94020: Fossil Energy Research and Development: Whither Coal?

Larry Parker
Environment and Natural Resources Policy Division

Updated November 20, 1996

CONTENTS

SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS

National Security Dimension

Economic Dimension

Environmental Dimension

Striking a Balance

The Clinton Budget Request and Congressional Response

Overview of the Coal R&D Budget

Specifics

The Coal Demonstration Program (Clean Coal Technology)

Issues for Coal

Legislative Action

SUMMARY

The Clinton Administration's FY1997 budget request for fossil fuel research and development (R&D) represented a continuing effort to realign budget priorities that began with its FY1994 budget request. Environmental issues, particularly global climate change, drive the FY1997 budget request for maintaining natural gas R&D funding near current levels and for decreasing coal R&D funding. The Administration also requested a significant rescission in funding for the Clean Coal Technology Program (CCTP). Overall, the proposal requested a 17.3% decrease from the estimated FY1996 appropriation for fossil energy R&D. Coal R&D would have dropped 15.4%. In contrast, natural gas R&D would have decreased 4.4%, fuel cells R&D would have decreased 11.1%, and petroleum R&D would have decreased 5.7%.

Since the oil embargo of 1973, the federal government has taken an active role in not only the research and development aspects of energy policy, but also the demonstration of promising, near-term technologies. In the 104th Congress, this assumption about the role of the federal government came under attack. For example, in the House version of the FY1997 budget resolution), a primary rationale given for cutting many fossil fuel R&D programs was to eliminate corporate and special interest "subsides" as reflected in various cost-sharing and near-term development efforts. How much this vision of the federal role in fossil energy R&D will be reflected in actual appropriation levels over time remains unknown, although with increasing pressure being brought to bear on the fossil energy research, development and demonstration budget, a fundamental reassessment of the federal role in such activities may occur at some point.

In the appropriations process, the House passed H.R. 3662 on June 20, 1996, providing $354.8 million for fossil energy, 14% below FY1996 levels, but 3% above the level recommended by the Administration. In Senate action, the Senate Appropriations Committee reported out H.R. 3662 with an appropriation of $367.5 million for fossil energy, 12% below FY1996 levels, but 4% above the level recommended by the House.

The conference agreement on H.R. 3662, which was rolled into the omnibus appropriation bill, provides $364.7 million for fossil energy, 13% below FY1996 levels.

On the heels of a $200 million rescission in 1995 (H.R. 889), the Administration requested a $325 million rescission for FY1997 and a $313 million deferral until FY1998 for the Clean Coal Technology Program. No specific justification is given by the Administration for this action, only that it would be done in the least disruptive manner. In the appropriations process, the House-passed H.R. 3662 did not include the Administration's proposed rescission of $325 million and deferral of $312.8 million for the program. The Senate Appropriations Committee agreed to a $150 million rescission, less than recommended by the Administration, but more than recommended by the House. The conference agreed to a $123 million rescission.

MOST RECENT DEVELOPMENTS

In September, Congress passed an omnibus appropriations bill containing a conference agreement on H.R. 3662. As enacted, the law provides an appropriation of $364.7 million for fossil energy, 13% below FY1996 levels. Compared with FY1996 levels, the law reduces coal research by 15%, oil research by 18%, and fuel cell research by 5%. In contrast, natural gas research, would increase by 17%. For the Clean Coal Technology Program, Congress agreed to a $123 million rescission, less than recommended by the Administration.

BACKGROUND AND ANALYSIS

Energy research, development, and demonstration (RD&D) policy since the 1973 oil embargo has undergone a number of shifts in direction and philosophy. Some of these transitions have been due to changes in Administrations and market conditions in the United States; others have been dictated by events abroad (e.g., embargoes). Frequently, policies have not been embraced; rather, specific alternatives have been explicitly (and sometimes reluctantly) rejected. A major problem in developing energy policy, particularly energy R&D policy, is that the energy issue is multifaceted, encompassing at least three dimensions: (1) national security implications, (2) economic consequences, and (3) environmental concerns. Thus energy RD&D policy, which generally requires a time line of years for budgeting and execution, has often found itself behind or out of step with energy market or environmental policy developments. Each of these dimensions is briefly discussed below.

