The Climate Challenge Memorandum of Understanding (MOU) describes DOE's obligations to the program. Section III of the MOU identifies several actions that DOE agreed to take. In particular, Section III.C.1 states that: "to the extent feasible, DOE agrees to take steps identified in Exhibit C, DOE Actions to Facilitate Greenhouse Gas Emission Reductions, Avoidance and Sequestration, to address incentives and barriers." Exhibit C lists twelve specific DOE actions:

Work with other Federal agencies to achieve appropriate tax policy for energy efficiency programs;

Work with other Federal agencies and Climate Challenge participants to implement cost-effective energy efficiency improvements and GHG emission reductions at Federal facilities;

Support government/utility joint ventures in energy efficiency to increase market penetration and reduce costs;

Seek funding for renewables;

Seek support for research, demonstration and deployment of fuel cells;

Work with other Federal agencies to address obstacles to continued and increased use of existing hydroelectric power facilities;

Work with other agencies to eliminate regulatory obstacles to tree planting at abandoned mine sites;

Seek funding for programs that encourage the use of electrotechnologies and electric vehicles that reduce net GHG emissions;

Seek support for research on cofiring low-sulfur coal with natural gas;

Encourage commercial deployment of high efficiency clean coal technologies;

Work to facilitate resolution of issues of nuclear waste storage, nuclear power plant life extension and relicensing policies, and the future of nuclear power; and

Work with Federal, state and local agencies and regulators to identify unwarranted obstacles to activities that reduce GHG emissions and work toward acceptable solutions.

Other DOE actions to support the Climate Challenge Program are identified in Section III.C in the main body of the MOU:

• Encourage recovery in electric rates of utility Climate Challenge expenses;
• Develop workshops and training courses;
• Provide incentives for reducing, avoiding and sequestering greenhouse gases (subject to authorization and appropriation); and
• Provide copies of DOE materials.

The remainder of this section describes DOE's efforts in support of the Climate Challenge Program.

Work with other Federal agencies to achieve appropriate tax policy for energy efficiency programs

DOE consulted with officials from the Department of the Treasury on tax treatment for utility expenditures for energy conservation and urged that these utility expenses be treated as business expenses. In Revenue Ruling 95-32, issued in early April 1995, the Internal Revenue Service concluded that utility expenditures on demand-side management (DSM) programs can be deducted from corporate income taxes as business expenses. The revenue ruling recognizes that utilities may include DSM expenses in the rate base for ratemaking purposes. In these situations, the utility will earn a rate of return on the unamortized balances over a period of years. The IRS nonetheless concluded that DSM costs are not capital expenditures that must be amortized for tax purposes.

DOE will continue to work with the Department of Treasury to seek appropriate resolution of similar tax issues as they arise.

Cost-effective energy efficiency improvements and GHG emission reductions at Federal facilities

The Department of Energy is a member of the Federal Energy Management Program (FEMP). The program has several successful energy efficiency, water conservation improvements, and renewable energy projects at Federal facilities. The following is a summary of these projects:

A major objective of DOE energy efficiency programs is investment in R&D to increase energy efficiency in all sectors of the economy. U.S. energy efficiency, as measured by energy consumption per dollar of domestic gross product, remains well below that of Japan and Germany. This indicates that there are significant opportunities to increase U.S. energy efficiency while reducing pollution.

Benefits from energy conservation and efficiency improvements include avoiding costly capital investments in electricity capacity, reducing vulnerability associated with having to import foreign oil and reducing adverse environmental impacts. One of the ways to increase market penetration and reduce costs of energy efficient technologies is for government to undertake joint ventures with industry partners. DOE has several government/utility joint ventures that support increased market penetration and cost reduction of energy efficient technologies.

DOE supports research and development efforts in renewable energy technologies. The Department also supports efforts to commercialize and deploy these technologies in both domestic and international markets. In a major portion of these efforts, the Department requires matching funds from industries, States, and other program partners. Specific efforts are conducted on photovoltaic, solar thermal electric, wind, biomass electric and geothermal technologies. Periodically, these programs support deployment activities involving grid-connected operation in cooperation with one or more electric utilities. Such projects provide performance evaluation and operational experience for all participants: the host utility(s), the system developer, and DOE program managers. These industry/government renewable energy partnerships include the Utility Photovoltaic Group, the Utility Wind Interest Group, and the Utility Biomass Commercialization Association.

