**Question 5 Diversification and Conservation**

To what extent and how can demand be reduced through conservation and
efficiency measures and through diversification of energy sources used
for electric generation, industrial and other applications?

-   Calpine

-   National Association of Regulatory Utility Commissioners

-   Nuclear Energy Institute

-   PPM Energy

-   Harvard University

-   Coal Utilization Research Council

-   American Gas Association

-   American Council for an Energy-Efficient Economy

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**Calpine Corporation**

**Executive Summary**

-   Calpine believes that significant energy cost savings can be
    achieved by employing efficient dispatch on a system-wide basis for
    electric power supply. Our proposal (proposed legislative language
    and summary is attached) directs FERC to adopt standards to guide
    public utilities that choose to implement efficient system dispatch.
    FERC would be able to take into account whether a utility has
    implemented efficient system dispatch as part of any FERC
    proceedings to determine whether rates are just and reasonable. Our
    proposal would allow states to make a determination that efficient
    system dispatch would be detrimental to ratepayers in that state
    with the result that FERC cannot take into consideration whether a
    utility has implemented efficient system dispatch in its ratemaking
    determinations.

-   Calpine believes that petcoke gasification technology can help
    diversify our country's energy sources and reduce the amount of
    natural gas used for power generation. Calpine proposes that loan
    guarantees be offered for no more than 5 petcoke gasification
    demonstration projects. Loan guarantees should be directed for the
    construction of petcoke gasification plants and the retrofitting of
    natural gas plants for petcoke use. Forty-percent of the total
    volume fuel mix used by power plants must be derived from gasified
    petcoke.

-   Calpine believes that increasing the capacity of geothermal electric
    power could provide greater diversification of energy resources used
    for generating electricity and help reduce the reliance on fossil
    fuels for electricity production. One means of increasing
    investments in geothermal electric power plants is to make changes
    to the production tax credit (PTC). Currently, the PTC does not
    apply equitably to all renewable technologies. Calpine proposes that
    Congress pass legislation to make the tax credit permanent, or
    alternatively, to extend the placed into service date by a minimum
    of 5 years; to provide the credit to all renewables for a 10-year
    term; and, to allow the credit to be taken by the owner, the
    operator, or the lessee of the geothermal facility.

    **5. Diversification and Conservation**

To what extent and how can demand be reduced through conservation and
efficiency measures and through diversification of energy sources used
for electric generation, industrial and other applications?

1)  The nation has recently experienced a sharp rise in energy costs,
    including significant increases in the costs of fuel used in the
    production of electric power. Faced with these rising fuel costs, it
    is critical that the country seek ways to conserve and efficiently
    utilize natural gas and other fuels in electric power plant
    operations. One step that can be taken to accomplish this goal is to
    encourage utilities to employ efficient dispatch on a system-wide
    basis for electric power supply.

The utilization of efficient system dispatch can lead to a reduction in
the consumption of natural gas and to other fuel efficiencies as well as
ensure that electric power is produced at the lowest fuel cost. Recent
statistics compiled by the Energy Information Administration (EIA) show
that significant cost savings in natural gas can be achieved by
encouraging the efficient dispatch of power. For example, the decrease
in the average heat rate (BTUs of natural gas used per kilowatt hour of
electricity produced) for gas-fired power plants in the U.S. from
1999-2003 saved more than 650 BCF of natural gas. If the U.S. used only
combined-cycle power plants with an average heat rate of 7.5, they would
have saved more than 1.6 TCF of gas in 2003.

While many proposed solutions to increasing the supply of natural gas
are medium to long-term in nature, improved efficiencies can increase
the availability of natural gas in the short-term. Because there is an
oversupply of gas-fired generation capacity in a number of regions of
the country, some new, very efficient units are underutilized while more
inefficient units are currently dispatched.

Attached is proposed legislative language to guide the nation in
employing efficient system dispatch for electric power supply. The
proposed language does the following:

-   Defines efficient system dispatch as the operation of the electric
    power supply system in a manner that schedules and economically
    prioritizes all available electric generation resources in order to
    minimize the cost of electric power.

-   Directs FERC to adopt standards to guide public utilities that
    choose to implement efficient system dispatch. FERC will consult
    with state commissions in the development of these guidelines.

-   Allows FERC to take into account whether a utility has implemented
    efficient system dispatch as part of any FERC proceedings to
    determine whether rates are just and reasonable.

-   Permits a state to make a determination that efficient system
    dispatch would be detrimental to ratepayers in that state with the
    result that FERC cannot take into consideration whether a utility
    has implemented efficient system dispatch in its ratemaking
    determinations.

2)  Calpine believes that petcoke gasification technology can help
    diversify our country's energy sources and reduce the amount of
    natural gas used for power generation. Petcoke is a low-value
    byproduct of the oil refining process that is often just treated as
    a waste product. Petcoke can be gasified and used in almost all
    existing natural gas-fired plants after certain modifications are
    made. Calpine proposes that loan guarantees be offered for no more
    than 5 petcoke gasification demonstration projects as well as for
    the modification of any existing natural gas plants that would
    utilize the synfuel of such petcoke gasification project. The loans
    obtained under such guarantees can be used for all costs related to
    the construction of petcoke gasification plants and the retrofitting
    of natural gas plants for the gasified petcoke. Forty-percent of the
    total volume fuel mix used by power plants must be derived from
    gasified petcoke.

3)  Calpine believes that it is important to maintain a balanced
    diversification of energy resources used to produce electricity.
    Expanding the use of renewable resources can play a key role in
    maintaining this diversity. In particular, increasing the capacity
    of geothermal electric power could provide both short term and
    long-term benefits in reducing the reliance on fossil fuels for
    electricity production. Compared to fossil fuel fired power plants,
    geothermal plants produce electricity with minimal environmental
    impact -- they produce virtually no air emissions; they re-inject
    the spent steam and hot water back into the geothermal reservoirs,
    solving water disposal problems; and, they require a fraction of the
    land needed for fossil-fueled plants. In addition, geothermal plants
    provide greater reliability and flexibility than other renewable
    energy and fossil-fueled resources. Unlike other renewables,
    geothermal power plants provide electricity almost constantly - they
    are typically available nearly 95% of the time. They can adjust
    their output to follow customer demand as it rises and falls
    throughout the day. In addition, geothermal fields, if properly
    managed, can be used to produce electricity indefinitely.

Currently in the United States, there is an operating capacity of 2,300
megawatts (MW) of geothermal power. It is estimated that nearly 10 times
that amount, 23,000 MW, of electricity could be produced in the US from
geothermal resources. However, there are several barriers to getting to
those estimates. One barrier Calpine believes Congress can focus on is
the issue of having all renewable resources treated equally with respect
to the production tax credit (PTC). A major step was taken on this issue
last year when Congress passed the JOBS bill with an expansion of the
PTC to include geothermal and other renewable resources, in addition to
wind energy. However, the language in the legislation had some major
shortcomings. First and foremost, the credit applies only to facilities
placed into service prior to January 1, 2006. Very few new geothermal
plants will be able to meet that deadline. Some smaller (\<10mw)
facilities already designed and permitted may be completed within the
timeframe of this current bill, but larger projects (\>10mw) even though
designed and permitted would not be capable of completing construction
within that timeframe. Typically, 3 to 4 years is required after
resource definition to cover engineering, permitting, and construction
of a new facility. This is in addition to 1 to 2 years to permit and
drill wells to confirm a resource prior to the start of the engineering
design activities. In order to encourage more investment in geothermal
power plants, it will be necessary to extend the placed into service
date, if not permanently, then by a minimum of 5 years.

The language also applies the tax credit unequally amongst various
renewable technologies: 1) while geothermal receives the credit for five
years, wind and others receive the credit for 10 years; and, 2)
geothermal is limited to only to the owner of the facility being
eligible to receive the tax credit, while for closed-loop biomass and
open-loop biomass the tax credit is allowed to be taken by the lessee,
operator, or owner. To create parity, the PTC should be available to all
renewables for a 10-year term and to the owner, operator or lessee of
the facility. This latter issue would improve the financing flexibility
for geothermal facilities. In today's financial market it is not
uncommon to have geothermal facilities financed, owned, and operated as
a limited partnership or limited liability corporation. Thus, the owner
may not be the operator or the financial investor. Providing the credit
to only the owner of the facility limits the usefulness of the PTC as an
incentive to invest in geothermal facilities.

**A BILL**

To conserve and efficiently utilize natural gas in electric power plant
operations, and to further diversify the energy supply of the American
people.

[SECTION 1. Findings]{.underline}

\(1\) That the supply of electric power and the conservation of natural
resources require that the consumption of natural gas and other fuels be
optimized;

\(2\) That efficient system dispatch can lead to a reduction in the
consumption of natural gas and to other fuel efficiencies; and

\(3\) That efficient system dispatch will ensure that electric power to
serve the nations' customers is produced at the lowest fuel cost with
the minimum level of fuel consumption.

[SECTION 2. Amendment of Federal Power Act]{.underline}

Part II of the Federal Power Act (16 U.S.C. 824 et seq.) is amended by
inserting after section \[214\] the following:

\"SEC.\[215\]. INCLUSION OF ALL AVAILABLE GENERATION IN EFFICIENT SYSTEM
DISPATCH

\"(a) Efficient System Dispatch Defined. \-- For purposes of this
section, the term \"efficient system dispatch\" means the operation of
the integrated transmission and electric power supply system in a manner
that schedules and economically prioritizes all available electric
generation resources, including proposed offers from nonutility
suppliers, so as to minimize the cost of electric power used to reliably
serve consumers, recognizing any operational limits of generation and
transmission facilities.

\"(b) Efficient System Dispatch Standards and State Participation.

\"(1) Not later than 120 days after the date of enactment of this
section, the Commission, after consultations with State commissions,
shall adopt (and from time to time thereafter revise) standards to guide
public utilities in the implementation of efficient system dispatch.
Such standards shall be designed to ensure that all generation resources
have the opportunity, under terms that are just, reasonable and not
unduly discriminatory or preferential, to specify their availability to
provide, and their price for, power and energy for inclusion in
efficient system dispatch.

