Energy research and development : introduction

Resources

and Energy

11 (1989)

ENERGY

103-112.

North-Holland

RESEARCH

AND

DEVELOPMENT

Introduction The Editors

This special issue, devoted to the topic of Energy Research and Development, gives an overview of R&D issues in the energy field and brings tools of evaluation to bear on them. While considerable progress has been made in the last decade and half in improving the evaluation of energy R&D, an implication of continuing concerns about the needs for improved energy technologies is that the societal payoff to better informed energy R&D will be great. This special issue attempts to spell out R&D needs and contributes to evaluation methodologies that will help determine efforts needed on particular technologies. Previous research on energy R&D has fallen largely into one of two broad categories: first, technical studies in particular technology areas and, second, economic impacts of R&D. Much has been done in the first area, most of it being specific to particular solar, geothermal, coal, nuclear and the various other energy sources. Myriad works of this genre could be cited. To mention only a very few, the Boer (1988) volume is the latest of its annual review of research and development on solar sources including photovoltaics, biomass and other technologies. The Committee on Geothermal Energy Technology (1987) aided an in depth study of technical requirements for geothermal sources of energy. The Energy Research Advisory Board (1985) summarized the state of various technologies in coal use and support of the research programs aimed at making these technologies feasible. Studies on particular R&D subjects are performed by the National Laboratories of the Department of Energy, the Electric Power Research Institute, universities and private firms. The other broad category of previous work on R&D is economic studies of R&D, dealing for the most part with wider or general issues of R&D with much less emphasis on energy per se. Some of the general economic studies of R&D are aimed at national growth issues and international 01654572/90/$3.50

0

1990, Elsevier Science Publishers

B.V. (North-Holland)

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The Editors, Introduction

competition, as well as the diffusion of technology to LDCs. Gamser (1988) and Kerdoun (1985) are recent examples that deal with the general problem of technology diffusion to LDCs. Thirtle and Ruttan (1986) and Rohrer (1986) are recent contributions in the area of agriculture while Rycroft and Regens (1984), Kassim-Momodu (1988), and Anand and Nalebuff (1987) are examples of recent work that considers energy technology. Another strand of general economic literature focuses on the economy wide effects or macroeconomic effects of R&D. Examples include Bernstein (1988), Levy and Terleckyj (1983) and Sveikauskas (1988). Still another strand deals with the pure theory of R&D including incentives to do R&D as well as to adopt new technologies. Examples here are Griliches (1984), Guesnerie and Tirole (1985), Link and Neufeld (1986), Grossman and Shapiro (1987), Dasgupta and Maskin (1987), and Stoneman (1987). Quirmbath (1986) and Reinganum (1983) deal with adoption of new technologies. Another part of the general economic literature on R&D concerns industrial organization, and deals with the structure of markets where there is R&D and the prospects for competition, as for example Cohen et al. (1987), de Meza (1986) Gallini and Kotowitz (1985), Harris and Vickers (1985), Link and Lunn (1984), Lunn and Martin (1986), Palmer (1984), Vickers (1986) Mehrez (1988), and Dasgupta and Maskin (1987). There is also literature on the effect of R&D on productivity at the industry level or profitability on the firm level, as for example Bernstein and Nadiri (1988), Chappell et al. (1986) Cockburn and Griliches (1988) Griliches (1986), Levin (1988), and Jaffe (1986). Another strand of the general economics literature deals with government involvement in R&D, and covers a wide range of topics. Barnard (j983) and Cohen and No11 (1986), offer evaluations of govenment involvement in particular R&D projects, while Bozeman and Link (1985) study tax incentives to promote R&D. Finger and Mehrez (1985) discuss generally what role government has to promote R&D. Levy and Terleckyj (1983) focus on the effect of government R&D on private R&D while Mayo and Flynn (1988) study how government regulations effect private R&D. Tolley, Hodge and Oehmke (1985) developed methodologies to determine allocation of public research funds and consider incentive problems in a situation of mixed public and private R&D, with concern for R&D in general and some attention to energy. Turning now from general economic studies of R&D to economic studies focusing on energy R&D, these in turn subdivide into those concerned with energy as a whole, and those concerned with specific technologies. The economic studies of R&D for energy as a whole include Jorgenson (1986), Baumgartner and Burns (1984), Keepin (1984), Van Go01 and Bruggink (1984), Kiimmel et al. (1985), Dobbs (1985), Gowdy and Miller (1987), and Maillet (1987) dealing with energy in economic activity; Olsen (1988) and

