Testimony 

Before the Subcommittee on Energy and 

Resources, Committee on Government 

Reform, House of Representatives

United States Government Accountability Office

GAO

For Release on Delivery 

Expected at 2:00 p.m. EST 

Wednesday, March 16, 2005 MEETING ENERGY 

DEMAND IN THE 21ST

CENTURY 

Many Challenges and Key 

Questions 

Statement of Jim Wells, Director 

Natural Resources and Environment 

GAO-05-414T 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

Highlights of GAO-05-414T, a testimony to 

Darrell Issa, Chairman, Energy and 

Resources Subcommittee, Committee on 

Government Reform, House of 

Representatives 

March 16, 2005

MEETING ENERGY DEMAND IN THE 21ST

CENTURY 

Many Challenges and Key Questions 

America’s demand for energy has, in recent decades, outpaced its ability to 

supply energy. As a result, the country has witnessed rapid price increases 

and volatility in some markets, such as gasoline, and reliability problems in 

others, such as electricity, where the blackout in 2003 left millions in the 

dark. Given these recent and sometimes persistent problems, as well as 

concerns about the impacts of energy consumption on air, water, and other 

natural resources, there is a growing sense that action is needed. 

Today, fossil fuels (coal, oil, and natural gas) provide about 86 percent of our 

total energy consumption, with the rest coming from nonfossil sources such 

as nuclear (8 percent) and renewables, such as hydroelectric energy and 

wind power (6 percent). Overall, the majority of the nation’s energy 

consumption is met by domestic production. However, imports of some 

fuels have risen. For example, over the past 20 years, imports—primarily oil 

and natural gas—have doubled, and in 2003 these imports comprised about 

one-third of total domestic energy consumption. Imports are expected to 

increase still further in order to meet future domestic consumption. In light 

of the current and expected levels of imports, the United States is, and will 

increasingly be, subject to global market conditions, with the transportation 

sector especially affected. Global markets may face future difficulties in 

meeting the growing energy demands of developed nations while also 

meeting the demands of the developing world, particularly considering the 

explosive growth in some economies, such as China’s and India’s. If world 

supplies for some fuels do not keep pace with world demand, energy prices 

could rise sharply. 

GAO believes that a fundamental reexamination of the nation’s energy base 

and related policies is needed and that federal leadership will be important 

in this effort. To help frame such a reexamination, we offer three broad 

crosscutting observations. First, regarding demand, the amount of energy 

that needs to be supplied is not fate, but our choice. Consumers, whether 

businesses or individuals, choose to use energy because they want the 

services that energy provides, such as automated manufacturing and 

advanced computer technologies. Accordingly, consumers can play an 

important role in using energy wisely, if encouraged to adjust their usage in 

response to changes in prices or other factors. Second, all of the major fuel 

sources—traditional and renewable—face environmental, economic, or 

other constraints or trade-offs in meeting projected demand. Consequently, 

all energy sources will be important in meeting expected consumer demand 

in the next 20 years and beyond. Third, whatever federal policies are 

chosen, providing clear and consistent signals to energy markets, including 

consumers, suppliers, and the investment community, will help them 

succeed. Such signals help consumers to make reasoned choices about 

energy purchases and give energy suppliers and the investment community 

confidence that policies will be sustained, reducing investment risk. 

Plentiful, relatively inexpensive 

energy has been the backbone of 

much of modern America’s 

economic prosperity and the 

activities that essentially define our 

way of life. The energy systems 

that have made this possible, 

however, are showing increasing 

signs of strain and instability, and 

the consequences of our energy 

choices on the natural environment 

are becoming more apparent. The 

reliable energy mainstay of the 20th

century seems less guaranteed in 

the 21st century. 

As a nation, we have witnessed 

profound growth in the use of 

energy over the past 50 years—

nearly tripling our energy use in 

that time. Although the United 

States accounts for only 5 percent 

of the world’s population, we now 

consume about 25 percent of the 

energy used each year worldwide. 

Looking into the future, the Energy 

Information Administration (EIA) 

estimates that U.S. energy demand 

could increase by about another 30 

percent over the next 20 years. 

To aid the subcommittee as it 

evaluates U.S. energy policies, GAO 

agreed to provide its views on 

energy supplies and energy demand 

as well as observations that have 

emerged from its energy work. 

This testimony is based on GAO’s 

published work in this area, 

conducted in accordance with 

generally accepted government 

auditing standards, and on EIA’s 

Annual Energy Review, 2003 and its

Annual Energy Outlook, 2005. 
Page 1 GAO-05-414T 

Mr. Chairman and Members of the Subcommittee: 

I am pleased to participate in the Subcommittee’s hearing on the future 

direction of our nation’s energy policies. Plentiful, reliable, inexpensive 

energy—in its various forms, including gasoline, natural gas, and 

electricity—has been the backbone of much of modern American 

economic prosperity and the activities that essentially define the American 

lifestyle. The United States accounts for only 5 percent of the world’s 

population but consumes about 25 percent of the energy used each year 

worldwide. U.S. energy demand has increased over 25 percent since 1980, 

and in 2003 amounted to the equivalent of about 790 billion gallons of 

gasoline, or roughly 2,800 gallons for every man, woman, and child in the 

country. 

As shown in figure 1, energy consumption in the United States has grown. 

While energy demand across residential, commercial, and the industrial 

sectors includes demand for all types of energy sources, such as oil, coal, 

and natural gas, demand in the transportation sector is almost completely 

oil dependent. 
Page 2 GAO-05-414T 

Figure 1: Energy Consumption by Sector, 1949-2003 

Note: BTU stands for British thermal units and is a standard unit used to measure energy 

consumption. In 2001, the average household in the United States consumes about 92 million BTUs 

per year. 

Increasing demand across our economy has, at times, strained our energy 

system. For example, in recent years, natural gas prices have nearly tripled 

and crude oil prices have more than doubled, and gasoline prices now 

exceed $2.00 per gallon in Washington, D.C., San Francisco, and other 

major cities. In addition, our energy supplies have also witnessed 

problems, most notably in 2003 when the largest blackout in U.S. history 

left as many as 50 million people in the dark. Further, there have been 

indications that our energy infrastructure has not kept up with changes in 

our demand for energy as illustrated by (1) the nation’s refinery capacity 

not keeping pace with the increasing demand for gasoline, leading to 

increased imports of gasoline, and (2) the electricity sector’s transmission 

constraints periodically limiting the flow of electricity in parts of the 

country. Lastly, our energy dependence on other countries has increased, 
Page 3 GAO-05-414T 

raising greater concern about international turmoil in the Middle East, 

Russia, Venezuela, and elsewhere. 

As shown in figure 2, the United States has increased production 

(generally through the extraction and use of oil, coal, and other fuels from 

the land) of a wide range of fuels over the past 50 years to help meet 

consumer demand. Today, fossil fuels account for about 80 percent of our 

total domestic energy production, with the rest coming from nonfossil 

sources such as nuclear electric energy, hydroelectric energy, and 

nonhydroelectric renewable energy sources, such as wind power. Despite 

the fact that the United States produces most of its energy, imports of 

some fuels are rising to meet growing U.S. consumption. 

Figure 2: U.S. Energy Production, 1949-2003 
Page 4 GAO-05-414T 

As shown in figure 3, over the past 50 years net imports of energy have 

increased. This increase has been most dramatic over the past 20 years, 

during which time energy net imports more than doubled, reaching 32 

percent of our total consumption in 2003. The vast bulk of these imports 

are oil and natural gas. 

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

1949-2003 

Nearly all energy is supplied by private companies that also own the 

energy supply infrastructure. Some of these companies are multinational 

corporations with worldwide shareholders, while others operate only 

locally. Further, most of the fuels used in the energy sector—including oil, 

coal, natural gas, and nuclear fuel—are sold at prices determined by 

competitive markets and, in some cases (such as crude oil), international 

markets. 

Over the years, the federal government has intervened in energy markets, 

providing tax credits and other benefits to suppliers and consumers of 

traditional and renewable energy. For example, the federal government 

has granted tax incentives, direct subsidies, and other support to the 

petroleum industry, as well as tax and other benefits to the ethanol 
Page 5 GAO-05-414T 

industry, in an effort to increase U.S. energy supplies. Similarly, the federal 

government has also provided tax credits for the production of energy 

using renewable energy resources, such as wind turbines. While these tax 

incentives generally work to increase the production of energy, they also 

generally decrease revenues accruing to the U.S. Treasury. 

