R&D?

I cannot accept such a conclusion. After all, some government interventions—like the Corporate Average Fuel Efficiency standards for cars and home appliance efficiency labeling—have probably helped. And although unregulated markets are efficient, they are notoriously myopic, as well as lacking in compassion.

For the time being, incrementalism seems inevitable. Yet it is hardly a panacea; longer plant lifetimes notwithstanding, it may saddle us with unnecessarily expensive energy. Thus there is room for a great many technical fixes over the long term, all of them suitable targets for government-backed R&D. We need to apply our ingenuity to reducing demand—for example, by developing cheap variable-speed motors and more efficient cars. At the same time, we must acknowledge that, contrary to the claims of doctrinal conservationists, demand management alone cannot defeat carbon dioxide; we need to find the technical means for ending our dependence on fossil fuels. This means devising inherently safe fission reactors that are both economical and acceptable to the American public. And it means continued exploration of solar and fusion.

We cannot rely on market forces to stimulate all the necessary advances in these areas. An appropriate role for government, then, is to provide the technical base for those elements of an energy system that are not mediated by the market. Strong support from the government—in conjunction with today's more sober, more realistic engineering community—can help to ensure a rational and resilient energy future.