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105

Jorgenson (1984) dealing with energy and productivity increases; and Ayoub (1984) Curlee (1984), Erickson (1985), DuPont and Diener (1985), Hassanain (1985), Numminen (1986) Criqui and Kousnetzoff (1987), Weyman-Jones (1986), Al-Sahlawi (1988), Byrne and Rich (1988), and Gordon (1987) dealing with overall energy futures. The economic studies of R&D for specific energy technologies cover a wide range of technologies, including gasohol/alcohol, nuclear power, solar, synthetic fuels, biomass, conservation and enhanced oil recovery. The studies deal with economic factors affecting the future of the technologies but are not generally carried out in a full R&D benefit cost framework attempting to compare either societal or private gains with R&D costs for the technologies. Recent work on gasohol/alcohol contains, among others, studies by Barnard (1983), Barzelay and Pearson (1985), Wright (1985), Manse11 and Jordan (1985), Hanson (1985) Robison and Silver (1986), Levinson (1987) Ortmann and Nieuwoudt (1987), Da Motta and Da Rocha (1988) and Da Motta (1987). Research in nuclear power includes Evans and Hope (1984), Sutherland (1986), and Mesquita e Cunha (1987). Solar studies include Katzman (1984), Gunter and Smathers (1984), Hochman and Zilberman (1985) Zuckerman (1985), and Guagnano (1986). Works on synthetic fuels include Daniels (1984) and Yanarella and Green (1987). Biomass pieces include Gopalakrishnan (1985), Shukla and Moulik (1986), and Solo (1987). Dubin et al. (1986) and Puiu and Preda (1986) concentrate on conservation while Stensland and Nystad (1987) discuss enhanced oil recovery R&D. Turning to economic studies of energy technologies most closely related to the present special issue of Resources and Energy, some studies deal with the methodology managers of firms use to decide on R&D efforts. A main work in this literature is Ramsey (1986) which considers criteria used to select R&D projects. A managerial point of view is taken, without, however, spelling out the particulars of how to go about determining benefits from projects. Van Cayseele (1986) addresses the problem of research strategy for a tirm that does multi-project R&D. The comparison is between a sequential strategy and a parallel strategy where there is much spillover between projects. This analysis takes into account portfolios of projects that are discussed in the articles here. Sarnat (1987) argues for a particular criterion of choosing between projects used by firms. He argues stochastic dominance is a better criterion than risk/rate-of-return tradeoffs because R&D distributions are often skewed, biasing the latter analysis. Studies most closely related of all to the present special issue are particular cost-benefit analyses of energy projects and considerations of methodologies available to evaluate alternatives. Anand and Nalebuff (1987) develop a costbenefit analysis for oil exploration in developing countries, incorporating the Hotelling pricing rule in determining net benefits. The methodology for calculating net benefits is similar in spirit to several of the articles in this

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issue. Darvish and Ekstein (1986) perform a cost-benefit analysis of an energy project that takes account of different sources of uncertainty, using a methodology not unlike that in the Barrager and Gildersleeve article in this issue. Peerenboom and Foe11 (1985) also describe a decision analysis technique for multiple-objective projects and give an example of how it works. Their analysis deals with the portfolio problem similar to that considered in the article by Fishelson and Kroetch in the present issue. The focus of this special issue is to identify areas of energy technologies that need R&D and to contribute to methodologies to evaluate efforts to improve these technologies, taking account of the contributions of technologies to goals and of the cost of developing the technologies to the point where they will be widely used. To this end, the issue contains an article on research needs, an article on governmental decision processes, and two articles on the fundamentals of economic evaluation of R&D projects and two articles that apply these fundamentals to energy R&D. The first article, ‘Major energy R&D needs’, outlines major areas of research needs as seen by a group of energy experts from a variety of disciplines. Since 1970, energy systems have experienced significant changes from technological, economic and regulatory influences. To deal with these changes, this article identifies major research needs in energy exploration, extraction, processing, storage, transmission and end-use. Goals considered are energy security, economic efficiency of energy supply and societal acceptability of new technologies. Topics are organized under energy supply, energy end-uses, and pervasive energy issues. Under energy supply, each major source is discussed: coal, natural gas, petroleum, nuclear and renewable sources. Under energy enduses, transportation, electric utilities and conservation are separately addressed. Pervasive energy issues included strategic energy security, dependence on foreign supply and alternative approaches to lessen environmental impacts. The second article, ‘Energy research and long-term energy policy in the Netherlands’, by Aubert concerns the experience of the Netherlands in formulating energy research policy. The article gives a brief history of the process of adopting a methodology as well as an in-depth description of methodology adopted. Early attempts to institute a formal multicriteria decision making (MCDM) technique was time consuming and ultimately failed because it was a formalized black box which left decision makers with little control over the final results. The methodology finally adopted combined multicriteria decision methods with common sense and consists of negotiating agreement at four stages; namely, the nature of future problems in the energy system, the kind of criteria to be set for long-term energy policy, the state of energy options, and finally, agreement on the research needed to develop these options.