Looking into the future, daunting challenges lie ahead. As shown in figure 

4, the Energy Information Administration (EIA), within the Department of 

Energy (DOE), estimates that U.S. energy demand could increase by about 

another 30 percent over the next 20 years, if current trends hold. Meeting 

these projected increases could be more challenging in the natural gas and 

petroleum industries, because consumption of these fuels is forecast to 

increase by 37 percent and 33 percent, respectively, during that period. In 

addition, forecast imports for these two fuels are expected to rise by over 

140 percent and 60 percent, respectively. 
Page 6 GAO-05-414T 

Figure 4: Forecast Energy Consumption, 2002-2025 

Unless changes are made, meeting the forecast increase in energy demand 

could further stress an already strained system. From a domestic 

perspective, the nation already faces energy supply constraints and higher 

prices for some important fuels, as well as environmental problems such 

as persistent air pollution in some cities. In addition, from an international 

perspective, the United States is increasingly subject to global markets for 

key energy sources, such as crude oil and, increasingly, for natural gas. 

Global markets may face difficulties in continuing to meet the growing 

energy demands of developed nations such as the United States, while also 

meeting the demands of the developing world, particularly in light of the 

explosive growth in some economies, such as China’s and India’s. If world 

supplies do not keep pace with world demand, energy prices could rise 

sharply. 
Page 7 GAO-05-414T 

Just last month, as part of our 21st Century Challenges report,1 we 

identified two broad questions focused on reexamining the nation’s energy 

base and related policies: 

• To what extent are federal energy policies and incentive structures 

adequately preparing the nation to satisfy its energy needs over the long 

term? 

• What is the appropriate balance between efforts to promote enhanced 

production of fossil fuels, alternative renewable energy sources, and the 

promotion of energy conservation? 

Given the importance of energy to our nation’s economy and current 

lifestyle choices, it is generally recognized that a secure, affordable, 

reliable, and environmentally sound energy supply is needed. However, 

the reliable energy mainstay of the 20th century seems less guaranteed in 

the 21st century. In the context of developing our nation’s energy policies, 

we are providing our views on energy supply and demand based on our 

published work in this area, conducted in accordance with generally 

accepted government auditing standards. In addition, we are providing 

information on forthcoming work, as GAO continues to report on a range 

of energy activities and policies of the federal government. 

In summary, based on past work and considering recent EIA forecasts, 

three broad crosscutting observations emerge that could help frame 

congressional efforts to develop the nation’s energy policies: 

• First, regarding demand, the amount of energy that needs to be supplied is 

not fate, but our choice. Consumers, whether businesses or individuals, 

choose to use energy because they want the services that energy provides, 

such as automated manufacturing, advanced computer technologies, and 

many high-technology household amenities. However, consumers can play 

an important role in using energy wisely by, among other things, choosing 

technologies that deliver the same services but that use less energy or 

reducing their energy usage when it is valuable to them to do so. For 

example, in electricity markets some utilities and system operators have 

created a variety of electricity pricing and other programs that encourage 

customers to adjust their usage in response to changes in prices or other 

factors. These “demand response” programs offer substantial benefits to 

participants and improve the functioning of these markets because they 

 1

GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, 

GAO-05-325SP (Washington, D.C.: February 2005). 
Page 8 GAO-05-414T 

provide more accurate price signals to consumers and encourage more 

careful energy use while providing better incentives for conservation 

and/or energy efficiency. 

• Second, all of the major fuel sources—traditional and renewable—face 

environmental, economic, or other constraints or trade-offs in meeting 

projected increases in demand. Consequently, all energy sources will be 

important in meeting expected consumer demand in the next 20 years and 

beyond. Meeting future demand will be particularly challenging for the 

transportation sector, where the United States is almost completely 

dependent on oil—more than half of which is imported. With just 5 

percent of world population, the United States consumes roughly 45 

percent of world gasoline. Further, the same international markets that 

supply U.S. needs will also need to supply countries in the developing 

world, such as China and India, which are experiencing increases in 

demand that far exceed even our own increasing thirst for oil. 

• Third, whatever federal policies are chosen, providing clear and consistent 

signals to energy markets, including consumers, suppliers, and the 

investment community, will help them succeed. Energy consumers need 

clear and consistent signals so that they can make reasoned choices with 

regard to purchases of energy-consuming equipment that help to 

determine their long-term energy demand. Energy suppliers require clear 

signals regarding national policies and confidence that those policies will 

be sustained over time in order to undertake the substantial investment 

needed to support expected increases in consumption. The investment 

community also needs these clearly articulated policies to determine how 

much to invest in current and future infrastructure, new products, and 

new technologies. 

Specifically, our testimony presents an overall energy picture, discussing 

each of the major energy sources used in the United States, along with 

consumer demand. We end each fuel discussion with examples of key 

questions facing the Congress, the executive branch, states, industry, and 

consumers. 

Oil is the largest single energy source used in the United States and 

remains perhaps the most visible energy source to most consumers. Oil, 

and the gasoline refined from it, provided the critical energy for the 

automobile that mobilized America. Oil remains at the center of the 

transportation sector and at the center of our national energy policy 

debate. 

Oil: Our Largest 

Energy Source, but 

Mostly Imported 
Page 9 GAO-05-414T 

In 2003, oil accounted for about 40 percent of the total U.S. energy 

consumption and the United States consumed about 7.3 billion barrels of 

crude oil—about 20 million barrels per day. Most oil is used in the 

transportation sector as gasoline, diesel, and jet fuel, with oil-based 

products accounting for over 98 percent of the U.S. transportation sector’s 

fuel consumption. In addition, oil is also used as a raw material in the 

manufacturing and industrial sectors; for heating in the residential and 

commercial sectors; and, in small amounts, for generating electric power. 

Although the United States accounts for about 5 percent of the world 

population, we consume about 25 percent of total world oil demand. 

Although today the United States and its industrialized counterparts 

currently account for the bulk of the world oil demand, demand is growing 

rapidly in the developing nations, especially those in Asia, such as China 

and India. 

The United States relies on imported oil for more than half of its supply 

and appears likely to increase its reliance in the future. Historically, the 

United States produced most of the oil it consumed. However, U.S. oil 

production began to decline in 1970 and has dropped by about 40 percent 

since then. Since 1970, imports of crude oil and other products have 

increased 255 percent, and imports now comprise nearly 56 percent of the 

U.S. oil supply. Part of the reason for the rising imports is cost; it has been 

less costly to purchase oil produced in other countries than it has been to 

produce it in the United States. 

Rising U.S. imports have increasingly been supplied by countries 

belonging to the Organization of Petroleum Exporting Countries (OPEC), 

which collectively provided about 42 percent of our total imports during 

2003. Since about 20 percent of our imports came from the Persian Gulf 

region and 14 percent came from Saudi Arabia, our reliance on these 

imports has made the United States subject to the political instability of 

the Middle East witnessed in recent years. We also import a large amount 

of oil from our neighbors in North America; about 30 percent of our 

imported oil came from Canada and Mexico. Going forward, the United 

States will increasingly rely on imported oil because although the United 

States is currently the world’s third largest oil producer, U.S. proven oil 

reserves account for only about 2 percent of total world reserves. In 

contrast, OPEC holds about 68 percent of total world oil reserves. 

The prices of crude oil and refined petroleum products, such as gasoline 

and home heating oil, have been volatile over the years. Since the 1970s, 

the crude oil market has, at times, been heavily influenced by the OPEC 

cartel. Because the member countries control a large share of world 
Page 10 GAO-05-414T 

production and total reserves, these countries have been able to influence 

crude oil prices by limiting supply through the use of country-by-country 

production quotas. These quotas have, at times, served to maintain a tight 

balance between world supply and world demand. However, because of 

the relative political instability in the Middle East and some of the other 

OPEC countries (such as Nigeria and Venezuela), occasional oil supply 

disruptions and price shocks have been a fact of life for about the past 30 

years and may remain an issue for the foreseeable future. Although crude 

oil prices play a large role in determining the prices for gasoline and other 

refined petroleum products, other factors also influence the volatility of 

gasoline prices, including limited refinery capacity, low inventory levels 

relative to demand, supply disruptions, and regulatory factors—such as 

various gasoline formulations that are used to meet federal and state 

environmental laws. Federal and state taxes on gasoline and other 

products serve to raise the level of prices, but these taxes do not fluctuate 

often and so do not contribute to price volatility. 