Starting in FY 1994 and continuing through FY 1996, the Department requested large funding increases in the Solar and Renewable Energy Program. In FY 1994 and FY 1995 these requests for increases in funding were approved by Congress. In FY 1996 and FY 1997 Congressional appropriations were well below the appropriation levels of FY 1994 and FY 1995. Table 3 provides the funding history of the DOE Solar and Renewable Energy Program from FY 1993 through FY 1997.

The DOE Fuel Cell program is working on advanced fuel cells that provide clean and efficient power that will be commercially available by 2000. One outcome has been the first commercially available fuel cell power plants using phosphoric acid fuel cell technology. International Fuel Cells Co. has installed more than sixty-five 200 kilowatt units which have logged more than one million hours of operation. Advanced molten carbonate and solid oxide fuel cells have been developed and scaled up to market size. Field tests of these technologies began in FY 1996 and will be completed in FY 1997. Building on results of these field tests, the technologies will be further improved and costs reduced to permit market readiness for dispersed power generation by the year 2000.

On June 3, 1996, the first molten carbonate fuel cell was dedicated in Santa Clara, California. The 2 MW unit is a joint industry/DOE effort, with a $28.3 million contribution from DOE. The molten carbonate fuel cell operates at nearly twice the efficiency of a coal combustion plant, reducing CO2 emissions by nearly 50 percent. The Santa Clara fuel cell is tied to a 70 MWe purchase of early commercial fuel cells by members of the Fuel Cell Commercialization Group. The Santa Clara project was conceived by the Group to reduce the technical risk of purchasing early commercial fuel cells.

In August, 1996, the Administration gave a major boost to the U.S. fuel cell industry by naming the first group of 15 private sector purchasers to receive Federal assistance to buy and deploy these high-technology, environmentally clean systems. The program, a joint effort of DOE and the Defense Department, was authorized by Congress with the intent of stimulating a major expansion of fuel cell manufacturing capability in the U.S. As a result of these grants, 21 new fuel cell power plants will be installed at companies, universities, and state agencies that have agreed to provide at least two-thirds of the cost of "market ready" fuel cell power plants. The Federal government, using funding appropriated to the Defense Department, will pay for the remaining one-third of the capital and installation costs and up to a year of testing.

In addition, performance testing has been completed on the first U.S.-built fuel cell powered bus; fabrication of the second and third fuel cell powered buses is complete. The fuel cell system, operating on methanol fuel, achieved 42 percent thermal efficiency at maximum load and higher efficiency at partial loads. The DOE-sponsored fuel cell bus demonstrated significant energy benefits (twice the fuel economy of comparable diesel buses) and environmental benefits (lowering CO2 emissions by 50 percent and reducing emissions of most pollutants by more than 99 percent compared with comparable diesel buses, due to greater efficiency and lower fuel carbon content).

On February 16, 1996, DOE filed comments in the Federal Energy Regulatory Commission's Docket No. RM95-16 supporting a review by the Commission of its hydroelectric relicensing regulations to correct problems encountered in processing recent applications and to make the relicensing process more efficient. The comments emphasized the need to minimize the cost to prepare and process hydroelectric relicense applications so that these renewable energy facilities can continue to provide clean, low-cost generation.

The Department cited the following specific changes that could improve the efficiency of the relicensing process:

• Initiate the National Environmental Policy Act process before the application is filed;
• Increase use of a prefiling collaborative process to identify and resolve environmental issues;
• Involve Commission staff in the prefiling collaborative process; and
• Create a simpler relicensing process for projects having little environmental impact.

Under the Surface Mining Control and Reclamation Act (SMCRA), no regulations expressly restrict the use of trees in revegetation. However, compliance with SMCRA regulations may limit establishment of viable forest lands on abandoned mined sites. The regulations do not contain any incentives for reclaiming abandoned sites. They do require that an entity reclaiming an abandoned site assume full liability for reclamation equivalent to active mining on previously undisturbed land including revegetation standards and performance bonding requirements. More reasonable standards for revegetation and success rates for that vegetation along with reducing the bond liability periods would do much to remove the disincentives to reclaiming abandoned mines to forests.