\"(2) With respect to any public utility over which the Commission has
ratemaking authority, and that is not otherwise exempt under subsection
(b) (3), the Commission shall consider whether such public utility has
implemented efficient system dispatch in any proceeding where the
Commission is determining whether such public utility or its affiliate
qualifies for market rate authority or when the Commission is otherwise
making a determination as to whether the rates charged by such public
utility are just, reasonable and not unduly discriminatory or
preferential. In making such determination, the Commission shall give
appropriate deference to the views of the affected State commission(s)
as to the impact of the implementation of efficient system dispatch on
retail ratepayers.

\"(3) The Commission shall not take into consideration whether a public
utility has implemented efficient system dispatch under the
circumstances in subsection (b) (2) if, (A) the Commission determines,
or the affected State commission(s) certify, in an on the record
proceeding and on the basis of appropriate studies, that including all
available generation in efficient system dispatch is detrimental to
retail ratepayers, or (B) such public utility participates in a
Commission-approved regional transmission organization in which
efficient system dispatch has been implemented on a system-wide basis.

\"(c) Enforcement. \-- Sections 210(g) and (h) of the Public Utility
Regulatory Policies Act of 1978 apply to judicial review and enforcement
of matters under this section to the same extent they apply to actions
under Section 210 of such Act.

\"(d) Savings Clause. \-- No provision of this section shall be
construed as limiting or impairing the authority of the Commission under
any other provision of this law."

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**National Association of Regulatory Utility Commissioners (NARUC)**

**Executive Summary**

The National Association of Regulatory Utility Commissioners (NARUC)
welcomes this opportunity to provide the United States Senate Energy and
Natural Resources Committee with our views on the nation's supply and
demand for natural gas. NARUC believes that any Federal policy will be
sustainable only if that policy includes "the triad" of: conservation
and efficiency; increasing supply; and diversification of energy
sources. Any policy must include all three dimensions or the goal of
energy security will not be met. In addition, any successful Federal
policy must respect and preserve the States' traditional roles in
regulating distribution systems, planning, siting approval, reliability
assurance, and consumer protection. As further detailed in the rest of
this document NARUC endorses the following positions:

-   Congress should encourage domestic exploration and production of new
    natural gas supplies, and expansion of natural gas transmission and
    delivery infrastructure, in an environmentally sound manner at
    reasonable costs, but should avoid an over‑reliance on natural gas
    for new electric generation.

-   Congress should invest in natural gas infrastructure R&D, and DOE
    should improve information-sharing with State and regional
    government entities.

-   Congress should facilitate diversification, conservation and
    efficiency as integral parts of any policy to improve the nation's
    natural gas situation. Increasing domestic supply alone is not a
    logical or sustainable solution for energy security.

-   Congress should continue to enact legislation providing for federal
    tax credits for cost-effective energy efficiency investments in
    residential and commercial buildings and the extension, expansion,
    and increasing the Renewable Energy Production Tax Credit as two
    measures to help reduce demand for natural gas.

-   Congress should enact legislation to invest federal royalty revenue
    received from gas production on federal land, up to a maximum of
    \$150 million, in an expanded research program on gas supply and
    delivery.

Congress should foster the policies that encourage development of
balanced natural gas portfolios, including elements of on-system and
off-system gas storage, as well as adequate natural gas pipeline and
distribution systems.

**5. Diversification and Conservation**

To what extent and how can demand be reduced through conservation and
efficiency measures and through diversification of energy sources used
for electric generation, industrial and other applications?

[Conservation and Efficiency]{.underline}

Conservation and efficiency must both be integral parts of any policy to
improve the nation's natural gas situation. NARUC does not believe that
increasing domestic supply alone is a logical or sustainable solution
for energy security. In fact, in a July 17, 2003, letter to State PUCs,
DOE Secretary Abraham agreed:

> "There are only limited opportunities to increase supply over the next
> 12 to 18 months; therefore, the emphasis must be on conservation,
> energy efficiency, and fuel switching."

That statement is as true today as it was in 2003. NARUC believes that
State and Federal regulatory commissions should revisit, review and
reconsider the level of support and incentives for existing gas and
electric utility programs designed to promote and aggressively implement
cost-effective conservation, energy efficiency, weatherization, and
demand response in both gas and electricity markets. We recognize that
the best approach towards promoting gas energy efficiency programs and
electric energy efficiency programs for any single utility, State or
region may likely depend on local issues, preferences and conditions.

The National Petroleum Council (NPC), in its September 25, 2003, report
on *Balancing Natural Gas Policy -- Fueling the Demands of a Growing
Economy*, also found that greater energy efficiency and conservation are
vital near-term and long-term mechanisms for moderating price levels and
reducing volatility and recommended all sectors of the economy work
toward improving demand flexibility and efficiency. The NPC, in its
report, identified key elements of the effort to maintain and continue
improvements in the efficient use of electricity and natural gas,
including (but not limited to):

> \(i\) Enhanced and expanded public education programs for energy
> conservation, efficiency, and weatherization,
>
> \(ii\) DOE identification of best practices utilized by States for
> low-income weatherization programs and encouragement of nation-wide
> adoption of these practices,
>
> \(iii\) A review and upgrade of the energy efficiency standards for
> buildings and appliances (to reflect current technology and relevant
> life-cycle cost analyses) to ensure these standards remain valid under
> potentially higher energy prices,
>
> \(iv\) Promotion of the use of high-efficiency consumer products
> including advanced building materials, Energy Star appliances, energy
> "smart" metering and information control devices,
>
> \(v\) On-peak electricity conservation to minimize the use of
> gas-fired electric generating plants,
>
> \(vi\) The use of combined-cycle gas-fired electric generating units
> instead of less-efficient gas-fired boilers, and
>
> \(vii\) Clear natural gas and power price signals

Further, the American Council for an Energy-Efficient Economy (ACEEE),
the Natural Resources Defense Council (NRDC), and the American Gas
Association (AGA) have adopted a Joint Statement noting that traditional
rate structures often act as disincentives for natural gas utilities to
aggressively encourage their customers to use less gas. Therefore, the
NRDC, AGA, and the ACEEE have urged public utility commissions to align
the interests of consumers, utility shareholders, and society as a whole
by encouraging conservation. Among the mechanisms supported by these
groups are the use of automatic rate true-ups to ensure that a utility's
opportunity to recover authorized fixed costs is not held hostage to
fluctuations in retail gas sales.

NARUC has encouraged State commissions and other policy makers to
support the expansion of natural gas energy efficiency programs and
electric energy efficiency programs, including those designed to promote
consumer education, weatherization, and the use of high-efficiency
appliances, where economic, and to address regulatory incentives to
address inefficient use of gas and electricity. NARUC has also
encouraged State and Federal policy makers to: (i) review and upgrade
the energy efficiency standards for buildings and appliances, where
economic, and to ensure these standards remain valid under potentially
higher energy prices, and (ii) promote the use of high-efficiency
consumer products, where economic, including advanced building
materials, Energy Star appliances, and energy "smart" metering and
information control devices.

NARUC has urged DOE to expeditiously promulgate and implement new
national standards for commercial air conditioners, heat pumps,
residential furnaces and boilers, and electric distribution transformers
so as to achieve the greatest level of cost-effective energy savings. We
have also encouraged DOE to establish an updated national standard for
residential furnaces and boilers that takes into account both the
equipment's electricity use and its fossil fuel consumption, and to
establish a voluntary standard more stringent than the national minimum
standard that is designed to be cost-effective in cold

climates and which cold-weather States could elect to implement in place
of the national minimum.

[Diversification]{.underline}

History has taught us the economic and environmental risk of
over-reliance on a single source of fuel for new electric generating
capacity. Since the early 1990s, new electric generating facilities have
been predominately gas-fired. According to the Energy Information
Administration, of the capacity added to the electric power grid in the
United States between 2000 and 2004, over 90 percent was gas-fired, and
over the next several years, most of the new electric generating
facilities that will become operational also will be gas-fired. This has
led many regions of the country to significantly increase their
dependence on natural gas for electric generation.

While natural gas-based generation technologies have made significant
advances in efficiency and environmental performance, and are a
necessary part of the overall generation mix, natural gas prices have
continued to climb, relative to price levels in the 1990s, and are
expected to continue to reflect a tight natural gas market over the next
several years. Fuel diversity, therefore, is increasingly being
advocated by industry stakeholders and policy makers as desirable for
resource planning in the electric industry.

The choice of fuel mix for electric generation, takes into account
several factors, including long-term economic costs, environmental
effects, power system reliability, and price volatility. However, market
incentives alone would be unlikely to achieve the most reliable
long-term fuel mix for electric generation. Evidence from various
studies sponsored by both government and industry, including the
September 2003 National Petroleum Council study requested by the
Secretary Abraham, has shown the decline in recent years of gas-fired
generating facilities with dual-fuel capability. At the same time, these
same studies have also shown the economic benefits of gas-fired
generating facilities with dual-fuel capability, including the dampening
of both electricity prices and natural-gas demand during peak periods.

These studies have identified the need to consider the use of
alternative fuels in the electric generation industry, in order to
provide for a balanced fuel mix. They have also identified the important
role that State commissions can play in affecting the capabilities of
new gas-fired generating facilities, when considering building with
dual-fuel capability or considering the ability of existing gas-fired
generating facilities, to switch to an alternate fuel where economic.
NARUC encourages State commissions and other policy makers to support
the concept of fuel diversity for electric generation. NARUC recognizes
that the appropriate diversity of fuel sources for electric generation
for any single utility or region likely depends on local issues,
preferences and conditions. Additionally, NARUC urges Congress or the
Administration to increase the efficiency for licensing and relicensing
processes of hydroelectric and nuclear facilities, without compromising
substantive environmental and safety standards.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**Nuclear Energy Institute**

**[ABSTRACT]{.underline}**

High prices for natural gas and the intense, recurring periods of price
volatility experienced over the last four years is caused partly by
unsustainable demand for natural gas in the electric generation sector.
Electric sector demand for natural gas is being driven by the large
amounts of new gas-fired electric generating capacity built in the
United States during the last decade. More than 90 percent of all new
electric generating capacity added over the past five years is fueled
with natural gas.