Demand has pressed the limits of the production and delivery 

infrastructure in the oil industry in recent years. While U.S. crude oil 

production has fallen, rapidly rising imports have required more ocean 

tankers of crude oil to be off-loaded each year—forcing expansions of 

ocean crude oil terminals and coastal refineries. Because some refineries 

have closed, and no new ones have been built since 1976, there are fewer 

refineries available to convert crude oil into gasoline and other products. 

Although increases in overall output have been achieved through 

expanding capacity at the remaining refineries and operating those 

refineries at very high production levels, the nation’s domestic refining 

capacity has lagged overall demand growth for petroleum products. 

Further, the network of pipelines that delivers refined petroleum products 

also operates at high levels of capacity, sometimes limiting the amount of 

fuel that can be shipped. Finally, the capacity of gasoline terminals that 

distribute fuel to local gas stations is also limited in some parts of the 

country. 

Over the past 30 years, the federal government has undertaken many 

efforts designed to influence petroleum markets and demand for 

petroleum based fuels. For example, in the mid-1970s, the federal 

government developed the Strategic Petroleum Reserve, part of an 

international reserve effort designed to mitigate the economic impacts on 

world economies of any large, sustained disruption to the oil supply. In 

addition, the federal government has supported a number of research and 

development and regulatory efforts designed to reduce demand for 

petroleum fuels in transportation. For example, the federal government 
Page 11 GAO-05-414T 

supported the Partnership for a New Generation of Vehicles in order to aid 

U.S. automobile manufacturers in developing gas-electric hybrid vehicles. 

In addition, the federal government has encouraged the development and 

deployment of technologies focused on identifying alternatives to 

petroleum-based fuels, such as the recent FreedomCAR initiative—a 

program to help develop fuel-cell technologies for vehicles. 

GAO has issued numerous reports on aspects of the petroleum sector, 

including gasoline markets and government efforts to reduce consumption 

of gasoline in vehicles among other areas. We also have reported on 

government efforts to improve gasoline vehicle efficiency through the use 

of gasoline-electric hybrid technologies and to shift vehicle fuel use to 

alternatives such as compressed natural gas or hydrogen-powered fuel 

cells. GAO has also noted that low gasoline prices do not reflect external 

costs associated with gasoline use, such as health and environmental 

impacts of air pollution or the economic cost that may result from the 

nation’s vulnerability to oil price shocks. Consequently, low gasoline 

prices work to discourage energy efficiency and the use of alternative 

fuels. Most recently we reported on the effects of mergers and market 

concentration in the U.S. petroleum industry, noting that mergers and 

increased market concentration that occurred in the mid-to-late 1990s 

contributed to higher wholesale gasoline prices—averaging about 1 to 2 

cents per gallon. Other factors such as changes in gasoline formulations 

and supply disruptions may have also contributed to higher gasoline prices 

during this period. Later this year, GAO will release a primer on how 

gasoline is made and distributed, what factors influence the price of 

gasoline, and why gasoline prices change, among other things. In 

forthcoming work requested by the Congress, GAO will report on the 

presence of multiple fuel formulation requirements in some parts of the 

country and how the expansion of these fuels have affected prices. 

Key Questions: 

• What are the potential implications for the United States of increased 

world reliance on oil supplies from politically unstable sources, such as 

OPEC countries? 

• To what extent can the United States increase refining capacity and other 

delivery infrastructure to meet growing demand for petroleum products? 

• What are the implications if there are further consolidations in the U.S. 

petroleum industry? 
Page 12 GAO-05-414T 

• Are there ways to better reflect the full societal cost of using gasoline in 

gasoline prices, and what are the trade-offs of doing so? 

Coal has been a key energy resource in the United States for over 100 

years. Over this time, the use of coal has provided low-cost electricity but 

has brought with it environmental consequences, such as air pollution. 

Choices regarding the use of coal revolve around balancing these 

consequences, in the light of new technologies to reduce them, with the 

energy benefits of using this plentiful domestic resource. 

In 2003, coal accounted for about 23 percent of total U.S. energy 

consumption. Nearly all of the coal consumed in the United States, 92 

percent, was used in the production of electricity, with almost all the 

remaining 8 percent used directly by industries such as steel 

manufacturing. Coal-fired power plants provided about half of total 

electricity generation in the United States in 2003, with larger shares in 

some parts of the country such as the mountainous West and the Midwest. 

Coal is expected to remain a vital element in the country’s energy supply; 

EIA’s most recent forecast indicates that coal would continue to provide 

about 20 percent of the country’s energy needs in 2025. 

The United States has substantial domestic coal resources, leading some 

to refer to the United States as “the Saudi Arabia of coal.” Nearly all of the 

coal used in the country is produced domestically. In 2003, using EIA data, 

estimates of recoverable U.S. coal reserves could last over 250 years, 

based on current usage. Coal is generally extracted from either surface, or 

underground mines, however underground coal also contains combustible 

gas, called coal bed methane, that can be removed using wells and burned 

to produce usable energy similar to conventional natural gas. Coal 

reserves are located across the country, with large reserves in the West, 

the Midwest, and the Appalachian Mountains, but consumption of coal 

from the West has increased sharply in recent years. A large portion of the 

coal reserves are located on federal lands and are subject to direct federal 

controls, such as payment of royalties, limits on the amount of federal land 

an individual company may mine, and requirements that surface land be 

restored to conditions similar to natural conditions when mining ends. 

Partly owing to the abundance of coal and technological improvements in 

the mining industry, coal prices have been declining in real terms since the 

mid-1970s. 

The production and use of coal have a variety of environmental 

consequences, including those related to mining and those related to the 

Coal: Balancing the 

Use of an Abundant 

Domestic Resource 

with Its 

Environmental 

Consequences 
Page 13 GAO-05-414T 

pollution that is emitted when coal is burned. Surface mining has the most 

significant impacts on land resources, in some cases substantially altering 

the terrain. Both surface and underground mines can significantly affect 

water resources by introducing pollution or silt into groundwater or 

waterways. Regarding air quality, combustion of coal in power plants 

emits pollutants and contributors to pollutants such as nitrogen oxides 

(NOx), sulfur oxides (SOx), particulate matter (PM), and toxic chemicals, 

such as mercury. Although some older power plants emit high levels of 

these substances, significant advancements have been made in the 

development of new power plants, utilizing new technologies that 

substantially reduce emissions. In addition to these pollutants, coal plants 

release a substantial amount of carbon dioxide, a gas that is common in 

nature but has been linked with the “greenhouse effect,” a greater-thannormal rise in the planet’s temperature. Although some countries have 

agreed to attempt to reduce emissions of carbon dioxide and other 

“greenhouse” gases, the United States does not currently regulate the 

emissions of such gases. However, DOE has supported research focused 

on developing a zero-emission coal-fired power plant that would not emit 

any pollutants or carbon dioxide into the air. In 2005, according to an 

industry policy group, 100 or more power plants featuring advanced 

technologies that substantially reduce emissions of pollutants are being 

considered for development in the United States. 

We have issued reports and testified on two primary coal related issues: 

technologies supported under DOE’s Clean Coal Technology program and 

the environmental consequences of using coal in power plants. Over the 

past several years, we have reported on the Clean Coal Technology 

program, noting that while DOE has reported successes in deploying new 

technologies, there have been management problems with the program 

and that there may be important lessons that should be considered in 

future similar efforts, such as the value of cost-sharing agreements and 

federal cost-sharing limits. We have also reported (1) that coal-fired power 

plants that have not been required to install modern pollution reducing 

equipment emit higher levels of pollutants such as NOx and SOx than 

plants where this equipment is present, and (2) that increased electricity 

generation in order to meet expected growth in demand may increase 

emissions of certain pollutants. In forthcoming work requested by the 

Congress, GAO will report on the effectiveness and cost of technologies to 

reduce mercury emissions, a toxic element present in coal that is emitted 

when coal is burned. 
Page 14 GAO-05-414T 

Key Questions: 

• How can the federal government balance the use of this abundant 

domestic energy source with its regulated and unregulated environmental 

consequences? 