These difficulties may have discouraged operators from foresting post-mined lands. Also, aggressive ground cover can hinder tree growth. In many areas, the historical ground cover mix has been tall fescue and related grasses. These grasses grow rapidly and reduce erosion, but they can also shade tree seedlings and inhibit successful tree growth. Several states are developing programs and regulations to encourage tree planting at post-mined sites. Indiana, for example, discourages fescue grasses that can compete with tree growth. Kentucky is undertaking a "Common Sense Initiative" involving coal operators, environmental groups, inspectors, and others to define ways to promote more productive post-mine land uses including reforestation. Based on research demonstrating that less severe compacting of soil during reclamation increases the likelihood of viable tree growth, the state is encouraging the use of rougher grading techniques.

Because it is easier to plant grasses, operators have little incentive to plant trees. However, some states are developing initiatives to encourage planting trees. For example, Ohio has promulgated an undeveloped land use rule, which allows operators to plant trees on lands not previously used for agriculture or forestry without having to meet the post-mining vegetative production quotas established for those land uses. Kentucky's recent resolution to develop rough grading and other reclamation practices acceptable under SMCRA for reforestation and other options that promote the use of trees may result in tree planting practices less costly than those currently required.

DOE has several programs that have the promotion of energy efficient electrotechnologies as a core element:

While DOE programs that encourage the use of efficient electrotechnologies are spread through the Department, the majority are housed within OIT. In both FYs 1994 and 1995 Congress appropriated $124 million for OIT. In FY 1996 DOE requested $173 million, but Congress appropriated only $116 million. For FY 1997, DOE requested $159 million for OIT, but Congress only appropriated $109 million.

The transportation sector is a major consumer of energy, accounting for approximately 27 percent of the energy consumed annually in the U.S., energy in the form of oil products: gasoline, diesel, and jet fuel. Electric drive vehicle technology is a cornerstone of DOE's initiative to significantly improve the energy efficiency of the nation's transportation sector and reduce emissions from vehicles. Through this program, the Department is supporting industry in the development of component and vehicle system technologies that will lead to commercialization of electric and hybrid vehicles in the near-term, and fuel cell powered vehicles in the longer term. The program strategy is to support the technologies which can make a major difference in fuel economy and conduct cost-shared cooperative programs with industry.

In FY 1994 Congress appropriated $74 million for Electric Drive Vehicle Technologies, and in FY 1995 that amount increased to $95 million. In FY 1996 DOE requested $129 million, but Congress appropriated only $94 million. In FY 1997 DOE requested $130 million, but Congress only appropriated $86 million.

Seek support for research on cofiring low-sulfur coal with natural gas

In order to facilitate research, design and development (RD&D) of advanced co-fired systems, the Energy Policy Act of 1992 included provisions for a five-year program on co-firing coal with natural gas in utility and large industrial boilers in order to determine environmental and operational benefits. Although the proposed program has gone unfunded, considerable progress has been made by DOE in the development of co-firing under existing programs and in concert with the utility and gas industries.

Several organizations have been performing RD&D to apply natural gas co-combustion to large-scale utility coal-fired boilers. The Gas Research Institute (GRI) has been the most active U.S. organization pursuing greater application of co-combustion through an active cooperative program with utilities, boiler manufacturers, gas companies, the Electric Power Research Institute (EPRI), and DOE. The objectives of the GRI program are the increased use of natural gas in coal- and oil- fired boilers to reduce emissions and to improve boiler operability in a cost-effective manner.

In addition, DOE is funding a major program to develop a combined cycle, highly efficient "High Performance Power System" (HIPPS) that uses natural gas to boost the temperature of a clean air stream that has been indirectly heated by coal combustion. The high temperature clean air is used to power a gas turbine while the flue gas from coal firing raises steam for further power production.

HIPPS is designed for applications in the 300 to 500 MW size range and is scheduled for completion by the year 2004 when it is expected that power plant designers/manufacturers will be able to offer a commercial HIPPS plant to the utility industry. A typical near-term HIPPS plant would fire approximately 65 percent coal and 35 percent natural gas to achieve plant efficiency of 50 percent, or more, with significantly lower emissions (i.e., less than 10 percent of those from conventional coal-fired power plants).

Encourage commercial deployment of high efficiency clean coal technologies

Utilization of highly efficient clean coal technologies being developed under the Clean Coal Technology (CCT) Program offers a major opportunity to contribute to the reduction of global CO2 emissions. This is because the increased efficiency results in lower CO2 per unit of power generated.