National Security Dimension. The 1973 oil embargo ushered in the notion of achieving "energy independence" and focused energy policy on national security and dependence on imported oil. During the 1970s, spending for energy R&D increased substantially as substitutes for foreign oil were pursued. Americans were urged to conserve, and additional funds were appropriated both to develop new energy conservation technologies and to provide incentives for conservation. The economic dimension of these decisions was grounded on the assumption that oil prices were going to rise; therefore, most investments to reduce oil dependence would eventually be economic.

Two decades have invalidated the assumption of continuous rising oil prices, and the nation is still heavily dependent on foreign oil. From a national security standpoint, it has been argued that this dependency has at least two primary effects. First, it unduly reduces the nation's freedom of action in defense and foreign policy. For example, some have questioned whether U.S. involvement in the Persian Gulf War was driven primarily by the nation's and the world's dependence on oil imports or by broader foreign policy goals. Second, dependence is seen by some as compromising U.S. economic independence. The high cost of importing half the oil consumed is a serious economic burden, and the periodic volatility of oil prices can disrupt the nation's economy. In practical terms, dependence on imported oil cannot be eliminated, but reducing the U.S. call on world oil even moderately might lessen the volatility of oil prices in the future and improve the U.S. balance of payments with other nations.

Economic Dimension. The nation's economy has developed with regular, abundant, and relatively low-cost energy. Prior to the 1973 oil embargo, the object of energy policy was to develop as much energy as was necessary at the lowest feasible market price. The consequence, critics argue, is that the nation has become "addicted" to cheap energy -- an "addiction" that permits foreign cartels to control oil prices, adversely affects the balance of payments, and threatens national security.

Others note that benefits can be associated with abundant, inexpensive energy. The abundance has allowed energy to be substituted for other inputs into the economy, such as labor (which has historically been in short supply), and allowed increased worker productivity and higher salaries. This situation has also shaped the development of technology and social patterns. Some argue that although the economy is continuously undergoing changes and refinement, abundant, low-price energy (from supply- or demand-side sources) remains an important element of economic growth.

Environmental Dimension. Generally speaking, the environmental consequences of energy policy have been dealt with in other policy arenas and by other policy actors than those that traditionally deal with energy policy. Currently, with the passage of the Clean Air Act Amendments of 1990 and growing concern about climate change, some would argue that environmental concerns are beginning to drive energy policy and that energy R&D should reflect that new reality. Others maintain that environmental concerns have assumed a disproportionate amount of attention.

Environmental factors are involved with the whole energy cycle: from resource extraction, to transportation, to conversion, to waste disposal. All major environmental foci are affected: air, water, land, wildlife, vegetation, and human health. The importance of energy-related activities to the environment is difficult to overstate. For example, energy-related activities contribute significantly to domestic air pollution -- 96% of nitrogen oxides (NOx) emissions, 42% of volatile organic compounds (VOC) emissions, 78% of carbon monoxide (CO) emissions, 46% of particulate emissions, and 85% of sulfur dioxide (SO2) emissions) -- and they are the largest contributor to many air toxics.

Also, energy-related activities produce 90% of domestic carbon dioxide (CO2) emissions, which have been suggested to be a major contributor to global climate change. This CO2 results primarily from fossil fuel combustion, with coal proportionately producing the most, followed by oil, followed in turn by natural gas (which produces about 40% less CO2 per unit of effective output than coal).

With major national, and potential international, attempts to further abate pollution, increasingly stringent controls on energy-related activities are probable. This dimension suggests the need for an energy research, development, and demonstration policy that anticipates future environmental policy developments.