• Where will additional coal be mined, where will new power plants be 

located, and are additional infrastructure improvements needed? 

• What is the potential role for coal bed methane, what are the trade-offs of 

extracting it, and what, if anything, should the federal government do to 

influence its development and production? 

• What changes in controls, if any, should the federal government make to 

how coal can be mined on federal land and elsewhere? 

• What role, if any, should the federal government play in providing 

incentives for using coal in ways that are safer for the environment? 

Natural gas, the fuel of choice recently, is one of the most versatile and 

widely used fuels—significant amounts are used as a raw material in the 

fertilizer, chemical, and other industries; for space heating in the 

industrial, commercial, and residential sectors; and for electricity 

generation. Until recently, prices have been low and use of natural gas for 

space heating and for electricity generation has expanded rapidly. Meeting 

the projected future growth of natural gas demand through delivering 

additional supply poses challenges. 

Natural gas plays a vital role in meeting the country’s national energy 

demand, accounting for about 23 percent of the total energy consumed in 

the United States. Use of natural gas has been growing rapidly since the 

mid-1980s, with consumption increasing by about 35 percent from 1986 

through 2003. Natural gas demand has been the greatest in the industrial 

sector, accounting for about 37 percent of total demand in 2003; followed 

by the residential sector and electric power, each accounting for about 22 

percent; then the commercial sector, at about 14 percent. The rest, about 3 

percent, is used in the transportation sector, mostly as fuel for pipelines. A 

significant share of the increased demand in recent years has resulted 

from increased use of natural gas to generate electricity. This use has 

increased by 79 percent since the repeal of the Powerplant and Industrial 

Fuel Use Act in 1987, which had restricted construction of power plants 

using oil or natural gas as a primary fuel; natural gas is now the primary 

Natural Gas: A Widely 

Used and Versatile 

Fossil Fuel 
Page 15 GAO-05-414T 

fuel in new power plants. EIA estimates that total natural gas demand 

could increase 50 percent in the next 25 years. 

Although natural gas prices remained low for many years, in recent years 

they have increased dramatically. From 1995 to 2004, average wellhead 

prices for natural gas increased nearly three-fold; rising from $1.55 per 

thousand cubic feet to $5.49 per thousand cubic feet. These higher prices 

for natural gas may have contributed to industrial companies reducing or 

ceasing U.S. operations. EIA data indicate that demand has fallen rapidly 

in the industrial sector, where consumption decreased by 16 percent from 

1997 through 2003. 

Historically, almost all the natural gas used in the United States has been 

produced here, but a small and growing share is imported. Most natural 

gas production involves extracting gas from wells drilled into underground 

gas reservoirs, although some natural gas is generated as a by-product of 

oil production. In 2003, domestic sources provided about 85 percent of 

total consumption. Historically, most of the country’s natural gas came 

from Texas, Oklahoma, and Louisiana. However, the Rocky Mountain 

region, Alaska, and areas beneath the deeper waters of the Gulf of Mexico 

are becoming increasingly important in supplying natural gas. Overall, 

from 1994 through 2003, domestic annual production held steady at about 

19 trillion cubic feet. In 2003, the United States imported about 15 percent 

of the total natural gas consumed, with nearly all of it coming from Canada 

via pipeline. However, a small share is shipped on special ocean tankers as 

liquefied natural gas (LNG) from countries such as Trinidad and Tobago, 

Nigeria, and others. Looking ahead, the Energy Information 

Administration estimates that U.S. consumption could increase to about 31 

trillion cubic feet (TCF) by 2025, expanding the gap relative to U.S. 

production and requiring increasing imports to meet U.S. needs. 

The United States still has substantial undeveloped natural gas resources, 

but some of these resources are located under federal lands, and access to 

some of these resources is restricted. For example, about 40 percent of the 

natural gas resources on federal land in the Rocky Mountain region are not 

available for development. Additional natural gas reserves are located in 

federally controlled offshore areas or other areas and are not available for 

development at this time. Extensive drilling for natural gas can 

substantially modify the surrounding landscape, and in some cases can 

adversely affect wildlife and its habitat, degrade air and water quality, and 

decrease the availability of groundwater to ranches and houses that may 

depend upon it. The federal government is required to consider these 

environmental consequences when determining if, and how, natural gas 
Page 16 GAO-05-414T 

will be extracted from federal lands. In response, the natural gas industry 

has and continues to use more advanced drilling methods and processes to 

mitigate future adverse impacts. 

Meeting the sharp increases forecast for natural gas demand could also 

require substantial increases in infrastructure, such as new pipelines and 

LNG terminals. In particular, increasing natural gas supplies may require 

greater pipeline capacity and new pipelines. For example, over the past 20 

years the federal government has considered a variety of issues with 

financing and building a new pipeline across federal and state lands to 

deliver natural gas from Alaska. The federal government is involved in the 

regulation and permitting of natural gas pipelines, particularly those that 

must traverse federal lands. To meet the need for sharply higher imports 

of natural gas, some experts believe that the United States may need to 

build more LNG terminals. To date, however, such facilities have not been 

built due to economic, safety, and security concerns. Consequently, it is 

not clear whether the United States can effectively compete with other 

countries for these supplies. 

Over the last several years, we have issued a number of reports on natural 

gas, including reports on the natural gas markets and their oversight, 

various approaches for compensating the federal government when 

natural gas is removed from federal land, and the impacts of higher natural 

gas prices on certain industries. In 2002 and 2003, for example, we issued 

reports analyzing natural gas markets and their oversight. We noted that 

(1) prices generally increase because limited supplies have not been able 

to react quickly enough to changes in demand; (2) the federal government 

(e.g., the Federal Energy Regulatory Commission and EIA) faces 

significant challenges in overseeing natural gas markets and ensuring that 

prices are determined in a competitive and informed marketplace, 

minimizing unnecessary price volatility; and (3) buyers of natural gas have 

options to reduce their exposure to volatile prices through the use of longterm contracts and financial hedging instruments. In forthcoming work 

requested by the Congress, GAO will report on federal efforts to 

understand and manage risks associated with potential terrorist attacks on 

LNG shipments and other tankers. 

Key Questions: 

• Should the federal government encourage further development of 

domestic natural gas on federal lands, and can it ensure that 

environmental impacts are adequately mitigated? 
Page 17 GAO-05-414T 

• What are the infrastructure needs of the natural gas industry, including 

natural gas pipelines generally and in Alaska in particular, and what role, if 

any, should the government play in facilitating the development of this 

infrastructure? 

• What are the implications for consumers (residential, commercial, 

industrial, and electric power) of the increasing reliance on natural gas to 

generate electricity? 

• What are the economic and other barriers and/or trade-offs to developing 

an infrastructure to support increases in LNG shipments, and what role, if 

any, should the federal government play? 

• To what extent is the federal government positioned to ensure that natural 

gas prices are determined competitively? 

Nuclear energy was once heralded as the single answer to all of the 

country’s energy woes, with predictions that electricity would soon be 

“too cheap to meter.” While these enormous expectations have not been 

met, nuclear energy has become an important part of the country’s current 

energy picture and may remain that way for years to come. Whether we 

can continue to rely on, or expand our use of, nuclear energy in the future 

at existing plants or at new plants based on new designs, hinges on solving 

the long-term waste storage problem as well as resolving concerns over 

safety and security. 

Nuclear energy currently accounts for about 8 percent of U.S. national 

energy consumption. Nearly all nuclear energy is used to generate 

electricity, and nuclear plants are important contributors to total U.S. 

electricity production, providing about 20 percent in 2003. The first 

commercial nuclear power plant came on line in 1957, and the country 

witnessed a flurry of construction from the late 1960s through the 1980s. 

Many nuclear plants operating today were initially licensed for 40 years, 

and many are now approaching the end of their licenses. Since an accident 

at the Three Mile Island nuclear plant in 1979 raised concerns regarding 

the safety of nuclear plants, no new plants have been ordered in the 

United States, and none has been brought on line since 1996. In addition, 

many of the plants that were completed witnessed multibillion dollar cost 

overruns. 