Diversity of fuel and technology is the core strength of the U.S.
electric supply system. A diverse, balanced portfolio of fuels and
technologies is a hedge against supply disruptions caused by
geopolitical events or simple commodity shortages.

This diversity is at risk because today's business environment and
market conditions inhibit investment in large, new capital-intensive
technologies, notably the advanced nuclear power plants and advanced
coal-fired power plants best suited to supply baseload electricity.

The United States faces a critical need for investment in energy
infrastructure, particularly the capital-intensive, long-lead-time
advanced nuclear and coal-fired power plants that represent the backbone
of the U.S. electricity supply system. Finding ways to stimulate
investment in these technologies is in the national interest because
advanced coal and nuclear power plants will (1) preserve the fuel and
technology diversity that is the core strength of the U.S. electric
power system; (2) help to address the environmental challenges (criteria
pollutants and greenhouse gases) that face the U.S. electric sector; (3)
strengthen U.S. energy security.

5\. Diversification and Conservation: *To what extent and how can demand
be reduced through conservation and efficiency measures and through
diversification of energy sources used for electric generation,
industrial and other applications?*

The Nuclear Energy Institute (NEI), the U.S. commercial nuclear energy
industry's Washington-based policy organization, appreciates the
opportunity to respond to questions posed by the Senate Energy and
Natural Resource Committee for its Natural Gas Supply and Demand
Conference. Nuclear energy can play a strategic role, in the short-term
and the long-term, in reducing pressure on natural gas supply and price.

High prices for natural gas and the intense, recurring periods of price
volatility experienced over the last four years are caused partly by
unsustainable demand for natural gas in the electric generation sector.
Electric sector demand for natural gas is being driven by the large
amounts of new gas-fired electric generating capacity built in the
United States during the last decade. More than 90 percent of all new
electric generating capacity added over the past five years is fueled
with natural gas. Natural gas has many desirable characteristics and
should be part of our fuel mix, but "over-reliance on any one fuel
source leaves consumers vulnerable to price spikes and supply
disruptions."[^1]

Diversity of fuel and technology is the core strength of the U.S.
electric supply system. A diverse, balanced portfolio of fuels and
technologies is a hedge against supply disruptions caused by
geopolitical events or simple commodity shortages.

This diversity is at risk because today's business environment and
market conditions inhibit investment in large, new capital-intensive
technologies, notably the advanced nuclear power plants and advanced
coal-fired power plants best suited to supply baseload electricity.
Construction of massive amounts of gas-fired generating capacity over
the last 12 years reflects the fact that gas-fired capacity represents
the lowest investment risk at a time when the U.S. electric power sector
faces a large number of significant business risks and uncertainties.
These uncertainties include:

1)  future environmental requirements, including the potential for
    controls on carbon;

2)  market design;

3)  the status, scope and timing of electric sector restructuring and
    deregulation, and

4)  the expectations, plans and procedures associated with resource
    planning and investment recovery.

These uncertainties inhibit capital investment in the long-lead-time,
capital-intensive new technologies (notably advanced nuclear power
plants and advanced "clean coal" technologies like integrated
gasification combined cycle \[IGCC\]) that provide the highest degree of
forward price stability.

The United States faces a critical need for investment in energy
infrastructure, particularly the capital-intensive, long-lead-time
advanced nuclear and coal-fired power plants that represent the backbone
of the U.S. electricity supply system. These two technologies represent
approximately 70 percent of U.S. electricity supply, and they provide
the highest degree of price stability, but investment in new nuclear and
coal-fired power plants has dwindled in the last 10-15 years. In the 12
years since the U.S. last enacted major energy policy legislation (the
Energy Policy Act of 1992), the United States has built approximately
270,000 megawatts of new gas-fired generating capacity. Only 4,355
megawatts of new nuclear capacity (all of it planned and under
construction long before 1992) and 9,560 megawatts of new coal-fired
generating capacity have entered service since 1992.

This trend must be reversed or the United States will place
unsustainable pressure on natural gas supply and price. Reversing this
trend will require federal government actions and initiatives to
stimulate investment in new baseload generating capacity, including
advanced coal-fired technologies and new nuclear power plants.

Finding ways to stimulate investment in these technologies is in the
national interest because advanced coal and nuclear power plants will
(1) preserve the fuel and technology diversity that is the core strength
of the U.S. electric power system; (2) help to address the environmental
challenges (criteria pollutants and greenhouse gases) that face the U.S.
electric sector; (3) strengthen U.S. energy security.

The nuclear energy sector has recorded dramatic efficiency gains over
the last 15 years. The industry is uprating capacity, and increasing
output, at its plants---over 2,000 megawatts of power uprates authorized
by the Nuclear Regulatory Commission over the last three years, and
another 2,000 megawatts expected over the next several years. In
addition, nuclear generating companies are pursuing license renewal.
This option allows today's operating plants to extend their lives for 20
additional years---from 40 to 60 years. The NRC has approved renewed
licenses for 30 reactors and 43 reactors have either already filed their
renewal applications, or indicated formally to NRC that they intend to
do so. The industry has also implemented systematic programs to manage
the systems and components in these plants for their entire expected
lifetime. Without all these steps in the short-term, today's natural gas
situation would be significantly worse.

There are obvious limits, however, on how much additional electricity
output can be produced at the existing 103 nuclear power plants. Meeting
the nation's growing demand for electricity---which will require as much
as an additional 400,000 MW by 2025, depending on assumptions about
electricity demand growth---will require construction of new nuclear
power plants in the years ahead.

The nuclear energy industry is committed to construction of new nuclear
plants, and the industry has been working for several years on
regulatory, legislative and financial policy initiatives that will allow
companies to invest in new nuclear capacity. Three companies (Dominion
Resources, Entergy and Exelon) are obtaining early site permits, part of
the new licensing regime created by the 1992 Energy Policy Act. Two
industry consortia are preparing applications for combined
construction/operating licenses (COLs). All this work, designed to
validate the new licensing process, is cost-shared with the Department
of Energy.

The overall objective for this industry initiative is to ensure new
nuclear plants can be operational by early in the next decade. In order
for this undertaking to be successful, continued funding of
pre-commercial activities under the Department of Energy's Nuclear Power
2010 program is essential. This program, cost-shared between industry
and the federal government, would (1) validate the new licensing process
created by the 1992 Energy Policy Act, and establish a well-defined,
predictable and stable process; (2) support sufficient detailed design
and engineering on advanced reactor designs to provide cost and schedule
certainty; and (3) demonstrate the early site permit and COL processes.

Construction of new nuclear generating capacity also requires limited
financial support and investment stimulus to offset the higher risks
associated with new nuclear plant construction in the minds of debt and
equity investors. The financial stimulus must address the investment
risks and issues that make it difficult for companies to undertake
capital-intensive projects (*i.e.*, risk of regulatory or judicial
actions causing delays in plant construction or operation; earnings
dilution during construction and no accretion to earnings during first
years of operation; long period for recovery of capital investment under
existing tax depreciation rules, etc.).

Electricity generated by America's nuclear power plants over the past
half century has played a key part in our nation's growth and
prosperity. Nuclear power produces over 20 percent of the electricity
used in the United States today without producing air pollution. As our
energy demands continue to grow in years to come, nuclear power should
play an even greater role in meeting those needs.

Over the past 30 years, nuclear energy played a strategic role in
reducing dependence on oil for electricity generation. At the time of
the first oil crisis in 1973, oil represented approximately 20 percent
of U.S. electricity supply; nuclear power, less than five percent.
Thanks to construction of new nuclear generating capacity in the 1970s
and 1980s, oil now represents only approximately 3 percent of U.S
electricity supply; nuclear energy, approximately 20 percent.

What nuclear energy did for U.S. electricity supply in the 1970s and
1980s with respect to oil, it can do for natural gas over the next 10-20
years. To produce the same amount of yearly electricity as a single
1,000-megawatt nuclear plant operating at 90 percent capacity factor
requires approximately 54 billion cubic feet of natural gas. This is
equivalent to the usage of approximately 660,000 residential gas
customers, or about one

percent of the total residential customers in the U.S. Clearly,
improving nuclear production---through efficiency gains and building new
nuclear power plants---relieves pressure on the natural gas supply and
enhances the nation's energy diversity.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**PPM Energy**

**[EXECUTIVE SUMMARY]{.underline}**

PPM Energy provides energy services to wholesale and large commercial
and industrial customers. The company is primarily involved in the
development of wind power projects and the marketing of wind energy to
electric utility companies along with the management of gas-fired
generation assets and, through ENSTOR, the provision of gas storage
services and the development of storage facilities.

Our portfolio of gas and power assets and other capabilities allows PPM
to deliver products and services that help customers manage risks and
uncertainty in the natural gas and power industries. In particular,
natural gas storage provides substantial benefits in managing the
volatility of gas prices and by providing a stable source of supply
during periods of high gas demand. In addition, wind energy provides an
important source of diversification for our nation's electric generation
portfolio, freeing-up significant amounts of natural gas for other
purposes, limiting imports of foreign-produced gas, and reducing the
upward pressure on gas prices.

However, there are a number of impediments limiting much-needed
investment in both gas storage and wind power facilities. PPM Energy
applauds the Committee's decision to hold a Natural Gas Conference on
January 24 and to consider proposals aimed at addressing growing
concerns about the adequacy of natural gas supplies and price increases.
As discussed in greater detail below, we recommend several actions (both
regulatory and legislative) the Federal government should take to
promote greater investment in both gas storage and wind energy
facilities in order to enhance domestic energy security and reduce gas
price volatility:

-   FERC should adopt a generic policy enabling all new independent
    natural gas storage facilities to charge market based rates.

-   FERC should waive existing regulatory constraints that inhibit the
    development of innovative gas storage based services.

-   Congress should amend the Tax Code to treat "cushion gas" in gas
    storage facilities as a depreciable asset.

-   Congress should adopt a national renewable portfolio standard to
    require utilities providing retail electric service to acquire
    renewable energy credits accounting for a specific portion of their
    generation/supply portfolio.