Striking a Balance

For energy RD&D policy, government decisions occur on two levels. At one level, the government must determine its appropriate role in the RD&D process. Since the oil embargo of 1973, the federal government has taken an active role in not only the research and development aspects of energy policy, but also the demonstration of promising, near-term technologies. Perhaps the most significant efforts in this respect are the now defunct Synthetic Fuel Corporation and the current Clean Coal Technology Program. Both of these programs understood the federal role as critical in bridging the gap between technology development and the acceptance of that technology for commercialization by industry. As stated by DOE during the latter part of the Reagan Administration with respect to the Clean Coal Technology Program:

For their [several clean coal technologies] development to continue today, with as much private financing as possible, sponsors need to have confidence that the federal commitment and the necessary cost-sharing funds will be available to take the final step at the end of their development phase. Funding for the Clean Coal program, therefore, serves as a stimulus for continued private R&D today.

With a new Congress, this assumption about the critical role of the federal government in cost-shared development and demonstration projects has come under attack. For example, in the House FY1997 budget resolution, a primary rationale given for cutting several fossil energy R&D programs was to eliminate corporate and special interest "subsides" as reflected in various cost-sharing and near-term development efforts. How much this vision of the federal role will be reflected in future appropriation levels remains unknown, although with increasing pressure being brought to bear on the fossil energy research, development and demonstration budget, a fundamental reassessment of the federal role in such activities may occur at some point in the future.

At a second level are federal decisions on the proper balance among the three energy policy dimensions identified above, accommodating the uncertainty that will always alter the relative importance of any one of these dimensions. Assumptions about and decisions concerning energy RD&D policy must be able to accommodate a range of future contingencies and scenarios. For example, the synfuels program, established in the late 1970s, was designed to reduce dependence on foreign oil by converting plentiful domestic coal to liquid fuels, but the 1970s assumption of rising oil prices (that justified otherwise uneconomic projects) was derailed by the price decline of the 1980s. As a result, the focus of energy policy reverted to its pre-embargo reliance on the marketplace to price and establish the mix of fuels used by the economy. Thus, as the expected higher energy prices did not materialize, several energy RD&D sectors that grew dramatically during the 1970s, such as synthetic fuels development, dropped just as dramatically during the 1980s. The 1980s also saw increasing concern about the environmental effects of coal combustion -- particularly acid rain -- which in turn led to a reappropriation of some synfuels funds to a "clean coal technology" program, based on the assumption that domestic coal could still be the fuel of choice for an array of applications.

With the 1990s, assumptions have changed again, particularly with respect to the electric generating sector. Natural gas, not coal, is the current fuel of choice for new electric generation, a choice reinforced by environmental considerations (acid rain, global warming), economic considerations (fuel price, technology choice), and changes occurring in the electric utility industry itself (competition in the generating sector, non-utility generators). In terms of electric generating technology development, this situation suggests that, at least in the short- and mid-term, natural gas technology, not coal technology, is expected to take the lead, particularly with respect to turbine and fuel cell developments. In terms of developing competitive sources of supplemental liquid transportation fuels to reduce oil imports, advanced oil extraction methods and natural gas conversion appear to provide more economic possibilities in the short or mid-term than coal synthetics.

This attempt to balance economic, environmental, and national security goals in RD&D policy continues in the new assumptions and decisions reflected in the Clinton Administration's budget request for FY1997.

The Clinton Budget Request and Congressional Response

Overview of the Coal R&D Budget

The Clinton Administration's FY1997 budget request for fossil fuel R&D represents a continuing effort to realign budget priorities that began with the Administration's FY1994 budget request. Environmental issues, particularly global climate change, drive the FY1997 request's proposal for maintaining natural gas R&D funding, while continuing to reduce coal R&D funding.

