Will free market spur energy saving?

The free-market forces of "Reaganomics" may drive the United States toward greater energy conservation rather than increased supply. Four separate analyses that have blossomed this spring identify decontrol of oil and natural gas prices as the essential element of an energ policy that could both give the US new prosperity and free it from dependence on foreign oil.

However, although the administration expects a liberated market to induce massive investment in new energy supplies, these studies suggest that money would flow instead to energy conservation as investors discover where the biggest payoff really lies. Moreover, they indicate that energy development that emphasizes conservation would take less capital than would increasing supply, and it could maintain substantial economic growth as well.

"Our numbers say that, if you do have a free market in energy, what you will see is a massive investment in energy productivity," explains Steven Carhart of the Mellon Institute. "The energy efficiency path we're talking about is actually the cheapest path, and will strain capital markets less than the all-out supply approach . . . ," says energy analyst Jan Beyea of the National Audubon Society.

Three studies already available were carried out respectively by the National Audubon Society, the Solar Energy Research Institute (SERI), and researchers Marc H. Ross of the University of Michigan and Robert H. Williams of Princeton University. A fourth analysis is expected soon from the Mellon Institute, which published a preliminary paper a year ago.

These studies are more than an exercise in semantics. The emphasis they give to economic growth comes directly out of their findings. Indeed, this has surprised some of those making the studies.

"The environmentalists have run into a paradox. Their conservation strategy produces economic growth, and that is not what they had in mind," quips the Mellon Institute's Roger Sant. More seriously, he and others involved in these studies point out that the very fact that conservation makes economic sense means that it is good for economic growth.

While cutting energy use in AD 2000 almost 25 percent over that of 1980, "it is possible to construct a plausible, practical, and economically attractive sequence of events that would allow productivity of the average American worker to increase as fast as it has during the past 20 years," notes the SERI study.

These studies cut what analyst Beyea calls "a middle-of-the-road path" in energy policy. Although they emphasize efficient use of energy and solar power, they do not eschew traditional energy sources, except to aim at independence from imported oil.

The Audubon study, for example, foresees a doubling of nuclear energy over the next 20 years -- growing from 4 percent to 8 percent of the total US energy supply. Use of coal would rise moderately, from 20 percent to 28 percent of total supply. And, although "solar renewables" are expected to meet 25 percent of US needs in 2000, most of this (19 percent) would be biomass (wood and alcohol), water power, and wind power. Solar collectors and solar-electric cells still would be a smaller contributor.

Where the studies differ drastically from the so-called conventional wisdom is in their anticipation of future energy demand. Estimates are usually given in quads (Q). One Q is a quadrillion British thermal units of energy. The US used about 80 Q in 1980.

The latest forecast by the Department of Energy, released last month, puts US energy demand at 102 Q in 2000. That is down from the 122 Q estimate of two years ago. The Edison Electric Institute expects something like 117 Q of demand as a moderate projection two decades hence. In contrast, SERI says putting investments in energy efficiency and renewable supply on a parity with conventional energy supply investments could bring consumption down to 62 to 66 Q oever that period. Williams and Ross think demand could be lowered to 64 Q. The Audubon study anticipates a steady demand of 80 Q throughout the period. And the Mellon study will likely project a modest increase to 88 Q of demand by 2010 (a 30-year projection).

To the conservationists, the key to curbing energy demand while maintaining economic growth is to carry free-market economics to the point where, in their terms, conservation and solar energy (in its various forms) can compete equally for investment dollars with coal, nuclear, gas, and oil. In particular, they dislike the boost in funding that the Reagan budget gives nuclear power while cutting back substantially on funds for conservation and solar energy programs.

"The proposed budget cuts, based on the mistaken notion that all the government must do in a market-oriented policy is decontrol oil and gas prices, would leave the nation's conservation program in a shambles," says Princeton's Robert Williams, as quoted in a report in Science. He adds, "The fate of nuclear power is not being left to the invisible hand of the market."

The Mellon Institute's Mr. Carhart agrees, being quoted in the same report as saying: "I can't see why the federal government should be involved in synfuels or why the nuclear budget needs to be increased. . . . These things should stand or fall as business investments."

This seems to be a major battle line drawn in these studies. While their authors would have nuclear power and other conventional energy sources compete for investment resources without federal subsidy, they do want subsidies for conservation and solar energy. Incentives such as low-cost loans and tax credits are seen as necessary to encourage these energy options, at least for homeowners. SERI even suggests at tax penalty on industrial energy use to encourage conservation, although it does recognize that this could be too much of a burden for weak companies.

Recognizing that there is no such thing as a really free market in the energy field, the conservationists also see a continuing need for some regulation. The Audubon study, while calling for decontrol, notes, for example: "We do, however, think Congress should insist on efficiency standards and higher automotive fuel-economy standards up to 37.5 miles per gallon by 1990."

At the same time, the study adds, "But we think we can work at [the] state level and with public utilities to accomplish our goals." This reflects the realization that regulation from Washington is not now a viable way to handle energy conservation matters. The society anticipates having to work at what its president, Russell W. Peterson, calls the "grass-roots level."

These studies have been several years in the making. The SERI analysis, for example, was commissioned by the Department of Energy in 1979. So their conclusions were not concocted in response to the new administration's budget decisions. However, their common theme of prosperity through free-market economics and energy efficiency now is likely to become a rallying cry for an effort to restore at least some of the lost funding to Energy Department conservation and solar energy projects, probably by transferring some funds from nuclear energy programs. Given President Reagan's recent budget victory in the House, at this writing the prospects for doing so this year seem slim.

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