-   FERC should adopt regulations ensuring that wind energy facilities
    have non-discriminatory and cost-effective access to the
    transmission grid.

**Question 5: To what extent and how can demand be reduced through
conservation and efficiency measures and through diversification of
energy sources used for electric generation, industrial and other
applications?**

As the demand for natural gas continues to rise, supplies are not
keeping pace. According to the National Petroleum Council, North
American natural gas production will satisfy only 75% of domestic demand
by 2025. Although conservation and efficiency measures are needed to
help reduce demand, the fact is that further action is necessary to
limit our growing reliance on imports of LNG.

The greatest increase in natural gas demand is attributable to the
electric generation sector. According to the National Commission on
Energy Policy, more than 150 gigawatts of gas-fired generation have been
added since 1999 alone.

Natural gas is undoubtedly going to be an important part of the electric
generation sector for the foreseeable future primarily because gas-fired
facilities have environmental and other advantages over certain other
types of generating plants. While important developments are being made
in the development of next-generation coal and nuclear technologies,
these technologies have some limitations.

PPM Energy believes that there is a significant opportunity to help
reduce the pressure on gas demand in the electric generation sector by
adding a substantial amount of renewable energy capacity, wind energy in
particular. There are currently approximately 6,000 MW of wind
generating capacity, which accounts for slightly less than 2% of all
generating capacity nationwide. The American Wind Energy Association
estimates that it is economically and technically feasible to install an
additional 100,000 MW of wind energy capacity in the U.S. over the next
fifteen years given the proper public policies. This additional
generation would reduce gas demand by 6 Bcf/day -- accounting for 10% of
total domestic gas consumption. The country would save \$12-15 billion
per year by reducing imports of LNG, and would save untold billions of
dollars by taking demand pressure off of gas and reducing its price.

The wind industry has made significant strides in reducing the cost of
production. According to the National Commission on Energy Policy, over
the last 30 years the cost of wind power has declined by more than 80%.
With the renewable production tax credit, wind generation costs are in
many cases competitive with gas-fired generation. Nevertheless, the
costs associated with integrating wind into the transmission grid are
impeding significant additions of wind capacity.

Wind projects are typically located in rural areas, distant from
population centers, relying on substantial transmission to transport the
power to the load pockets where the energy is consumed. The lack of
adequate transmission capacity in some regions of the country is
stunting wind power development in those areas. Moreover, because wind
is an intermittent resource (projects don't operate at full capacity at
all times -- depending on wind availability), wind power projects don't
always have access to transmission capacity

on the same terms as thermal generation, including natural gas plants.
Wind power producers are subject to discriminatory penalties that
substantially add to the cost of the delivered power product -- putting
wind at a competitive disadvantage.

Section 45 of the Tax Code provides a 1.8 cents/kwh tax credit for power
produced by eligible renewable energy facilities (including wind power)
for the first ten years of commercial operation of each facility.
Although this credit has been instrumental in promoting renewable energy
development, its "stop and start" nature has limited the benefit.
Investments are only made for projects that can be completed and put
into commercial operation before the expiration date of the credit
(currently December 31, 2005). On several occasions significant time has
expired before Congress acted to extend the credit -- virtually shutting
down all wind project development. The uncertainty over the future of
the PTC (timing and length of future extensions) leads to substantial
underinvestment in wind energy.

PPM believes that Congress and FERC should implement several measures
designed to promote adequate investment in wind energy facilities in
order to reduce the demand for natural gas in the electric generation
sector.

First, Congress should adopt legislation establishing a national
renewable portfolio standard (RPS) similar to the proposal offered by
the Energy Committee's Ranking Democrat -- Senator Bingaman. An RPS
would require each retail electric supplier to obtain renewable energy
credits associated with a specific percentage of that supplier's retail
electric sales. Credits could be obtained by the retail supplier
generating the renewable energy itself, purchasing renewable energy from
another entity or purchasing credits from other entities or the
government.

A market based approach, such as a national RPS, rewards only the most
efficient renewable power projects. In addition, unlike the PTC, it
provides a long-term path forward which facilitates the development of
greater amounts of renewable energy capacity. Moreover, a national RPS
is cost effective for consumers because it substantially reduces the
demand for natural gas and thus gas prices. A recently released paper by
the Lawrence Berkeley National Laboratory -- "Reducing National Gas
Prices through Increased Deployment of Renewable Energy and Energy
Efficiency" -- analyzed fifteen studies examining the impact of a
national RPS on gas prices. These studies all concluded that a RPS will
reduce natural gas costs by billions -- nine of the fifteen studies
predict savings in the \$10-\$40 billion range by 2020.

Almost 20 states have adopted their own individual RPS programs.
Although state programs provide benefits, they fail to capture the
efficiencies associated with a national renewable credit trading market
and don't necessarily lead to the maximum amount of renewable energy
generating capacity.

In addition to the adoption of a RPS, PPM believes FERC should modify
its transmission policies to eliminate the discriminatory penalties to
which wind producers are now subjected. Currently, many transmission
providers subject generators to financial penalties if the amounts of
power they produce differ from the amount of power the generator has
scheduled. Because wind is an intermittent resource, it is difficult for
wind facilities to meet prearranged delivery schedules, subjecting the
resource to substantial imbalance penalties.

Moreover, FERC should encourage utilities, as some are currently
contemplating, to adopt creative transmission products that recognize
that requiring wind generation to acquire costly firm transmission
products is punitive, given that wind projects don't always need a
constant amount of transmission capacity. As an example of a new
transmission product that supports wind energy development, the
California ISO offers creative products that enable intermittent
generation, such as wind, to avoid imbalance penalties. Products such as
these will facilitate investments in wind generation facilities while
maintaining the high reliability of the electric grid.

FERC should also support efforts by transmission-owning utilities to
develop workable solutions that enable sufficient investments in
additional transmission capacity to meet the growing demand for wind
power. Southern California Edison recently announced that it will seek
FERC approval for a plan to roll-in to its overall transmission rates
the costs of a new trunk line intended to connect a new wind project
into the company's grid. This is in sharp contrast to the participant
funding methodology of transmission cost assignment that would require
the wind project developer to pay for the costs of the new transmission
line. In some cases participant funding prevents wind projects from
being built due to the prohibitive nature of the capital costs that must
be raised to pay for the transmission. It is important that Congress
acts to facilitate not prohibit FERC from approving approaches, such as
that proposed by Southern California Edison that would enable utilities
to meet their state renewable portfolio standard obligations.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

William G. Rosenberg

John F. Kennedy School of Government

Harvard University

**Executive Summary of Proposal**

Congress should adopt a National Gasification Strategy to promote
commercial investment in gasification technologies that will manufacture
synthesis gas from domestic coal, biomass, or petroleum coke to
supplement domestic natural gas supply and reduce demand. By providing
federal loan guarantees and other incentives for industrial and
electricity investments in gasification plants, a National Gasification
Strategy could produce gas supplies equivalent to those expected from
the Alaska Gas Pipeline (1.5 trillion cubic feet (TCF)), and in a more
immediate time frame.

Loan guarantees (like 80% of project costs provided for the Alaska Gas
Pipeline) are a preferred incentive approach because they assure capital
availability and minimize federal budget costs. A \$30 billion loan
guarantee program for gasification projects could be scored in the
federal budget for \$3 billion (\$600 million over five years) if
creditworthy purchase contracts were provided by industrial and
electrical customers. The National Gasification Strategy would stimulate
manufactured gas production equivalent to 1.5 TCF of natural gas, lower
natural gas demand, and reduce natural gas and electricity prices. The
manufactured gas could be produced for \$4.5 per million Btu (mmBtu) and
coal gasification power for 4.2 cents per kilowatt-hour (cents/kWh),
well below current natural gas prices of \$6 -7.00/mmBtu and natural gas
power that costs over 6 cents/kWh.

The National Commission on Energy Policy reports that the Alaska Gas
Pipeline, by delivering 1.5 TCF per year, "could lower gas prices
nationally by up to 50 cents/mmBtu." The National Gasification Strategy
is designed to achieve equivalent domestic gas supply. If natural gas
prices were reduced 50 cents/mmBtu by the program, it would produce an
annual savings to consumers in 2020 of about \$15 billion and a present
value savings to consumers of over \$200 billion during the 30 year life
of the loan guarantees. Considering that the present value cost to the
government would be about \$2.5 billion, investment in the National
Gasification Strategy is justified to promote a more secure,
predictable, and affordable national energy future.

The National Gasification Strategy should include concurrent funding for
research, development, demonstration, and deployment of carbon capture
and sequestration technologies that could leverage gasification
investments under the program. Details of the National Gasification
Strategy are described in a January 2005 John F. Kennedy School of
Government Paper, *National Gasification Strategy\--Gasification of Coal
& Biomass as a Domestic Gas Supply Option,* Rosenberg [et]{.underline}
[al]{.underline}., 2005 (available at:
http://bcsia.ksg.harvard.edu/publication.cfm?program=STPP&ctype=paper&item_id=473)

**5. Diversification and Conservation**

To what extent and how can demand be reduced through conservation and
efficiency measures and through diversification of energy sources used
for electric generation, industrial and other applications?

Congress should adopt a National Gasification Strategy to promote
commercial investment in gasification technologies that will manufacture
synthesis gas from domestic coal, biomass, or petroleum coke to
supplement domestic natural gas supply and reduce demand.
![](media/image1.wmf){width="6.163385826771654in"
height="4.101574803149607in"}The National Gasification Strategy has been
discussed as a supply option, but it will also reduce demand.

The program is focused on establishing loan guarantees for industrial
and electric sector gasification projects. These two sectors account for
about 60% of natural gas consumption in the U.S. and they are both
projected to significantly increase consumption over the next 20 years,
with the electric power sector demand projected to increase 90% by 2025.
Refueling industrial and electric power facilities to use gasified

Rosenberg/ John F. Kennedy School of Government

coal, biomass, or petroleum coke would help ease this demand growth.

Low natural gas price assumptions in the late 1990's (based on industry
and government projections indicating prices would remain at historic
levels) led to an unprecedented surge in the construction of natural
gas-fired power plants. Since 1995, over 230,000 mega-watts (MW) of new
natural gas generating capacity came on line, including 184,000 MW since
2000, which is more natural gas capacity in four years than the total
capacity (all fuels) added in any decade except the 1970's.