Overall, the proposal requests a 17.3% decrease over the estimated FY1996 appropriation for fossil energy (FY1997 request of $348.5 million versus an estimated FY1996 appropriation of $421.5 million). Under the proposal, coal R&D would drop 15.4% (from $121.3 million to $102.6 million). In contrast, natural gas R&D would decrease 4.4% (from $59.7 million to $57.1 million), fuel cells R&D would decrease 11.1% (from $52.5 million to $46.6 million), and petroleum R&D would decrease 5.7% (from $55.7 million to $52.5 million).

The reduction in coal R&D reflects a continuation of the Administration's efforts to focus coal R&D on electric power generation, where coal's domestic abundance and relative price stability may offer important benefits. In particular, the Administration's request is directed toward improving the environmental acceptability of coal. Funding for non-power-related areas, such as indirect liquefaction, is cut sharply. Although some note is made of national security and economic issues with respect to coal (particularly with the prospect of jobs from export of clean coal technologies), the focus on global climate change seems to be a driving force behind the Administration's lower priority for coal. This would also seem to explain the lesser reductions in natural gas R&D; one of the Administration's policy goals is to increase use of natural gas as a clean and efficient fuel.

Specifics

As was the case in the FY1996 request, the category of coal R&D activities taking the greatest cut under the Clinton FY1997 budget proposal is "Advanced Clean Fuels Research" which includes: (1) coal preparation, (2) direct liquefaction, (3) indirect liquefaction, (4) advanced research and environmental technology, and (5) systems for coproducts. Traditionally, these activities to derive mostly liquid fuels from coal were primarily justified on the basis of national security concerns -- a justification that overcame their uncertain short-term economics. These programs received a 38% reduction in FY1996; the proposed FY1997 budget, while reducing some programs does not cut the overall funding as sharply (see Table 1). Coal preparation and direct liquefaction accounts are maintained at about their FY1996 levels while the others are reduced significantly.

The House-passed FY1997 bill, H.R. 3662, was similar generally to the Administration's request, with only a significant reduction in the funding for the direct liquefaction account. The Senate Appropriations Committee reported version was also similar, but includes a significant funding increase for Advanced Research and Environmental Technology. The conference report reflected Congress' priorities by retaining the reduction in direct liquefaction, while providing some increased funding for Advanced Research and Environmental Technology.

Recognizing that coal's primary market and future is electricity generation, the second category, Advanced Clean/Efficient Power Systems, focuses on advanced electricity generation systems that burn coal with minimal environmental impact. As indicated in Table 2, much of the effort centers on coal gasification combined cycle technology, where the United States is perceived to have an advantage internationally. Considerable funding is also requested for pressurized fluidized bed combustion, where the United States is in competition with several European countries. This reduced budget request for coal's primary market partially reflects the Administration's opinion that technology advancements in natural gas conversion will lead to advances in coal technologies. Hence, these budget numbers should be read in conjunction with the budget levels that the Administration is seeking for natural gas turbine and fuel cell R&D.

The House-passed appropriations measure, H.R. 3662, was similar generally to the overall budget recommended by the Administration, but with a significant increase in Advanced Pulverized Coal-Fired Powerplant Activities. This increase was partly offset by a decrease in funding for Advanced Research and Environmental Technology. The Senate Appropriations Committee's reported version also followed the budget request very closely, but provided a considerably smaller increase in the Advanced Pulverized Coal-Fired Powerplant Activities than recommended by the House. The conference report provided substantial increased funding for it, more in line with the proposed House funding than either the Senate or the Administration.

The third category of coal R&D is Advanced Research and Technology Development. This category represents the Administration's effort to ensure that the nation continues to have a strong human resource capability in critical science and technology fields. Steady funding is proposed for coal utilization science (research into fundamental physics chemistry and thermodynamics); technology crosscut (including environmental analyses, research, monitoring and trade assistance); and university/national lab research (including grants to Historically Black Colleges and Universities (HBCUs)). Substantial reductions are proposed for research on advanced material and components, similar to those reductions proposed in previous Administration budgets.