During FYs 1995 and 1996, the international activities of the Clean Coal Technology Program increased substantially and the potential role of clean coal technologies in reducing CO2 emissions on a global basis was emphasized. The importance of these technologies for achieving the goals in improving the global climate was demonstrated in Congressional guidance which directed the program to measure the interest of the U.S. business community in entering into joint government/private sector demonstration projects performed in other countries. In November 1994, DOE solicited statements of interest in commercial projects employing CCTs in countries projected to have significant growth in greenhouse gas emissions. The 77 responses proposed projects employing U.S.-developed CCTs in 21 countries, primarily in the Pacific Rim and Eastern European region. The responses identify the extent to which various types of Federal incentives would accelerate the commercial availability of CCT's in an international context.

Currently, there are 42 projects in the CCT Program, with slightly more than 50 percent in operation and 20 percent completed. A number of commercial successes have been realized, most reducing CO2, SO2, and/or NOx emissions. Additional information on the successes of this program can be found on page III-3 of this report.

Work to facilitate resolution of issues of nuclear waste storage, nuclear power plant life extension and relicensing policies, and the future of nuclear power

The challenge of safely managing and disposing spent nuclear fuel and high-level radioactive waste has engaged the efforts of many individuals and organizations for decades. The effort to find a long-term solution is receiving increased attention from the Administration and the Congress. Much is at stake in the effort to resolve the accumulation of spent nuclear fuel and high-level radioactive waste. Removal of spent fuel from commercial reactor sites, safe storage, and ultimate disposal is critical to maintenance of public support for nuclear generation.

The Nuclear Waste Policy Act of 1982 created the Office of Civilian Radioactive Waste Management (OCRWM) within the Department of Energy to manage and dispose of the spent nuclear fuel and high-level radioactive waste. The Nuclear Waste Policy Amendments Act of 1987 designated the Yucca Mountain site in Nevada for detailed scientific investigation to evaluate the suitability of the site to serve as a geologic repository. In 1994, OCRWM proposed an approach and funding profile that would permit the program to meet the policy goals set by Congress. That approach was pursued with the Fiscal Year 1995 appropriation of $522 million for the program. However, the Fiscal Year 1996 appropriation did not support the continuation of this program approach, as the appropriation was about 40 percent below the 1995 level. Efforts have been refocused at Yucca Mountain to address the critical unanswered technical and engineering questions which will lead to an assessment in 1998 of the viability of licensing the proposed repository site. The 1998 assessment will be an early and integral step on the path to preparing a repository environmental impact statement and a license application in 2002.

OCRWM has restructured its waste acceptance, storage, and transportation activities to maintain a capability to respond quickly and effectively if interim storage is authorized. These efforts target two major near-term objectives. First, OCRWM is working to engage industry in the development of a market-driven waste acceptance and transportation strategy that relies on the private sector for implementation. Second, OCRWM is conducting non-site-specific design and engineering analysis on an interim storage facility design to make early progress toward a Nuclear Regulatory Commission license.

OCRWM will continue its interactions with stakeholders as the Federal waste management efforts progress and will work to assure public and worker health and safety and to protect the environment. The program will continue to share information and seek the views of program regulators, oversight organizations, and other stakeholders as it refines program strategies and plans to meet its near-term and long-term goals.

Work With Federal, State, and Local Agencies and Regulators, Identify Unwarranted Obstacles to GHG Reduction Activities and Work on Acceptable Solutions

As noted earlier, DOE consulted with officials from the Department of the Treasury on the tax treatment for utility expenditures for energy conservation and urged that these utility expenses be treated as business expenses. In Revenue Ruling 95-32, issued in early April 1995, the Internal Revenue Service concluded that utility expenditures on demand-side management (DSM) programs can be deducted from corporate income taxes as business expenses.

In addition, the Department continues to work with the electric industry and state and Federal agencies and regulators to support restructuring of the electric industry that will improve efficiencies. Over the past several years, the Department has filed comments in numerous regulatory proceedings before state commissions and with the Federal Energy Regulatory Commission.

Departmental comments filed with the Public Utility Commission of California on July 21, 1995, are a good representation of the Department's position on restructuring issues that could affect greenhouse gas emissions. In the California comments, the Department supported restructuring that:

• Protects the environment, including establishment of a mitigation strategy if restructuring would have an adverse effect on stabilizing U.S. greenhouse gas emissions;
• Provides adequate funding levels for research and development, including technologies that use renewable energy resources;
• Encourages fuel and technology diversity, including renewable energy resources that do not emit greenhouse gases; and
• Emphasizes market-driven demand-side management and market transformation strategies that promote energy efficiency.