![](media/image2.wmf){width="5.993700787401575in"
height="4.131889763779528in"}Beginning around 1997, electric generator
natural gas demand growth began to accelerate as the new natural
gas-fired power plants came on-line. Between 1997 and 2004, demand from
electric generators grew 1.1 TCF, or 27 percent, while natural gas
demand from all other sectors decreased 1.8 TCF, or 10 percent (with
industrial demand declining 16 percent). Demand from the electric power
sector is currently about 5.3 TCF (25 percent of total demand), but the
existing fleet of natural gas power plants, particularly natural gas
combined cycle (NGCC) plants in deregulated markets, are operating well
below their design capacities. The underutilization of these plants
creates a demand overhang estimated to be 3.3 TCF and creates the
potential for significant increases in natural gas use from the electric
power sector without any additional capital investment.

This same fleet of NGCC power plants offers the potential for deploying
gasification technology to reduce electric sector natural gas demand
growth and generate electricity at reduced cost. At current prices,
operating the fleet of new natural gas generation is uneconomic most of
the time. Consequently, NGCC facilities built to sell power into
deregulated electricity markets are in widespread financial distress.
Some of theses facilities financed with non-recourse debt have already
been turned over to banks, and other facilities have been sold for less
than 20 percent of their original cost. Facilities built in regulate
electricity markets (and approved by state utility commissions), on the
other hand, are still operating at higher capacity factors and passing
high generating costs through to electric customers.

NGCC power plants can be refueled to use synthesis gas from coal
gasifiers. The Wabash IGCC power plant in Indiana switches back and
forth between natural gas and synthesis gas from the coal gasifier. The
conversion of a NGCC facility requires only marginal changes in piping,
values, and the turbine to run on coal syngas. About 40 to 45 percent of
the cost of an IGCC facility is the combined cycle power block, so using
existing, underutilized NGCC infrastructure for the development of IGCC
facilities could provide for significant cost savings. The conversion of
NGCC facilities to utilize coal or other gasified fuels would directly
reduce natural gas demand.

Unlike other policy approaches that would work to either expand natural
gas supply *or* reduce demand, the National Gasification Strategy would
provide additional gas supply *and* reduce demand from industrial and
electric generation users concurrently. It would produce gas while
opening the door for use of diverse domestic energy resources, including
coal, biomass and petroleum coke where natural gas is used today.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**Coal Utilization Research Council**

**(CURC)**

## Executive Summary

With the average price of natural gas expected to remain between \$5.00
and \$6.00/mmBtu through 2025, [^2] the U.S. cannot rely on natural gas
alone to fuel the majority of the projected increased demand for
electricity (See Figures 1 and 2). Coal, America's most abundant,
domestically-controlled fossil fuel resource,[^3] should be one part of
a balanced portfolio of energy alternatives designed to cost effectively
meet the energy demands heretofore anticipated as being met by natural
gas (See Figure 1).

[Policy Recommendation #1]{.underline}: CURC is proposing the
authorization of an advanced coal-based technology deployment program
that would make available tax incentives, and federal loan or risk
performance guarantees, to support the "refueling" of existing, but
underutilized, natural gas combined cycle (NGCC) units with commercially
offered IGCC technology. More than 180,000 megawatts of new natural
gas-fired units have been permitted and/or constructed since 2000. This
capacity was added in anticipation of forecasted natural gas supplies
that never materialized and at wellhead prices well below current and
projected markets. Now much of this newly constructed capacity is idle
or operating well below design parameters. CURC recommends authorizing
an advanced coal-based generation technology deployment program to
provide financial assistance directed at covering the risks associated
with retofitting an existing NGCC unit with new coal gasification
technology that would then create an integrated gasification combined
cycle (IGCC) system for the displacement of natural gas and the
generation of electricity.

[Policy Recommendation #2]{.underline}: It is also recommended that
Congress authorize and fund an advanced coal-based technology deployment
program designed to financially assist the installation and operation of
IGCC or other advanced combustion-based systems in new greenfield
applications or retrofit and repowering applications at existing coal
facilities. The deployment of an initial fleet of IGCC and other
advanced coal combustion-based systems will enable the development of
cost competitive electric generation options (by using coal) that
achieve emissions performance characteristics nearly comparable to that
attained by NGCC systems and, importantly, will provide commercially
acceptable alternatives to natural gas use. IGCC technology is also
capable of producing products other than electricity, such as fuels and
chemicals, that would allow the chemical industry and others now reliant
upon natural gas to use coal as an alternative feedstock to natural

gas. Multi-product systems (producing electricity in addition to other
products) should be included in the recommended deployment program.

[Policy Recommendation #3]{.underline}: In order to remove environmental
impact concerns and to best insure the long-term, low-cost use of coal,
it is vital that Congress adequately fund research, development and
demonstration (RD&D) in advanced coal systems. Funding for federal coal
RD&D must be maintained at recently enacted Congressional levels (FY
2004) and strategically increased in certain areas. Funding priorities
are described in the DOE/CURC/EPRI roadmap[^4] (see Figures 3 and 4), a
technology roadmap developed by and agreed to by DOE and industry. In
this regard, it is also important that Congress provide funding
assurances and federal commitments to industry partners to proceed with
FutureGen.[^5]

BACKGROUND

There are 335 gigawatts of installed coal fired generation capacity in
the U.S. today that generated 52 percent of our nation's electricity in
2003. In comparison, there are 238 gigawatts of installed natural gas
capacity in the U.S. that generated 16 percent of our nation's
electricity in 2003.[^6] Of the 238 gigawatts of natural gas capacity,
approximately 180 gigawatts has been constructed since 2000. This
construction was undertaken for a variety of reasons, the most important
being that NGCC units are relatively easy to permit and construct, have
low capital cost per kilowatt of installed capacity compared to a
pulverized coal combustion unit, and exhibit superior environmental
performance over coal-fired power generation systems. Importantly, these
systems were expected to easily meet rising demand while taking
advantage of projected long-term, low costs and plentiful supplies of
natural gas.[^7] Much of that NGCC capacity is currently underutilized,
and for some NGCC units, this is because natural gas prices have
increased substantially, from approximately \$2.50/Mcf in 1992 to over
\$6.50/Mcf in 2002.[^8]

From 1992 to 2002, the demand for natural gas increased by 2.23 billion
cubic feet (bcf)/day. Of this increase, 93.6% was due to electric
generation demand.[^9] This increase in demand for natural gas, with a
corresponding decrease in domestic gas production, caused unanticipated
price increases; many units that were constructed to operate as baseload
units have not been so dispatched and high gas prices resulted in
reduced, and in many cases, negative profit margins for NGCC plant
owners.[^10] As a result, many NGCC units are idle, underutilized, or
construction has been suspended.

The National Petroleum Council in its 2003 Report states that
traditional North American gas producing areas will provide 75 percent
of long-term U.S. gas needs, but will be unable to meet projected demand
alone. The NPC Report also states that LNG imports and available Arctic
gas could meet an additional 20-25 percent of projected demand, but
would have associated higher-costs, longer lead times, and major
barriers to development.[^11] The fact that domestic gas production and
associated prices are volatile and production may be unable to meet
projected demand, even with foreign imports, presents a major energy
security problem and a unique opportunity for refueling some of these
idle or underutilized NGCC units with coal gasification technology.

REFUEL EXISTING NGCC UNITS WITH COAL GASIFICATION

Repowering idle or underutilized NGCC plants with a coal gasifier is
technically feasible.[^12] By using coal instead of natural gas, IGCC
systems burn coal-derived synthesis gas and through this conversion of
coal to a synthesis gas, it has been shown that emissions of criteria
pollutants are nearly as clean as NGCC systems. Importantly, the
Department of Energy (DOE) has also reported that as much as 12,000
megawatts of these existing NGCC facilities are within range of rail
transportation so that it is possible to deliver coal to many of these
existing sites.[^13]

Providing financial incentives to support the conversion of these NGCC
units to IGCC would have the added benefit of reducing both the cost and
reliability issues that have to date prevented the commercial use of
IGCC technologies. Although gasifying coal is a commercially proven
process and is used throughout the world in developing chemicals, fuels
and other byproducts, the integration of coal gasification with a
combined cycle power block to produce electricity has been demonstrated
on only a limited basis in the United States. Converting NGCC plants to
coal-based IGCC and burning a domestic energy source thus presents a
unique opportunity to achieve a number of benefits, not the least of
which is to convert electricity generating units from natural gas to
coal.

FINANCIAL ASSISTANCE FOR NEW POWER PLANT APPLICATIONS

In addition to the refueling of existing natural gas fired generating
units with coal gasification systems, Congress is urged to authorize and
fund a limited duration program to provide financial incentives (tax
incentives and federal guarantees) that will operate to encourage the
use of advanced coal based generation technology (both IGCC and advanced
coal combustion systems) in new, greenfield applications or to repower
existing coal fired units. A federally assisted program providing
limited and carefully targeted incentives would insure that these
technologies are considered and used as the next generation of electric
generation capacity and constructed to meet new demand and replace aging
units. This program would also have the added benefit of reducing the
demand for natural gas in electricity generation by continuing to use
coal in an efficient and environmentally acceptable manner.

[CONTINUED AND ENHANCED FUNDING FOR COAL R&D]{.mark}

[]{.mark}

[Over the past three decades,]{.mark} coal has remained the dominant
fuel of choice for electric power generation and during that time,
technology has insured that coal use can meet increasingly more
stringent environmental policies. The challenge is to use this abundant
domestic resource in a manner that meets our nation's environmental
goals while **CURC**

preserving and enhancing our national energy security and providing low
cost power and products for the American economy. The federal
government's coal research, development and demonstration programs are
central to assuring continued technology progress.