The House-passed funding levels for Advanced Research and Technology Development were lower than those recommended by the Administration, particularly for University Coal Research (including HBCU funding). Generally, funding recommended by the Senate Appropriations Committee was lower than that recommended by the House, except for University Coal Research. In conference, the committee agreed to the lower of either the House or Senate numbers.

The Coal Demonstration Program (Clean Coal Technology)

The Clean Coal Technology program funds demonstration projects on a cost-share basis with private industry. It is designed to prove the technical and economic viability of less-polluting coal combustion technologies. Solicitations began in 1986 and a fifth and final round of proposals was completed and winners announced in 1993. Funding for the first three rounds is complete; funding for the last two rounds is ongoing with advance appropriations having been made.

Unlike the fossil fuel R&D budget, the Clean Coal Technology Program request does not reflect any fundamental realignment of priorities from the policies of the previous Administration. The program would continue under the FY1997 request, although its funding schedule would be altered, and some unobligated funds would be rescinded. The Clinton FY1997 budget request for DOE's Clean Coal Technology Program is $0, reflecting the availability of previously appropriated funds to carry on round 4 and 5 activities. The Administration also proposes in its FY1997 budget request to limit the program to the 45 projects currently underway. (See Table 4.)

Originally, the Clean Coal Technology Program was funded through advanced appropriations for $2.75 billion. In 1995, $200 million was rescinded by Congress (P.L. 104-6, H.R. 889). The Administration's FY1997 funding request would rescind an additional $325 million, reducing total funding to $2.225 billion. Under the Administration's proposal, available funds could be used for any of the five rounds of solicitation, regardless of previous specific appropriations. In addition, the Administration would defer $138 million of the FY1997 advanced appropriations until FY1998, and defer $175 million in unobligated balances until FY1998. The Administration does request that $17 million from prior year balances be used to administer the program during FY1997.

Like the Administration, the House-passed H.R. 3662 did not provide any new budget authority for the Clean Coal Technology Program, expecting the program to continue with existing advanced appropriations. However, the House did not include the Administration's proposed deferrals and rescissions in H.R. 3662. In the Senate, the Appropriations Committee also provided no new funding for the Clean Coal Technology Program; however, the Committee did agree to a $150 million rescission, less than recommended by the Administration, but more than recommended by the House.

The conference report to H.R. 3662, as incorporated in the omnibus appropriations bill, did not provide any new budget authority for the Clean Coal Technology Program. However, it did include a $123 million rescission in funding, reflecting the availability of such funds due to the termination of projects.

Issues for Coal

According to DOE, the Clinton Administration's fossil energy R&D budget priorities have been derived from four specific strategic goals:

• affordable electricity supplied by advanced power generation technologies that support both economic growth and environmental improvements;

• economically competitive sources of supplemental liquid transportation fuels to reduce the alarming growth in oil imports;

• greater production and use of natural gas; and

• continued support of a strong human resources capability in critical crosscutting science and technology fields.

Within this array of strategic goals, it is not clear what the short-, mid-, and long- term roles of coal are in the Clinton energy policy. It would appear that coal's position in the R&D programs is being maintained at a reduced level because coal is plentiful in the United States and because it is the primary source of electricity generation. However, there is no clear definition of how coal figures into the future energy mix. As summarized by DOE:

Energy will be supplied to consumers in the 21st century from a mix of fuels. The Nation must continue its transition to clean, renewable and largely inexhaustible energy sources. But as Secretary O'Leary said in her confirmation hearing in January [1994], "I am pragmatic enough to understand that we cannot withdraw from existing energy sources that are technologically correct and feasible and don't do environmental harm."