The Office of General Counsel will accommodate requests to intervene in regulatory proceedings of Federal, state and local commissions and boards on issues pertinent to the Climate Challenge program. As of October, 1996, General Counsel had not received any such requests.

DOE is working with MOU signatories to develop software and other tools that can be used to develop Climate Challenge Participation Accords and Letters of Participation and facilitate the reporting of greenhouse gas reductions under the section 1605(b) guidelines. DOE has also developed workshops and other training programs for internal DOE use and will expand these workshops and training courses for use outside of DOE if requested.

The 104th Congress was not receptive to the provision of incentives for reducing, avoiding, and sequestering greenhouse gases. No funds have either been authorized or appropriated specifically for incentives. However, funding was maintained for a number of related programs.

DOE has supplied MOU signatories, individual participants and others with DOE-generated materials including: (1) fact sheets; (2) viewgraphs and other presentation material; (3) compilations of pledged reductions; (4) lists of Climate Challenge participants and contacts; (5) outreach materials; and (6) copies of the Climate Challenge Options Workbook.

In the EIA Voluntary Reporting of Greenhouse Gases Program, extensive efforts have been made to facilitate reporting in the 1996 reporting cycle and in communicating the results of the 1995 reports. Forms EIA-1605 and EIA-1605EZ have been simplified to make them easier to use. The electronic versions of these forms can be loaded with last year's information, avoiding the need to re-key information. EIA has also released the results of the first year's reporting cycle in two formats. The public use database, which contains all the non-confidential reports received during the first reporting cycle, is available on CD-ROM as well as on EIA's World Wide Web site.

DOE has also developed tabletop displays and exhibition materials for use at conferences. These materials have enabled Climate Challenge representatives to meet with many individuals throughout the utilities, related industries, environmental community, and government, and to inform them of the program opportunities within the Climate Change Action Plan.

DOE is ready and willing to provide DOE-generated material to all Climate Challenge participants and others who request it, subject to limitations on program resources.

The Department has been active in negotiating Participation Accords and reviewing existing Accords. DOE has also been active in developing, facilitating, and promoting the Climate Challenge Program, both in the United States and abroad.

The Department has worked extensively with electric utilities to complete the 114 utility agreements signed to date. In addition, with the assistance of the American Public Power Association and the National Rural Electric Cooperative Association, a simpler method of participation has been developed for smaller utilities (those with less than 50,000 customers). In lieu of a Participation Accord, these utilities need only submit a Letter of Participation and worksheet to join Climate Challenge.

The Department has helped make the process of drafting an accord a simple one for the utility participants in Climate Challenge. DOE has met with those utilities that wished by conference call rather than in face-to-face meetings, thus saving them the time and expense of travel to Washington. Most accords have only required one conference call or meeting; subsequent discussions have occurred by fax exchanges or phone calls.

Based on lessons learned from the earlier meetings and discussions with utilities, DOE compiled a two-page memorandum with guidance on putting together an accord. DOE now has sample accords which cover every type of commitment and describe many types of projects to serve as models for other utilities.

The utilities included in the 114 Participation Accords signed to date cover more than 60 percent of the industry's generation and CO2 emissions. This level of participation is considered to be outstanding for a voluntary program. Outreach efforts are underway to increase participation even more.

DOE, with the assistance of the Edison Electric Institute (EEI), drafted a letter for EEI members that signed letters of intent to enter into accords but have yet to sign a Participation Accord or Letter of Participation to encourage them to follow up. In cooperation with other utility trade associations, DOE is preparing similar letters for their members.

In each utility's participation accord, DOE and the utility agreed to meet for a midpoint review of the utility's progress under Climate Challenge. So far DOE has met with about a dozen utilities to discuss the status of their Climate Challenge commitments, and is scheduled to meet with about 50 more by June 30, 1997.

The midpoint review meetings that DOE has conducted with the utilities so far indicate that, by and large, utilities are on track with their Climate Challenge commitments and, in fact, expect to exceed their pledges. Many utilities have begun taking on additional commitments beyond those described in their Participation Accords, and the industry associations are spearheading new industry-wide initiatives. Several utilities have already updated their Participation Accords to record their progress. DOE anticipates that this trend will continue.

TABLE OF CONTENTS

APPENDIX A: CLIMATE CHALLENGE SIGNED AGREEMENTS

Please send comments to:
Lawrence.Mansueti@hq.doe.gov