The electricity generating industry, working in conjunction with the
Department of Energy (DOE), is developing the next generation of
coal-based generating technologies through R&D, the Clean Coal Power
Initiative (CCPI) and the FutureGen project. These programs, jointly
funded by industry and DOE, are designed to move promising technologies
along the R&D path to full-scale commercial demonstration. Industry
alone would be unable to take on the financial risks of demonstrating
the technological advancements envisioned in these projects. A way to
visualize the technology development path and the role of industry and
government is depicted in Figures 5 and 6 at the end of this document.
Technology is first developed in the laboratory, then further developed
at the pilot scale to full-scale demonstration levels. The costs of
these activities are progressively greater and in many cases, the
government's financial contribution is highest during the early stages
of technology development. As a technology matures and proceeds through
the demonstration phase and beyond, the percentage of government
contribution and involvement can be expected to be less. A technology is
considered to be successful when it is used commercially.

Each technology development step is important to the success of the
technology, and government plays a vital role in each phase. If the CCPI
and FutureGen programs are successful, the technologies being
demonstrated through these programs (many of which were initially
developed through the DOE's R&D programs) are expected to be available
for widespread deployment in the timeframes suggested in the
DOE/CURC/EPRI coal technology roadmap. The roadmap is a useful tool in
examining the critical technologies that must be successfully developed
(and adequately funded), and also indicates the timelines for when that
development must take place if the Nation is to have highly efficient
(near 55 percent conversion to useful energy) coal energy production
facilities available for commercial deployment by 2020. These same
technologies will be capable of near zero emissions to the air or water
and will be able to provide low cost, competitive electricity or other
useful products to end use consumers. The Committee may wish to consider
using the roadmap as a tool to guide government and industry's
collaborative research and development efforts and oversee the coal
technology R&D programs of the DOE and others to insure we remain on
course toward near zero emissions from coal use.

CONCLUSIONS:

Not only would accelerated commercialization of clean coal technologies
relieve the pressures on the natural gas industry, it would also keep
U.S. industry in the forefront of the world marketplace, as well as
create jobs and favorable economic contributions to the U.S. economy.
Federal incentives would also help to promote economic growth, energy
price stability, fuel diversity, and national energy security by
allowing coal to remain a readily available and competitive source of
clean fuel for electric generation.

> **Figure 1: U.S. Natural Gas Production Treadmill** -- there is
> concern that domestic natural gas production will remain flat and
> possible decrease while demand will continue to rise. (Sources:
> Simmons & Company International, EIA Natural Gas Monthly, Baker Hughes
> Rig Count)
>
> ![](media/image3.png){width="7.309722222222222in"
> height="3.772222222222222in"}

#######  

####### 

####### ![](media/image4.png){width="6.416666666666667in" height="3.717361111111111in"}Figure 2: Growth of the U.S. electricity market is significant and tied to economic growth (Sources: EIA - Annual Energy Review 2001, Annual Energy Outlook 2003 Reference Case)

Figure 3: DOE/CURC/EPRI Roadmap Environmental Performance Goals

+-------------------+------------------+------------+-----------------+
|                   | **New Plant**    | **2010**   | **2020**        |
|                   |                  |            |                 |
|                   | **Technology Of  |            |                 |
|                   | Today**          |            |                 |
+-------------------+------------------+------------+-----------------+
| **Air Emissions** | 98% SO~x~        | 99%        | \>99%           |
|                   | removal          |            |                 |
+-------------------+------------------+------------+-----------------+
|                   | 0.10 lb/MM Btu   | 0.05       | \<0.01          |
|                   | NO~x~            |            |                 |
+-------------------+------------------+------------+-----------------+
|                   | 0.01 lb/MM Btu   | 0.005      | 0.002           |
|                   | PM               |            |                 |
+-------------------+------------------+------------+-----------------+
|                   | Hg               | 90%        | 95%             |
|                   | \"Co-benefits\"  |            |                 |
+-------------------+------------------+------------+-----------------+
| **Byproduct       | 30%              | 50%        | Near 100%       |
| Utilization**     |                  |            |                 |
+-------------------+------------------+------------+-----------------+

**Figure 4: DOE/CURC/EPRI Roadmap Process Cost and Performance Goals**

  ----------------------- ------------------ ------------- ---------------
                          **New Plant        **2010**      **2020**
                          Technology of                    
                          Today**                          

  **Efficiency (HHV)**    40%                45-50%        50-60%

  **Availability**        \>80%              \>85%         \~90%

  **Capital Cost, \$/kW** 1000-1300          900-1000      800-900

  **Cost of Electricity,  35                 30-32         \<30
  \$/MWh**                                                 
  ----------------------- ------------------ ------------- ---------------

![](media/image5.wmf){width="4.916666666666667in" height="3.6875in"}
**Figure 5**

![](media/image6.wmf){width="4.916666666666667in" height="3.6875in"}
**Figure 6**

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**American Gas Association**

**(AGA)**

**Statement of the American Gas Association**

## 

## Executive Summary

Natural gas demand has been increasing more rapidly than our ability to
produce more supply, and the resultant tight market has exhibited higher
and more volatile gas prices. Without aggressive action by government,
this unstable situation will persist. Increasing the ability to produce
gas supply is necessary for economic growth and consumer well being, and
it can be compatible with environmental protection.

The Lower-48 has provided about 85 percent of the total U.S. gas supply
in recent years. This percentage likely will decline over time, but it
will continue to provide the majority of our gas for the foreseeable
future. Increasing or even maintaining current Lower-48 production
levels without increased land access is, at the very best, problematic.
Maintaining natural gas production levels, and increasing them, will
require increased land access in the Lower 48. Congress should review
existing restrictions on land access to determine which remain truly
necessary to protect environmental values given the considerable changes
in exploration and production technology in the last twenty-five years.
Congress should also enact provisions to streamline and expedite the
various permitting processes and should authorize and appropriate
adequate funding for the agencies charged with these responsibilities.

New sources of gas supply, including Alaska and imported liquefied
natural gas (LNG), must also account for a larger share of our gas
supply portfolio in the future. Congress last year took action to
encourage Alaskan supply and should take additional action to encourage
liquefied natural gas supply by codifying certain federal policies
concerning open-access at marine LNG import terminals and reaffirming
exclusive federal jurisdiction over LNG siting.

Congress should also enact accelerated tax distribution to ensure that
ample infrastructure exists to meet the demand for natural gas.

A number of provisions contained in the November 18, 2003, conference
report to the Energy Policy Act of 2003 would streamline and expedite
both natural gas supply and natural gas infrastructure. Congress should
adopt these provisions as a part of any action to address natural gas
supply in 2005. (Additionally, A summary of AGA 2005 priorities is
attached.)

**5. Diversification and Conservation**

To what extent and how can demand be reduced through conservation and
efficiency measures and through diversification of energy sources used
for electric generation, industrial and other applications?

At present there is no significant ability to increase natural gas
production in the very near term because production is essentially
occurring at full capacity. In this context, additional demand---whether
generated by weather or economic activity---produces great volatility in
prices. In essence, additional demand rationalizes the market through
price.

In this context, only conservation and efficiency measures can, in the
near term, moderate demand and, therefore, moderate prices. Conservation
can have an impact in the short term, but efficiency measures can only
be effective in the longer term. AGA strongly endorses addressing the
nation's energy policy on a comprehensive basis, with conservation and
energy efficiency playing an essential role. The conference report on
the Energy Policy Act of 2003 includes a large number of energy
conservation and energy efficiency provisions, addressed not only to
natural gas but also to almost all fuel sources. Congress should move
forward with these provisions as an integral element of a comprehensive
energy bill.

AGA also believes that the nation should rely upon a full portfolio of
energy sources to meet its energy needs. A balanced portfolio of energy
sources is in the national interest.

**Adopt full fuel-cycle energy-efficiency analysis.** Moreover, energy
policy should seek to put each fuel to its most effective use.
Regrettably our energy policy today is not founded upon this principle.
In most instances, for example, on a life-cycle basis and from the
perspective of allocative efficiency, natural gas is most efficient in
direct-flame applications---space heating, cooking, and water heating.
On a life cycle, full-fuel-cycle basis, electricity generally is
considerably less efficient for these uses. Thus, by ignoring this
fundamental precept, our energy policy today misallocates resources.
Energy policy would make a great step forward in this regard by
performing its analysis on a full-fuel-cycle, full life-cycle basis.

Congress should move forward in this realignment of the nation's
approach to energy efficiency. To make federal energy usage measurement
accurate, Congress should direct the federal agencies that sponsor
promotional and rating programs for energy-efficient appliances, homes,
and buildings (*i.e.,* DOE, EPA Energy Star, etc.) to base those
programs on total energy usage (in addition to measuring the energy
usage at the site of consumption). All other things being equal, this
shift would tend to shift gas

toward direct flame applications and somewhat away from consumption in
generating peak electricity, resulting in a more efficient usage of the
nation's resources.

**Reliance on market forces.** AGA also believes that government policy
should not seek to interfere in the market decisions that result in the
nation's energy portfolio. High natural gas prices as we are
experiencing at the moment tend to produce calls for energy allocation
schemes (for example, suggestions that government policy should
affirmatively discourage the use of natural gas in the generation of
electricity). Past events should provide ample proof that such calls, if
accepted, always produce new, unintended, and unforeseen deleterious
consequences. AGA believes that the market, if left unhindered, will
produce a diverse and robust energy portfolio for the nation.

**Encourage innovative gas utility rate proposals that reward utilities
for encouraging conservation and energy efficiency.** Additionally, from
the perspective of AGA and its members, the goals of conservation and
energy efficiency are often ill served by the rate and cost recovery
mechanisms employed at the retail level by local natural gas utilities.
More often than not utility rates are designed on a volumetric basis,
where utility efforts to encourage conservation and reduce natural gas
consumption result in financial harm to the utility. These traditional
rate mechanisms run counter to public policies regarding conservation
and energy efficiency. This need not be the case. Recently several
states have adopted innovative rate structures that align the utility's
economic interests and the goals of conservation and energy efficiency.
Other state public utility commissions will soon be considering similar
proposals. Adoption of these mechanisms should reduce natural gas
consumption and reduce overall consumer bills while allowing natural gas
utilities to earn their authorized returns. Last year leading
environmental and energy conservation organizations joined the American
Gas Association in supporting such innovative gas utility proposals.