Over the past several years, a number of nuclear generating units have 

been retired, but because the remaining 104 units have increased their 

Nuclear Energy: 

Emission-Free Energy 

Source, but with 

Waste Storage 

Problems and 

Safety/Security 

Concerns 
Page 18 GAO-05-414T 

productivity, the output actually increased by about 13 percent from 1998 

through 2003. This increase in productivity has been impressive; the 

average annual capacity factor2

 has increased from 71 percent in 1997 to 

90 percent in 2004. These increases in productivity and other 

improvements have led some plant operators to seek to operate some 

plants at somewhat higher capacity. 

There appears to be renewed interest in extending the licenses of some 

existing plants and even building new plants. Interest in nuclear power 

plants has increased, in part, because they do not emit regulated air 

pollutants such as nitrogen oxides, sulfur dioxides, and particulate matter 

that can be costly to control, or carbon dioxide, a greenhouse gas, that 

many in the electricity industry believe might be regulated in the future. 

Given the improved performance, limited air emissions, and production 

cost advantages of nuclear power plants, some companies operating 

existing nuclear plants have already had them relicensed through the 

Nuclear Regulatory Commission (NRC) to operate for up to another 20 

years, and others have started similar efforts. In addition, there have been 

trade industry reports that a number of utilities and other energy 

companies are actively considering submitting applications to build new 

plants. Over the past 20 years, plants have continued to be built overseas. 

New designs have emerged and foreign manufacturers have gained 

significant experience building them. Nuclear energy plays a large role in 

supplying energy in France, Germany, Canada, Japan, and other developed 

nations. Although nuclear plants remain very costly to build compared to 

some other plant types, they have lower fuel and other operating costs and 

can produce electricity at a lower cost than new plants that use fuels such 

as coal or natural gas—the primary energy source used in new U.S. power 

plants. In this country, NRC has approved new reactor designs and NRC 

and the Department of Energy are working to reduce the approval and 

construction lead times for potential new plants. 

Although the United States has a large domestic supply of uranium, the 

nation increasingly relies on international markets to obtain the nuclear 

fuel used here. Historically, the fuel used at U.S. reactors has been 

produced here. However, several factors have combined to reduce the 

competitiveness and capacity to domestically supply reactor fuel, 

including falling prices for reactor fuel on international markets and 

 2

Capacity factor is the ratio of electricity generated to the amount of energy that could have 

been generated if the plant ran every hour of every day in the year. 
Page 19 GAO-05-414T 

factors surrounding the 1998 privatization of the United States Enrichment 

Corporation (USEC). In response to the changes in the market, USEC 

closed the Portsmouth, Ohio, fuel plant leaving only the facility at 

Paducah, Kentucky, as the domestic source. Both France and Japan have 

advanced facilities that produce nuclear plant fuel, and these provide a 

large and growing share of international supplies, including those used in 

the United States. 

Although nuclear plants do not emit pollutants, they produce radioactive 

waste, including the highly radioactive waste that must be stored in 

isolation for thousands of years. The federal government committed to 

develop a permanent storage facility that would receive this waste by 1998, 

but delays have pushed the potential opening of the facility to the 2012 to 

2015 time frame. Efforts to develop the facility have focused on storing the 

waste deep under Yucca Mountain in the desert north of Las Vegas, 

Nevada. In 2002, NRC reported that about 45,000 tons of spent fuel from 

nuclear plants was stored in the United States. Because the permanent 

repository has not been completed, the highly radioactive waste remains 

stored at power plants and other facilities and has been the subject of 

several lawsuits. 

Nuclear power plants have been operated safely, largely without incident. 

Nuclear power plants contain radioactive materials that if released could 

pose catastrophic risks to human health over an expansive area, but are 

designed and operated to avoid such an event and incorporate measures to 

protect the plant from attack. The Nuclear Regulatory Commission, among 

other things, oversees these plants, conducting periodic inspections of the 

plant equipment and evaluating security. However, since the terrorist 

attacks of September 11, 2001, nuclear plants have emerged as a key 

security concern and attention on these plants has increased. Industry 

expects that new plant designs will further reduce safety and security 

risks, incorporating features that, among other things, automatically cool 

the nuclear reaction. 

We have issued a number of reports dealing with aspects of nuclear energy 

covering three key areas: NRC’s oversight of safety issues at the existing 

nuclear plants; the development of a permanent storage facility for the 

highly radioactive waste produced by nuclear plants; and the potential 

vulnerability of these plants in light of the terrorist attacks of September 

11. In May 2004, we issued a report on the discovery that corrosion had 

eaten a pineapple-sized hole in the nuclear reactor vessel head at the 

Davis-Besse power plant in Ohio that did not result in a radioactive release 

but highlighted problems with NRC’s inspections and oversight. We have 
Page 20 GAO-05-414T 

issued a series of reports, spanning more than 20 years, that focus on 

various aspects of developing of a permanent nuclear waste storage 

facility. In 2002, we reported (1) that it would be premature for DOE to 

recommend the facility at Yucca Mountain to the President as a suitable 

repository for nuclear waste; (2) that DOE was unlikely to achieve its goal 

of opening a permanent storage repository at Yucca Mountain by 2010; and 

(3) that DOE did not have a reliable estimate of when, and at what cost, 

such a repository could be opened. We have also issued reports 

concerning the vulnerability of nuclear power plants to terrorist attacks. In 

September 2004, we testified that NRC was generally approving plants’ 

new security plans on the basis of limited details in the plans and without 

visiting the plants. In forthcoming work requested by the Congress, GAO 

will undertake a comprehensive review of NRC’s reactor oversight process 

and how NRC ensures that plants operate safely. GAO will continue to 

examine homeland security issues related to protecting commercial 

nuclear power plants from terrorist attacks. 

Key Questions: 

• What role should nuclear energy continue to play in providing the nation’s 

energy needs in view of the aging of existing plants? 

• Should new nuclear power plants be built in the United States, and can 

their design and construction make sense from a business standpoint 

while providing the safety and security assurances important to 

surrounding communities? 

• How can existing and future nuclear waste generated by power plants be 

managed in an appropriate and timely manner? 

• Are changes needed in how the industry and NRC ensure that plants are 

operated safely and securely, and is enough being done to protect nuclear 

plants from terrorist attacks? 

Electricity has emerged as one of the essential elements in modern life. 

Today, electricity lights our homes, enables our businesses to be more 

productive through the use of computers, and creates the basis for our 

modern quality of life, providing power for everything from our morning 

coffee to our nightly television news. Unlike the other types of energy that 

we have discussed—so-called primary sources of energy—electricity is 

generated through the use of the other energy sources (such as when 

natural gas is burned in power plants to generate electricity). Encouraged 

Electricity: In the 

Midst of Change 
Page 21 GAO-05-414T 

by the federal government, the electricity industry is in the midst of 

historic changes. Assessing that transition and determining whether the 

federal government can improve how electricity markets function remains 

a focus for federal policy. 

Electricity use has grown steadily in recent years. From 1980 through 

2003, the quantity of electricity sold increased by 75 percent, with the 

largest increases coming in the residential and commercial sectors. 

Electricity is used in these sectors for space heating and for cooling, 

lighting, and operating small appliances, such as computers and 

refrigerators. Industrial consumption declined slightly over this period, 

reflecting the contraction of manufacturing, including some large 

industrial users of electricity such as the aluminum and steel industries. 

In 2003, over 70 percent of electricity was generated using fossil fuels, with 

over 50 percent coming from coal-fired power plants, about 16 percent 

from natural gas, and small amounts from petroleum and other fossil fuels. 

In recent years, new power plants have predominantly relied on natural 

gas. Nuclear energy provides about 20 percent of electricity generation, 

hydroelectric energy provides about 7 percent, and a variety of renewable 

resources, such as wind turbines, provide the remainder. 

The federal government has a direct role in supplying electricity, through 

the federally controlled Power Marketing Administrations, which market 

electricity produced by federally owned dams and other power plants and 

which own an extensive transmission network to deliver that electricity. 

These entities initially aided in the federal mission to bring electricity to 

rural areas; however, most now serve major metropolitan areas, in 

addition to some rural customers. 