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Agreement on the nature of future problems is accomplished by focusing on a specific date, 2010, researching potential bottlenecks in the flow of energy. Agreement on the criteria to be used is accomplished by setting a minimum impact standard and priorities. To be considered, projects must provide an extra 5% contribution to meeting demand at the target date. Projects are then classified as to how well they meet six supply and environmental criteria. Agreement on the state of energy options involves examination of the particulars of the research and how well they match up. Finally, agreement on the research needed to develop the options sizes up current funding and attempts to reallocate resources to better reach the outlined goals. The third article, ‘A framework for the appraisal of energy R&D’, by Tolley, Fishelson and Tiwari considers basic cost-benefit analysis issues for energy R&D projects. It covers single project evaluation as well as multiple project portfolio analysis in corporations. Probability of technical success and market penetration are identified as elements in a cost-benefit analysis. These are combined to yield the net-benefits to a project by comparing time profiles of R&D costs and adoption benefits. An analytical example demonstrates the technique. The article then describes how the cost-benefit analysis can be used to form a portfolio of projects in the multiple project case, when the outcome of one project affects another project bringing out that projects can be substitutes or complements either in technical success or marketability. Finally, the article spells out decision rules for including projects in a portfolio; by comparing net benefits of undertaking projects separately to the net benefits of undertaking them jointly. As evaluating the probability of technical success is an important part of assessing a project’s net benefits. The fourth article, ‘The probability of technical success and R&D appraisal’, by Hodge and Hakkio, develops methods for estimating the probability of technical success from options of experts. Two types of projects are considered: first, projects that are either complete successes or complete failures, and, second, projects that allow for intermediate success levels. For the first type, an expert evaluator’s answers to a questionnaire on the probability of success are used to estimate a logit probability distribution. The results yield weights on project characteristics that can be used to calculate the expected level of success of new projects. For projects that may have partial success, the beta distribution is used as the basis for eliminating a probability density function. Methods of using an expert evaluator’s opinion to determine the parameters of the beta distribution are developed, including estimating the parameters from values of means and variances as well as having the expert pick out the appropriate distribution. The fifth article, ‘A methodology to incorporate uncertainty into R&D

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cost and performance data’, by Barrager and Gildersleeve, develops a methodology that compares competing projects on a head to head basis. The methodology takes into account uncertainty from different sources in the analysis and ultimately calculates a probability distribution for the differences in costs. It combines modeling, sensitivity analysis and subjective probability encoding and involves two stages: a deterministic stage and a probabilistic stage. The deterministic stage does not address uncertainty associated with the comparison, but rather defines the comparison in terms of costs and identities key variables for each technology through sensitivity analysis. The probabilistic stage determines probability distributions for the key variables and then calculates probability distributions for project costs using approximations for the distributions of the key variables. The article applies the methodology in a case study in comparing an integrated gasification-combined cycle plant with a conventional coal plant with flu gas desulfurization. The final article, ‘Energy R&D portfolio analysis’, by Fishelson and Kroetch considers the application of cost-benefit portfolio analysis to energy storage devices. The article brings out the fact that energy storage is well suited to portfolio analysis because there are many different storage technologies and many different sectors where storage could take place. It contains a technical discussion of cost-benefit analysis of R&D projects, with particular attention to technical success. It also contains an example of developing a portfolio of energy storage projects with peak and off-peak electricity markets.

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