**Senate Energy and Natural Resources Committee**

**Natural Gas Conference**

**American Council for an Energy-Efficient Economy (ACEEE)**

## Summary

ACEEE research shows that energy efficiency is the most viable near-term
strategy for moderating natural gas prices, and is also vital to
stabilizing longer-term gas markets. Our proposal is based on a recent
ACEEE analysis, which shows that if we can reduce gas demand by as
little as 4% over the next five years, we can reduce wholesale natural
gas prices more than 20%. These savings would put over \$100 billion
back into the U.S. economy, at a cost of \$30 billion in new investment,
of which less than one-quarter would be public funds at a combination of
the federal and state levels.

Moreover, this investment would help bring back U.S. manufacturing jobs
that have been lost to high gas prices, and would help relieve the
crushing burden of natural gas costs experienced by many lower-income
households. Importantly, much of the gas savings in our analysis come
from electricity efficiency measures, because so much electricity is
generated by natural gas, often inefficiently.

The proposed policy solutions, some of which were contained in H.R. 6
and S. 2095 in the 108^th^ Congress, are:

1.  **Set end-use efficiency performance targets for electric and gas
    utilities.**

2.  **Create tax incentives for high-efficiency technologies.**

3.  **Accelerate federal appliance efficiency standards.**

4.  **Support advanced building energy codes.**

5.  **Expand support for Combined Heat and Power (CHP).**

6.  **Increase funding for energy efficiency research, development, and
    deployment.**

7.  **Conduct a national efficiency and conservation campaign.**

    ACEEE offers proposals in three of the Committee's eight areas of
    focus: (5) diversification and conservation, (6) tax incentives,
    and (7) investment. The preponderance of our proposals are presented
    under area (5). More detailed estimates of energy and natural gas
    savings are provided in our comments under areas (5) and (6).

    **5. Diversification and Conservation**

*To what extent and how can demand be reduced through conservation and
efficiency measures and through diversification of energy sources used
for electric generation, industrial and other applications?*

**Introduction**

Energy efficiency is the best available policy tool for balancing U.S.
natural gas markets in the near term, and should thus be a cornerstone
of any balanced national energy policy. U.S. gas production and delivery
can be increased on the margin---in the medium term---through energy
industry investments and policy measures. However, these efforts will
not affect U.S. gas markets for several years due to their long lead
times, and they will not ultimately reverse the long-term decline in
U.S. gas production. Imports could also provide additional supply, but
as LNG, they will come at a price premium, and also bear safety and
national security risks by further exposing the U.S. to international
energy markets. Since most new supply initiatives are likely to come at
a price premium, market forecasts are for higher prices into the
foreseeable future.

Given the limitations and cost premiums associated with natural gas
supply options, Congress must consider options to manage demand as part
of a balanced energy policy. Energy efficiency and conservation are
proven resources for moderating energy demand, and are also the most
effective tools to apply in the near-term to bring balance to gas
markets. By combining aggressive demand management with prudent supply
development, we can stabilize natural gas markets and husband this
strategic fuel to support America's economic growth and environmental
protection.

## 

## Efficiency's Track Record and Current Potential

## 

## Energy efficiency is a quiet but effective energy resource, contributing substantially to our nation's economic growth and increased standard of living over the past 30 years. Energy efficiency improvements since 1973 accounted for approximately 25 quadrillion Btu's in 2002, which is about 26% of U.S. energy use and more energy than we now get annually from coal, natural gas, or domestic oil sources. 

Even though the United States is much more energy-efficient today than
it was 25 years ago, enormous potential remains for additional
cost-effective energy savings. Some newer energy efficiency measures
have barely begun to be adopted. Studies by the Department of Energy's
national laboratories, by ACEEE, and by other experts show that we can
reduce national energy use 20% to 30% below baseline forecasts over the
next 15-20 years.[^14] [^15] California turned to energy efficiency in
its 2001 energy emergency,

reducing energy use by 7%[^16] at a cost of about 3 cents per kWh,[^17]
less than the typical average wholesale price of electricity.

While much of the research literature focuses on energy efficiency in
the electricity sector, the gas-intensiveness of marginal electricity
generation means that saving electricity produces significant natural
gas savings from the electric power generation sector. In terms of
direct natural gas end-use efficiency, ACEEE's preliminary research on
natural gas energy efficiency potentials shows a number of
cost-effective efficiency measures that would collectively save more
than 10% of U.S. gas usage by 2020. A sample of these measures is shown
in Table 1.

# Table 1. A Sample of Natural Gas Energy Efficiency Measures

+---+-------------------------+--------+------+--------+------+--------+
| # |                         | **Cur  | **   | *      | *    | **Ave  |
| # |                         | rent** | Effi | *Units | *Pot | rage** |
| # |                         |        | cien | for    | enti |        |
| # |                         | **     | cy** | Effi   | al** | **Cost |
|   |                         | Effici |      | ciency |      | of**   |
| M |                         | ency** | **   | Ta     | **G  |        |
| e |                         |        | Targ | rget** | as** | **S    |
| a |                         |        | et** |        |      | aved** |
| s |                         |        |      |        | **S  |        |
| u |                         |        |      |        | avin | **En   |
| r |                         |        |      |        | gs** | ergy** |
| e |                         |        |      |        |      |        |
|   |                         |        |      |        | **In | **(\   |
|   |                         |        |      |        | 20   | $/ther |
|   |                         |        |      |        | 20** | m)\*** |
|   |                         |        |      |        |      |        |
|   |                         |        |      |        | **   |        |
|   |                         |        |      |        | (TBt |        |
|   |                         |        |      |        | u)** |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Ind\'l management       | Typ.   | 8%   | s      | 402  | 0.351  |
|   | practices               | plant  |      | avings |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 2 | Comm\'l building        | 149    | 134  | k      | 362  | 0.229  |
|   | retrocommissioning      |        |      | Btu/sf |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 3 | Res duct sealing &      | Avg.   | 20%  | H&C    | 310  | 0.450  |
|   | infiltration reduction  | home   |      | svgs   |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 4 | Residential windows     | .      | .33  | U-F    | 233  | 0.154  |
|   |                         | 64/.65 | /.44 | actor/ |      |        |
|   |                         |        |      |        |      |        |
|   |                         |        |      | SHGC   |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 5 | Commercial furnaces and | st     | P    | s      | 181  | 0.082  |
|   | boilers                 | andard | ower | avings |      |        |
|   |                         | units  | bu   |        |      |        |
|   |                         |        | rner |        |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 6 | New homes               | Avg.   | 30%  | H&C    | 178  | 0.401  |
|   |                         | home   |      | svgs   |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 7 | Res. furnaces/boilers   | 82%    | 90%+ | AFUE+  | 162  | 0.479  |
|   | (equip. & install.)     |        |      |        |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 8 | Sector-based comm       | 0.5    | 0.4  | the    | 162  | 0.361  |
|   | retrofit (e.g. offices) |        |      | rms/sf |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 9 | Advanced commercial     | 1      | .45  | U/SHGC | 145  | 0.301  |
|   | glazing                 | .3/.69 | /.45 |        |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Comm\'l new             | 90.    | 30%  | s      | 140  | 0.322  |
| 0 | construction            | 1-1999 |      | avings |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Res. combo gas space &  | 82/59  | 9    | A      | 85   | 0.543  |
| 1 | water htg unit          |        | 0/90 | FUE/EF |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Comm\'l cooking and     | typ    | impr |        | 76   | 0.300  |
| 2 | ventilation             | equip  | oved |        |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Major residential       | F      | 21%  | s      | 53   | -0.859 |
| 3 | appliances              | ederal |      | avings |      |        |
|   |                         | Sta    |      |        |      |        |
|   |                         | ndards |      |        |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Res. gas water htg      | 0.59   | 0.62 | Energy | 52   | 0.370  |
| 4 | (stand-alone units)     |        |      | Factor |      |        |
+---+-------------------------+--------+------+--------+------+--------+
| 1 | Bldg. operator training | Typ    | Be   |        | 51   | 0.063  |
| 5 | & certification         | O&M    | tter |        |      |        |
+---+-------------------------+--------+------+--------+------+--------+
|   |                         | TOTALl |      |        | 2    |        |
|   |                         |        |      |        | ,590 |        |
+---+-------------------------+--------+------+--------+------+--------+

\* Note: Cost of Saved Energy is the cost of a measure per unit of unit
of fuel saved. Measures costing less than retail gas prices (currently
averaging about \$1.30/therm for residential customers) are
cost-effective. A negative cost of saved energy means that savings in
non-energy costs can fully pay for the measure.

Source: Nadel, Steven, 2002, *Screening Market Transformation
Opportunities: Lessons from the Last Decade, Promising Targets for the
Next Decade*, Washington, DC: American Council for an Energy-Efficient
Economy available online at <http://aceee.org/pubs/u022full.pdf>.

**Documenting Efficiency's Effect on Reducing Wholesale Gas Prices**

Energy efficiency investments can help reduce natural gas prices. In
2003, ACEEE conducted an analysis of the effect energy efficiency and
renewable energy could have on natural gas wholesale prices. In the
tight markets we are experiencing, small changes in demand or supply
have large impacts on price. To test this market principle, we used one
of the best available computer models of U.S. natural gas markets,
designed and operated by Energy and Environmental Analysis, Inc., the
firm who performed most of the modeling for the National Petroleum
Council (NPC)'s 2003 natural gas study. We analyzed small (2-4%) changes
in natural gas demand over the next 1-5 years.