However, even by "pragmatic" standards, it does not appear that coal stacks up well against natural gas and oil, given the goals listed by the Administration. First, in terms of advanced technology for electricity generation, the budget suggests that, at least in the short- and mid-term, natural gas technology, not coal technology, is expected to take the lead, particularly with respect to turbine and fuel cell developments. It is assumed that when economics dictate, the turbine and fuel cell technologies developed for natural gas can be relatively quickly modified to run efficiently and reliably on synthetic coal gas. The current focus seems reasonable, given current fuel economics and potential environmental restraints (i.e., carbon dioxide). However, if natural gas prices remain relatively low and utilities and independent power producers become more familiar with using natural gas facilities, the desire of power producers choosing to employ natural gas to shift back to coal may decline over time (particularly if CO2 restraints become a reality), and this could further reduce coal's market appeal.

Likewise, the second goal with respect to liquid transportation fuels does not envision a short- or mid-term role for coal. Instead, the Administration sees advanced oil extraction methods and possible natural gas conversion as more economic possibilities than coal synthetics. Given current economics, this logic seems sound. However, it narrows the future role of coal in the energy mix.

The third goal is a clear signal of the Administration's preference for expanding the use of natural gas among fossil fuels.

The fourth goal is by its nature a long-term foundation for future developments. Its assistance for coal technology exports reflects the current lack of a domestic market for clean coal technologies, and thus the desire to commercialize them overseas.

This shift in the Administration's policy raises a number of questions. The focus on natural gas is based on the current outlook for fossil fuel availability and current prices, as well as environmental advantages versus coal or petroleum. To what extent should fossil fuel R&D priorities be based on current trends and a view of natural gas as a "transition fuel" to non-fossil-fuels? Is the policy suggested by the R&D budget being followed or reinforced by the regulatory arms of the Department of Energy (DOE) and the Federal Energy Regulatory Commission (FERC)? Should more of the fuel cell effort be focused on coal-gas-fired fuel cells? Is the Administration's vision of coal's role in the energy mix (electric generation and technology exports) too narrow? Would these proposed changes have a negative impact on jobs and the economy or would they develop new markets and opportunities?

Continued funding of the Clean Coal Technology Program also raises questions. The Administration's budget request states that purpose of the Clean Coal Technology Program, in accelerating commercialization of coal technology, reflects coal's relative abundance, cost-effectiveness, and importance to the economy and cites concerns in the 1985 report by the U.S. and Canadian Special Envoys on Acid Rain. This appears to be at odds with the Administration's R&D budget, in which coal comes off as the fuel of last resort.

Legislative Action

In June, Congress passed a budget resolution to achieve a balanced budget by 2002 (H.Con.Res. 178). The conference report to H.Con.Res. 178 assumes a reduction of 45% in the energy account over 6 years with DOE's efforts to commercialize energy technologies specifically mentioned for reduction.

Also in June, the House Appropriations Committee marked up the Department of the Interior and Related Agencies Appropriations Bill, 1997. On June 20, the House passed H.R. 3662, making FY1997 appropriations for the Department of the Interior and related agencies. In debate on that measure, an amendment was accepted by voice vote to reduce funding for fossil energy R&D by $4 million from the Appropriation Committee's recommended levels. That reduction would come from the advanced natural gas turbine account.

In Senate action, the Senate Appropriations Committee reported out H.R. 3662 with an appropriation of $367.5 million for fossil energy, 12% below FY1996 levels, but 4% above the level recommended by the House. Compared with FY1996 levels, the Committee would reduce coal research by 15%, oil research by 12%, and fuel cell research by 5%. In contrast, natural gas research, led by advanced turbine systems, would increase by 17%. For the Clean Coal Technology Program, the Committee agreed to a $150 million rescission, less than recommended by the Administration, but more than recommended by the House.

In September, Congress passed an omnibus appropriations bill containing a conference agreement on H.R. 3662. As enacted, the law provides an appropriation of $364.7 million for fossil energy, 13% below FY1996 levels. Compared with FY1996 levels, the law reduces coal research by 15% (to $103 million), oil research by 18% (to $45.9 million), and fuel cell research by 5% (to $50.1 million). In contrast, natural gas research, would increase by 17% (to $70.1 million). For the Clean Coal Technology Program, Congress agreed to a $123 million rescission, less than recommended by the Administration.