Historically, electricity has been produced and delivered by local 

monopoly utilities within a specific area, but this has been changing. The 

electricity sector is restructuring to foster more competition and provide 

an increased role for open markets. Competition is already under way for 

the wholesale markets that the federal government regulates. To facilitate 

fair wholesale competition, the federal government has also pressed for 

change in what entities control transmission lines—by approving the 

creation of independent transmission operators to take the place of 

utilities in performing this function. Some states, such as California and 

Pennsylvania, had also moved to introduce competition to state-regulated 

retail markets, where most consumers obtain their electricity. Although 

the electricity industry is restructuring to include a greater role for 

competition, the federal government still oversees wholesale electricity 
Page 22 GAO-05-414T 

markets through the Federal Energy Regulatory Commission (FERC). 

Because federal actions have restructured wholesale markets nationwide 

and states have variously chosen to restructure the markets that they 

oversee, the national electricity market is currently a hybrid, somewhere 

between competitive and regulated. 

Unlike the other forms of energy, the amount of electricity supplied by 

power plants must be balanced, on a second-to-second basis, with the 

amount of electricity consumed in homes and businesses. To do this, 

utilities or independent entities direct the production of electricity and its 

movement over transmission lines to avoid blackouts. In some cases, such 

as in California in 2000 and 2001 and more recently in the Northeast in 

2003, the balance between supply and demand was disrupted and 

blackouts occur. 

Electricity demand is projected to increase by at least 36 percent by 2025, 

and the industry may require significant investment in power plants and 

transmission lines to reach those levels. The National Energy Policy 

Development report estimated that the United States may need to add as 

many as 1,900 power plants to meet forecasted demand growth. In 

addition, because the existing network of power lines frequently 

experiences congestion, the capacity of many key transmission lines may 

need to be increased to move electricity from these new plants and 

improve the reliability of the existing system. 

We have reported on the development of competition in the electricity 

industry and evaluated the oversight of electricity markets. For example, 

in one report we found that the way the market was structured in 

California enabled some electricity sellers to manipulate prices. We also 

reported on the ability to add new power plants in three states, concluding 

that the success of restructured markets hinged on private investment in 

power plants and that this investment was reduced by higher levels of 

perceived risk in some markets, such as in California. Further, we recently 

reported on the potential value of empowering consumers to manage their 

own electricity energy demand in order to save money and improve the 

functioning of these markets. Allowing consumers to see electricity prices 

enables them to reduce their usage when prices are high—reducing their 

energy bills and improving the functioning of the markets. Following the 

2003 blackout, we issued a report that highlighted challenges and 

opportunities in the electricity industry, including whether reliability 

standards should be made mandatory and whether control systems critical 

to the electricity industry have adequate security. Regarding oversight of 

electricity markets, we reported that while the Federal Energy Regulatory 
Page 23 GAO-05-414T 

Commission has made progress in revising its oversight strategy, it still 

faced challenges in better regulating these markets. In forthcoming work 

requested by the Congress, GAO will assess progress in reporting 

electricity market transactions for use in developing market indexes and 

the adequacy of controls over this reporting. 

Key Questions: 

• To what extent does the division of regulatory authority between the 

federal government and the states limit the electricity industry’s ability to 

achieve the benefits expected from the introduction of competition in 

electricity markets? 

• What changes are necessary to federal and state monitoring and oversight 

of electricity markets to ensure that they are adequately overseen? 

• Will FERC’s actions to promote reliability be sufficient, or will additional 

actions be needed to improve compliance with reliability rules? 

• How does continued uncertainty about how the future of electricity 

restructuring and electricity markets affect electricity companies, 

investment in new plants and transmission lines, and consumer prices? 

• What role should the federal Power Marketing Administrations play in 

restructured electricity markets? 

• To what extent are homeland security principles being integrated into new 

electricity infrastructure and business processes? 

Renewable energy sources, such as hydroelectric dams, ethanol, wind 

turbines, and geothermal and solar applications, currently comprise a 

small percentage of the total energy resources consumed in the United 

States. Several alternative sources, such as hydrogen and fusion power, 

may offer potential long-term promise, but research remains at an early 

stage. While these renewable and alternative energy sources have a nearly 

unlimited domestic supply, are perceived as relatively clean, and help 

diversify the U.S. energy supply, technical problems and high costs relative 

to other options have limited their use. 

According to EIA, in 2003 renewable and alternative energy sources 

accounted for slightly more than 6 percent of the total U.S. energy 

consumption. Hydropower is the largest single source in this category and 

Renewable and 

Alternative Energy 

Sources: What Role 

Will They Play in the 

Future? 
Page 24 GAO-05-414T 

makes up over 45 percent of all renewable and alternative energy 

consumed. Hydropower generation, which varies due to weather 

conditions, has fluctuated at about the same level since the 1970s. Wood 

accounts for about 34 percent of total renewable energy, although its use 

has declined since 1989. Waste and other byproducts, such as municipal 

solid waste, landfill gas, and biomass, account for about 9 percent and 

their use has been relatively flat since the mid-1990s. Geothermal energy 

use has decreased slightly since it peaked in 1993 and now accounts for 

about 5 percent of the total. Alcohol fuels, such as ethanol, make up about 

4 percent of the total, but their use has increased rapidly in recent years, 

almost doubling from 1999 through 2003. Wind energy accounted for about 

2 percent of the total renewable energy consumed in 2003 but has 

witnessed substantial and persistent growth in recent years, more than 

tripling from 1998 through 2003. Solar energy accounts for about 1 percent 

of all renewable and alternative energy consumed, and its use has declined 

slightly but steadily since 1997, although use of some specific solar 

technologies such as photovoltaic solar cells that convert sunlight directly 

into electricity has grown in recent years. 

Renewable energy technologies are increasingly becoming part of global 

markets and are, in some cases, owned by large multinational energy 

companies such as oil companies. Solar and wind energy have grown 

substantially in these markets, but remain at relatively low levels in the 

United States. Growth in wind power has benefited from improvements in 

wind turbine technology and the availability of government tax credits 

here and overseas, both of which have improved the competitiveness of 

wind power technologies with more traditional forms of energy. EIA 

estimates, however, that if the federal government removes the tax credit, 

the U.S. growth in the generation of wind power will almost stop. 

However, EIA estimates that if the government maintains the tax credit, 

wind power generation in the United States is expected to grow nearly 

seven-fold over the next 20 years. Solar technologies, especially solar cell 

technologies that produce electricity, have supplanted traditional 

technologies, such as generators for some remote applications, and sales 

of solar cells have expanded rapidly worldwide, albeit from a small base. 

Several alternative sources may offer long-term promise, although they are 

not ready for widespread application. Technologies such as hydrogen 

power and fusion are currently being developed as new sources of energy. 

While these technologies have the potential to deliver large amounts of 

energy with fewer environmental impacts than traditional energy sources, 

they cannot be counted upon to deliver significant amounts of energy in 

the near future due to significantly higher costs and technical challenges. 
Page 25 GAO-05-414T 

To date, use of hydrogen fuel cells still requires the extraction of hydrogen 

from another fuel source, such as natural gas, and currently this extraction 

is too costly to compete with other sources of energy. In addition, the 

infrastructure to support hydrogen power has not been built. While fusion 

also may have the ability to provide an abundant and clean energy source, 

research on this technology remains at a very early stage. 

We have issued several reports describing the viability and technical 

progress of several renewable and alternative energy sources supported by 

the federal government. A continuing theme of these reports has been that 

when the government invests money into research and development 

initiatives, it is important to keep one eye on the technical goals and one 

eye on the marketplace. We have noted that the success of the investment 

should be measured by its contribution to increasing the use and 

feasibility of an energy source, rather than reaching specific technical 

research and development goals. In forthcoming work requested by the 

Congress, GAO will report on the impact of wind turbines on birds and 

other aspects of the environment, as well as geothermal energy 

development in the United States. 

Key Questions: 

• Should the federal government establish clear and measurable goals for 

the development and use of renewable and alternative energy sources, 

and, if so, how should progress toward these goals be measured? 

• What should the federal government’s role be in researching and 

developing existing and future sources of renewable and alternative 

energy sources? 

• What are the costs and benefits of increasing our use of renewable and 

alternative energy sources? 