What we found was that moderate gains in end-use efficiency over the
next five years can reduce wholesale gas prices by about 20%, or about
\$1 per thousand cubic feet. This would bring substantial price relief
to all gas consumers, particularly farmers and manufacturers. Achieving
these results would cost about \$30 billion in new investment, including
about \$7 billion in public expenditures, but would generate over \$100
billion in direct economic benefits, including direct energy savings to
customers who invest in efficiency and lower gas prices to all energy
users. The ratio of benefits to costs would be more than three to
one.[^18]

Our findings are quite consistent with those of the NPC study. The NPC
report calls for energy efficiency to offset about 4% of demand growth
by 2010, and about 19% by 2025.[^19] It also estimates that 2010
wholesale prices would fall by about 20% under its Balanced Future
policy scenario.[^20] Our analysis simply took a more detailed look at a
specific efficiency investment scenario, using the same analytical
approach and tools. We updated this analysis in 2004, under tighter
market conditions. As one would expect, the energy efficiency investment
scenario produced even more dramatic price drops in wholesale gas
prices, up to 26% at the Henry Hub in 2010.[^21]

A major finding of our study, which is not apparent in the NPC report,
was that more than half of the natural gas savings came indirectly,
through investments in electricity efficiency. This effect stems from
the fact that natural gas has become the marginal generating fuel in
many power markets, so that electricity savings tend to displace gas
used for generation more than any other fuel. Also, because the average
efficiency of natural gas generation remains relatively low, especially
at peak times, saving one unit of electricity backs out several units of
gas at the generator. Thus saving electricity is a key strategy for
saving natural gas, and adding electricity-saving measures to the list
in Table 1 would greatly expand the potential for gas demand reduction.

### *Policy Recommendations* 

ACEEE recommends eight policy actions, involving federal, state, and
private initiatives. Some of these, including appliance efficiency
standards, tax incentives, increased authorizations for efficiency RD&D,
and support for combined heat and power, were addressed in the H.R. 6
conference report and in S. 2095 in the 108^th^ Congress. The others
have proven successful at the state level, could be expanded to other
states, and should be considered for inclusion in federal energy policy.

1.  **Create and expand end-use efficiency performance standards and
    public benefits funds for utilities.** Texas's electricity
    restructuring law (SB-7 1999)[^22] created a requirement for
    electric utilities to offset 10% of their demand growth through
    end-use energy efficiency, and enabled them to use public benefits
    funds for this purpose. Pennsylvania's new Advanced Energy Portfolio
    Standard includes end-use efficiency among other clean energy
    resources. Other states have set targets for energy savings from
    utility programs. Congress should set electric and gas end-user
    savings targets for utilities, with flexibility to achieve them
    through a market-based trading system. States should also reform
    their utility regulations, so that utility revenues and profits are
    sustained regardless of fluctuations in sales -- several states have
    already taken this step. To help fund efficiency investment in this
    sector, 18 states collectively spend over \$1 Billion on public
    benefits efficiency programs funded through utility bill fees. Other
    states, and Congress, should follow this example, and states with
    current programs should increase funding levels.

2.  **Create tax incentives for high-efficiency technologies.** Congress
    should pass incentives for energy efficiency technologies
    immediately, based on the provisions in H.R. 6 and S. 2095 from the
    last Congress, with minor updates. Our specific recommendations are
    provided in our response to question 6.

**Accelerate federal efficiency standards.** Congress should adopt the
standards contained in H.R. 6 and S. 2095, expanded to include recent
consensus agreements with manufacturers. These agreements call for
establishing specific negotiated standards on commercial packaged air
conditioners, refrigerators and freezers and on

residential ceiling fans and dehumidifiers. We are also working with
manufacturers of other products and expect to complete several
additional consensus agreements in the next month. In addition, the
Department of Energy's appliance efficiency standards program currently
has a rulemaking underway for residential heating equipment. DOE should
accelerate this rule, allowing cold-weather states to elect a higher
standard level, and including furnace fan efficiency in the standard.
DOE is questioning whether it has authority to set separate standards
for cold-weather states and for furnace fans. H.R. 6 and S. 2095
specifically grant authority to set furnace fan standards; Congress
should expand this provision to clarify that DOE also has authority to
set separate standards for cold and warm states, provided such standards
meet all of the provisions in the underlying law.

3.  **Support Advanced Building Codes.** Building codes are an important
    element in the efficient policy portfolio, insuring that buildings
    built today place minimum strain on tomorrow's energy supplies and
    put minimum pressure on market prices. The International Energy
    Conservation Code (IECC) is widely adopted in states, but many
    states need to update their codes. DOE should both push for more
    aggressive updates to model codes like the IECC and ASHRAE 90.1, and
    provide more support to states and local governments in implementing
    better codes.

4.  **Expand support for Combined Heat and Power (CHP).** CHP generates
    electricity far more efficiently than the majority of the
    conventional natural gas generation. Congress should expand its
    support for CHP by passing the proposed CHP tax credit now under
    consideration as part of the package of energy efficiency and
    renewable tax credits. The Congress should also include language in
    the energy bill that encourages states and utilities to provide fair
    and reasonable interconnection and tariff treatment for new CHP
    systems.

5.  **Increase funding for efficiency deployment and R&D programs.** We
    recommend Congress increase FY 2005 appropriations for federal
    programs that deliver energy savings to consumers, including the
    Energy Star programs, the Weatherization program, and DOE's suite of
    other deployment programs, and that the Administration follow suit
    in its FY 2006 budget request. These programs have been shown to be
    effective in the limited geographic areas, and at the limited
    funding levels in which they have operated. With added funding, they
    can quickly ramp up energy savings in the next few years. The Energy
    Star program in particular is positioned to achieve substantial
    short-term savings with additional funding -- we recommend that an
    additional \$20 million per year be provided for this highly
    successful program. Longer-term R&D on electricity- and gas-saving
    technologies is also needed.

6.  **Conduct a national efficiency and conservation campaign.** The
    Administration should lead a partnership effort among efficiency
    manufacturers, farm organizations, utilities, states, and others to
    accelerate efficiency investments and encourage short-term behavior
    modifications. California spent about \$30 million in 2001 on a
    concerted public awareness campaign; evaluations indicate that this
    campaign was responsible for about one-third of the energy savings
    realized in that year.

ACEEE is examining the savings in energy and natural gas available from
each of these policies. On a preliminary basis, we estimate that the
policies outlined above would save over 150 billion kilowatt-hours,
almost 3 trillion cubic feet of natural gas, and over three Quads
(Quadrillion Btu) of total energy for 2006 through 2008, and about 4
trillion kilowatt-hours, over 60 trillion cubic feet of natural gas, and
more than 80 Quads cumulatively through 2020. More detailed estimates
will be available in time for the January 24, 2005 Committee workshop.

These policies have been shown to be effective at the federal or state
levels. They are also a good economic investment, yielding benefits over
three-times greater than the combined private and public investments
needed to achieve these savings. These efficiency initiatives are also
the only near-term set of tools available to the federal government as
it seeks to bring relief to natural gas markets. For these reasons, we
urge Congress to make energy efficiency a major focus in its efforts to
forge a balanced and effective energy policy for natural gas.

[^1]:
    > Report of the President's National Energy Policy Development
    > Group, May 2001, page xiii.

[^2]: EIA Annual Energy Outlook 2005.

[^3]: There are 250 years of coal supplies in the U.S. at current rates
    of consumption.

[^4]: The roadmap is the product of a collaborative effort by the
    Department of Energy (DOE), the Coal Utilization Research Council
    (CURC), and the Electric Power Research Institute (EPRI).  The
    roadmap, which can be found on the CURC ([www.coal.org)]() and DOE
    ([www.netl.doe.gov](http://www.netl.doe.gov/)) websites, includes
    details on the specific technology advances, associated research,
    development and demonstration needs, and costs to achieve the
    proposed goals.

[^5]: The FutureGen Project is a Presidential Initiative to accelerate
    the development of near-zero net emissions technology by building
    and operating a prototype coal-fueled power plant of the future.

[^6]: EIA Electric Power Monthly, November 15, 2004 and EIA Electricity
    Power Annual, December 2004.

[^7]: SAIC Report by Vaux, et al, "Potential for NGCC Plant Conversion
    to a Coal-Based IGCC Plant -- A Preliminary Study," May 2004.

[^8]: EIA Monthly Gas Prices, May 2004.

[^9]: National Coal Council Report, "Opportunities to Expedite the
    Construction of Coal Fired Power Plants," November 2004.

[^10]: SAIC Report by Vaux, et al., "Potential for NGCC Plant Conversion
    to a Coal-Based IGCC Plant -- A Preliminary Study," May 2004.

[^11]: National Petroleum Council Report, "Balancing Natural Gas Policy
    and Fueling the Demands of a Growing Economy", September 2003, p.
    16.

[^12]: EPRI Report \# 1004233, "Phased Construction of Natural Gas
    Combined Cycle Plants with CO2 Recovery" November 2002.

[^13]: SAIC Report by Vaux, et al prepared for DOE, "Potential for NGCC
    Plant Conversion to a Coal-Based IGCC Plant -- A Preliminary Study,"
    May 2004.

[^14]: Interlaboratory Working Group, 2000, *Scenarios for a Clean
    Energy Future*. Washington, D.C.: Interlaboratory Working Group on
    Energy-Efficient and Clean-Energy Technologies, U.S. Department of
    Energy, Office of Energy Efficiency and Renewable Energy.

[^15]: Nadel and Geller, 2001, *Smart Energy Policies: Saving Money and
    Reducing Pollutant Emissions through Greater Energy Efficiency*,
    www.aceee.org/energy/reports.htm. Washington, DC: American Council
    for an Energy-Efficient Economy.

[^16]: California Energy Commission, 2001, *Emergency Conservation and
    Supply Response 2001.* Report P700-01-005F. Sacramento, CA.

[^17]: Global Energy Partners, 2003, *California Summary Study of 2001
    Energy Efficiency Programs, Final Report.* Lafayette, CA.

[^18]: Elliott et al. 2003. *Natural Gas Price Effects of Energy
    Efficiency and Renewable Energy Practices and Policies,*
    <http://aceee.org/energy/efnatgas-study.htm>*.* American Council for
    an Energy-Efficient Economy, Washington, DC.

[^19]: National Petroleum Council. 2003. Op. cit., Vo. 1, page 8, Figure
    3.

[^20]: Ibid., page 11, Figure 6.

[^21]: Elliott, R.N. 2004. *ACEEE Fall 2004 Update on Natural Gas
    Markets, <http://aceee.org/energy/fall04ngmkt.pdf>.* American
    Council for an Energy-Efficient Economy, Washington, DC.

[^22]: See <http://texas.efficiencylink.net/> for additional
    information.