• What are the implications of renewable energy mandates for deploying 

renewable energy technologies and for electricity markets? 
Page 26 GAO-05-414T 

Experts have long contended that energy strategies that reduce demand 

can cost less, be brought on line faster, and provide greater environmental 

benefits compared to strategies that increase the amount of energy 

supplied—particularly if demand reductions decrease fossil fuel 

consumption and related pollution. Such strategies include improving the 

efficiency of energy we already use and allowing consumers to choose 

when it makes the most sense to conserve energy. Despite their 

advantages, however, opportunities to improve efficiency and consumer 

choice are often overlooked. 

Overall, energy demand in the United States has trended steadily upward 

for the last 50 years. While demand has increased, the amount of energy 

the country uses relative to its economic output has fallen. The amount of 

energy used for each dollar of gross domestic product has dropped by 

about half from 1970 through 2003. The reduction has been even more 

striking when examining the industrial sector, where energy used per 

dollar of GDP has fallen by over 60 percent since 1970. It is not clear 

whether this reduction reflects a decrease in energy intensive industries, 

such as aluminum and steel manufacturing, improvements in energy 

efficiency, or some combination of the two. 

The federal government has, periodically, made efforts to reduce demand, 

encourage energy efficiency, or both. To reduce demand, the federal 

government has, among other things, encouraged consumers to voluntarily 

limit excessive heating and cooling of homes and to reduce the number of 

miles that they drive. To encourage energy efficiency, the federal 

government has established energy efficiency standards for such things as 

home appliances, air conditioners, and furnaces, as well as provided 

incentives for purchasing energy-efficient equipment. In the transportation 

sector, the federal government has required automakers to meet overall 

efficiency standards—known as Corporate Average Fuel Economy 

(CAFÉ) standards—for the vehicles they sell. The federal government has 

also made investments to improve energy efficiency and save money on 

energy at its own buildings through the Federal Energy Management 

Program and utilizing energy savings performance contracts. 

Federal efforts have met with some success. According to the American 

Council for an Energy Efficient Economy and the Alliance to Save Energy, 

energy efficiency investments made from 1973 through 2003 saved the 

equivalent of 40 to 50 quadrillion BTUs of energy in 2003, equal to about 40 

to 50 percent of total energy consumption and more than any single fuel 

provided. Several organizations, including a panel of several national 

Reducing Energy 

Demand through 

Efficiency and 

Consumer Choice: the 

Often-Overlooked 

Energy Option 
Page 27 GAO-05-414T 

laboratories, estimate that many opportunities for additional 

improvements in energy efficiency remain untapped. 

At times, however, federal efforts to reduce energy demand and improve 

energy efficiency have had to compete with efforts to keep energy prices 

low. For example, residential and commercial sectors of the economy 

have until recently been somewhat protected from price volatility by 

regulated prices for electricity and natural gas and thus have been less 

likely to reduce their consumption of these sources. Moreover, inflationadjusted energy prices have generally declined, until recently. Reducing 

demand when prices are falling has been difficult for several reasons. For 

example, because energy-consuming equipment, such as air conditioners, 

furnaces, and lighting systems, is generally costly to purchase and lasts 

many years, consumers do not want to replace it unnecessarily. In 

addition, consumers are often not aware of the energy inefficiency of their 

homes and businesses. Falling energy prices have also made it more 

difficult to demonstrate the cost-effectiveness of spending money to 

replace aging and inefficient equipment, particularly for residential and 

commercial customers. In contrast, when consumers face prolonged 

period of higher energy prices, they are more likely to identify and adopt 

cost-effective strategies for reducing their energy demand. For example, 

following prolonged supply disruptions and price increases for gasoline in 

the 1970s, consumers in the 1980s chose to purchase more fuel-efficient 

vehicles, pushing up overall fuel efficiency averages nationwide. In the late 

1990s the opposite has been true; relatively low prices for gasoline have 

encouraged consumers to choose to purchase larger and less fuel-efficient 

vehicles. 

GAO has examined policies designed to reduce demand in electricity 

markets, as well as efforts to develop more fuel-efficient automobiles. In 

August 2004, we issued a report finding that electricity demand programs 

that better link the electricity prices consumers pay with the actual cost of 

generating electricity offer significant financial benefits to consumers, 

improve the functioning of electricity markets, and benefit the federal 

government by lowering its utility bills. In March 2000, we reported on the 

Partnership for a New Generation of Vehicles (which sought to develop a 

family sedan that could drive about 80 miles on a gallon of fuel) and found 

that the vehicle being developed did not match consumer vehicle 

preferences and that automakers would not be manufacturing such a 

vehicle for U.S. markets. In forthcoming work requested by the Congress, 

GAO will evaluate the Department of Energy’s program for setting energy 

efficiency standards for appliances. 
Page 28 GAO-05-414T 

Key Questions: 

• What are the benefits and costs of potential federal efforts to reduce 

energy demand? 

• Are there economic, regulatory, or other barriers preventing the adoption 

of cost-effective, energy-efficient technologies that could meet consumer 

needs? 

• Are there promising energy-saving technologies that are nearly costeffective that the federal government should consider encouraging 

through the use of consumer incentives? 

• Are there emerging energy-efficiency technologies that are past basic 

research but that could benefit from federal and industry collaboration? 

• Which technologies offer the greatest long-term potential for reducing 

demand, and should they be considered for intensive federal research? 

• To what extent are retail price structures impeding the deployment of 

cost-effective and energy-efficiency technologies? 

Given the increasing signs of strain on our energy systems and our 

growing awareness of how our energy choices impact our environment, 

there is a growing sense that federal leadership could provide the first step 

in a fundamental reexamination of our nation’s energy policies. As the 

Congress, executive agencies, states and regions, industry, and consumers 

weigh such a reexamination, we believe that it makes sense to consider all 

energy sources together, along with options to encourage more efficient 

energy use and consumer choices to save energy. While a balanced energy 

portfolio is needed, striking that balance is difficult because of sometimes 

competing energy, environmental, economic, and national security needs. 

Clearly none of the nation’s energy options are without problems or tradeoffs. Current U.S. energy supplies remain highly dependent on fossil 

energy sources that are either costly, imported, potentially harmful to the 

environment, or some combination of these three, while many renewable 

energy options still remain more costly than traditional options. On the 

other hand, past efforts to reduce energy demand appear to have lost some 

of their effectiveness in recent years. Striking a balance between efforts to 

boost supplies from these various energy sources and those focused on 

reducing demand presents challenges as well as opportunities. 

Conclusions 
Page 29 GAO-05-414T 

In the end, the nation’s energy policies come down to choices. Just as they 

did some 30 years ago in the aftermath of the major energy crises of the 

1970s, congressional choices will strongly influence the direction that this 

country takes regarding energy issues—affecting consumer, supplier, and 

investor choices for years to come. Consumer choices made from today 

forward will determine to a great extent how much energy will be needed 

in the future. In the same way, energy suppliers have choices about how 

much of each type of energy to provide, based increasingly on their 

interaction with competitive domestic and sometimes global markets for 

energy. Choices made by consumers and suppliers will be influenced by 

state and local entities, along with regional stakeholders in some areas of 

the country, which have authority over key decisions that affect such 

things as the siting of generation and transmission facilities as well as 

access to their lands. Similarly, investors have choices regarding where to 

invest their money, whether in new power plants, refineries, research and 

development for new technologies, or outside the energy sector all 

together. Yet, many of these choices may be significantly influenced, or 

even overshadowed, by broader forces that are beyond our control, such 

as expected energy demand growth in the developing world. 

In closing, providing the American consumer with secure, affordable, 

reliable, and environmentally sound energy choices will be a challenge. I 

would like to note that more than 30 years ago, during the first energy 

crisis, our nation faced many of the same choices that we are confronting 

today. How far have we come? Have we charted a course that can be 

sustained in the 21st century? In 30 years, will we again come full circle 

and ask ourselves these same questions about our energy future? The 

answer to this final question lies in our collective ability to develop and 

sustain a strategic plan, with supporting incentives, along with a means to 

measure our progress and periodically adjust our path to meet future 

energy challenges. 

I would be pleased to respond to any questions that you, or other Members 

of the Subcommittee, may have at this time. 

For further information about this testimony, please contact me, Jim 

Wells, at (202) 512-3841. Contributors to this testimony included Godwin 

Agbara, Dennis Carroll, Mark Gaffigan, Dan Haas, Mike Kaufman, Bill 

Lanouette, Jon Ludwigson, Cynthia Norris, Paul Pansini, Ilene Pollack, 

Melissa Roye, Frank Rusco, and Ray Smith. 

Contact and 

Acknowledgments 
Page 30 GAO-05-414T 

Energy Markets: Effects of Mergers and Market Concentration in the U.S. 

Petroleum Industry. GAO-04-96. Washington, D.C. May 17, 2004. 

Research and Development: Lessons Learned from Previous Research 

Could Benefit FreedomCAR Initiative. GAO-02-810T. Washington, D.C.: 

June 6, 2002. 

U.S. Ethanol Market: MTBE Ban in California. GAO-02-440R. 

Washington, D.C.: February 27, 2002. 

Motor Fuels: Gasoline Prices in the West Coast Market. GAO-01-608T. 

Washington, D.C.: April 25, 2001. 

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

February 23, 2001. 

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO 

Work. RCED-00-301R. Washington, D.C.: September 25, 2000. 

Cooperative Research: Results of U.S.-Industry Partnership to Develop a 

New Generation of Vehicles. RCED-00-81. Washington, D.C.: March 30, 

2000. 

Alaskan North Slope Oil: Limited Effects of Lifting Export Ban on Oil 

and Shipping Industries and Consumers. RCED-99-191. Washington, 

D.C.: July 1, 1999. 

International Energy Agency: How the Agency Prepares Its World Oil 

Market Statistics. RCED-99-142. Washington, D.C.: May 7, 1999. 

Energy Security and Policy: Analysis of the Pricing of Crude Oil and 

Petroleum Products. RCED-93-17. Washington, D.C.: March 19, 1993. 

Energy Policy: Options to Reduce Environmental and Other Costs of 

Gasoline Consumption. T-RCED-92-94. Washington, D.C.: September 17, 

1992. 

Energy Policy: Options to Reduce Environmental and Other Costs of 

Gasoline Consumption. RCED-92-260. Washington, D.C.: September 17, 

1992. 

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

1990. 

Related GAO Products 

Oil 
Page 31 GAO-05-414T 

Energy Security: An Overview of Changes in the World Oil Market. RCED88-170. Washington, D.C.: August 31, 1988. 

Clean Air Act: Observations on EPA’s Cost-Benefit Analysis of Its 

Mercury Control Options. GAO-05-252. Washington, D.C.: February 28, 

2005. 

Fossil Fuel R&D: Lessons Learned in the Clean Coal Technology 

Program. GAO-01-854T. Washington, D.C.: June 12, 2001. 

Clean Coal Technology: Status of Projects and Sales of Demonstrated 

Technology. RCED-00-86R. Washington, D.C.: March 9, 2000. 

Natural Gas: Domestic Nitrogen Fertilizer Production Depends on 

Natural Gas Availability and Prices. GAO-03-1148. Washington, D.C.: 

September 30, 2003. 

Natural Gas Flaring and Venting: Opportunities to Improve Data and 

Reduce Emissions. GAO-04-809. Washington, D.C.: July 14, 2004. 

Natural Gas: Analysis of Changes in Market Price. GAO-03-

46. Washington, D.C.: December 18, 2002. 

Energy Deregulation: Status of Natural Gas Customer Choice 

Programs. RCED-99-30. Washington, D.C.: December 15, 1998. 

Nuclear Regulation: NRC’s Assurances of Decommissioning Funding 

During Utility Restructuring Could Be Improved. GAO-02-

48. Washington, D.C.: December 3, 2001. 

Nuclear Waste: Technical, Schedule, and Cost Uncertainties of the Yucca 

Mountain Repository Project. GAO-02-191. Washington, D.C.: December 

21, 2001. 

Nuclear Nonproliferation: Implications of the U.S. Purchase of Russian 

Highly Enriched Uranium. GAO-01-148. Washington, D.C.: December 15, 

2000. 

Coal 

Natural Gas 

Nuclear 
Page 32 GAO-05-414T 

Nuclear Regulation: Better Oversight Needed to Ensure Accumulation of 

Funds to Decommission Nuclear Power Plants. RCED-99-75. Washington, 

D.C.: May 3, 1999. 

Nuclear Waste: Impediments to Completing the Yucca Mountain 

Repository Project. RCED-97-30. Washington, D.C.: January 17, 1997. 

Renewable Energy: Wind Power’s Contribution to Electric Power 

Generation and Impact on Farms and Rural Communities. GAO-04-

756. Washington, D.C.: September 3, 2004. 

Geothermal Energy: Information on the Navy’s Geothermal 

Program. GAO-04-513. Washington, D.C.: June 4, 2004. 

Department of Energy: Solar and Renewable Resources Technologies 

Program. RCED-97-188. Washington, D.C.: July 11, 1997. 

Energy Policy: DOE’s Policy, Programs, and Issues Related to Electricity 

Conservation. RCED-97-107R. Washington, D.C.: April 9, 1997. 

Energy Markets: Additional Actions Would Help Ensure That FERC’s 

Oversight and Enforcement Capability Is Comprehensive and 

Systematic. GAO-03-845. Washington, D.C.: August 15, 2003. 

Energy Markets: Concerted Actions Needed by FERC to Confront 

Challenges That Impede Effective Oversight. GAO-02-656. Washington, 

D.C.: June 14, 2002. 

Petroleum and Ethanol Fuels: Tax Incentives and Related GAO 

Work. RCED-00-301R. Washington, D.C.: September 25, 2000. 

Electricity Markets: Consumers Could Benefit from Demand Programs, 

but Challenges Remain. GAO-04-844. Washington, D.C.: August 13, 2004. 

Electricity Restructuring: 2003 Blackout Identifies Crisis and 

Opportunity for the Electricity Sector. GAO-04-204. Washington, D.C.: 

November 18, 2003. 

Renewable/ 

Alternative 

Multiple Fuel 

Electricity 
Page 33 GAO-05-414T 

Air Pollution: Meeting Future Electricity Demand Will Increase 

Emission of Some Harmful Substances. GAO-03-49. Washington, D.C.: 

October 30, 2002. 

Electricity Markets: FERC’s Role in Protecting Consumers. GAO-03-

726R. Washington, D.C.: June 6, 2003. 

Electricity Restructuring: Action Needed to Address Emerging Gaps in 

Federal Information Collection. GAO-03-586. Washington, D.C.: June 30, 

2003. 

Lessons Learned From Electricity Restructuring: Transition to 

Competitive Markets Underway, but Full Benefits Will Take Time and 

Effort to Achieve. GAO-03-271. Washington, D.C.: December 17, 2002. 

Restructured Electricity Markets: California Market Design Enabled 

Exercise of Market Power. GAO-02-828. Washington, D.C.: June 21, 2002. 

Air Pollution: Emissions from Older Electricity Generating Units. GAO02-709. Washington, D.C.: June 12, 2002. 

Energy Markets: Concerted Actions Needed by FERC to Confront 

Challenges That Impede Effective Oversight. GAO-02-656. Washington, 

D.C.: June 14, 2002 

Restructured Electricity Markets: Three States’ Experiences in Adding 

Generating Capacity. GAO-02-427. Washington, D.C.: May 24, 2002. 

California Electricity Market: Outlook for Summer 2001. GAO-01-870R. 

Washington, D.C.: June 29, 2001. 

California Electricity Market Options for 2001: Military Generation and 

Private Backup Possibilities. GAO-01-865R. Washington, D.C.: June 29, 

2001 

Energy Markets: Results of Studies Assessing High Electricity Prices in 

California. GAO-01-857. Washington, D.C.: June 29, 2001. 

Electric Utility Restructuring: Implications for Electricity R&D. TRCED-98-144. Washington, D.C.: March 31, 1998. 
Page 34 GAO-05-414T 

Mineral Revenues: A More Systematic Evaluation of the Royalty-in-Kind 

Pilots Is Needed. GAO-03-296. Washington, D.C.: January 9, 2003. 

Alaska’s North Slope: Requirements for Restoring Lands After Oil 

Production Ceases. GAO-02-357. Washington, D.C.: June 5, 2002. 

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

Energy Production on 

Federal Lands 

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