The Impact of Budget Sequestration on DOD Energy Innovation

The impacts of budget sequestration are slowly being unveiled to the general public. Furloughs at the Federal Aviation Authority (FAA) led to air traffic gridlock and angry travelers. Parks and national tourist sites are cutting back hours. And the Department of Defense (DOD) recently announced furloughs for 680,000 civilian employees. While these short-term impacts are painful, in particular to those losing work hours and income, sequestration is initiating cuts with negative, long-term impacts, which are not yet immediately apparent.

One area of specific concern is the potential $381 million in cuts to energy innovation investments at the DOD – a 25 percent cut compared to FY2012 levels. Since 2009, DOD has invested $5 billion in clean energy research, development, testing, demonstration, and procurement, representing almost 25 percent of U.S. clean energy funding in FY2012. DOD’s focus on clean energy innovation is important for three reasons:

• The DOD has been the source of some of the last century’s most important breakthrough technologies, including the Internet, GPS, and microchips and it could have a similar impact on clean energy technologies like batteries and smart grid;
• The DOD has developed its own cohesive innovation ecosystem that bridges its investments in research to its procurement budget and actual use of new technologies in the battlefield, which allows for accelerated pathways for technology development;
• The DOD budget is typically not politically controversial in comparison to other sources of energy innovation investment like the Department of Energy, assuring consistent funding over time rather than periods of boom and bust.

During the past five years DOD has quickly ramped up its energy innovation investments to address strategic challenges impacting warfighters, such as protecting liquid fuel supply lines and addressing the geopolitical consequences of climate change. But budget sequestration threatens to slow, or even halt, these efforts.

According to the Budget Control Act of 2011 – the legislative vehicle for the sequester – the DOD budget must be reduced by 9.4 percent beginning in FY2013 from its FY2011 budget and then remain at those levels with minimum increases through FY2021. The severity of sequestration indicates that most programs will feel at least some budget pain, but it’s unclear how each energy program or project will specifically be impacted until DOD leadership decide how to allocate the cuts. Even so, we can estimate how much investment in energy innovation will be reduced at DOD if cuts are made across-the-board.

ITIF’s Energy Innovation Tracker details each of DOD’s energy innovation projects in an easy to use database and provides a good baseline to estimate sequestration cuts. According to the Tracker, the DOD invested roughly $1.5 billion in energy innovation in FY2012, which I’ll use as a close proxy for this year’s budget because Congress simply passed an FY2013 Continuing Resolution rather than a new budget. I also group DOD’s energy innovation budget into two buckets: (1) research, development, testing, and demonstration; and (2) procurement.

Table 1 estimates cuts to energy research, development, testing, and demonstration programs. The second column represents DOD’s energy research budget baseline in FY2011 using Tracker data. The third column represents DOD’s energy budget in FY2012. Assuming the DOD cuts each of these tranches of research funding evenly, I estimate the 9.4 percent cut to each services research budget compared to the FY2011 baseline in the third column. The total estimated sequestration cut compared to DOD’s FY2012 budget is shown in the last column. Based off of these assumptions, sequestration cuts $195.7 million from DOD’s FY2012 energy research budgets, or roughly 19.6 percent.

Table 2 details the same estimation as Table 1, but for DOD’s energy procurement investments. Sequestration cuts $185.2 million from DOD energy procurement investment in FY2012, or a total cut of 38 percent. In total, I estimate that sequestration is cutting DOD energy innovation investments by $380.9 million, or 25.7 percent from its FY2012 budget of $1.5 billion.

What does this mean for DOD energy innovation? Immediately, sequestration is reducing the Army’s ability to develop and demonstrate new hybrid and all-electric vehicle technology for its Green Warrior Convoy, and the Navy’s ability to develop highly efficient power electronics systems in the pursuit of electrifying its ship fleet. It also may reduce DOD’s ability to procure next-generation biofuels for both the Air Force and the Navy, and advanced mobile electric grid systems for the Army. These innovations in power generation and use have the potential to spill over into commercial markets with DOD’s research, testing, and procurement support.

Of course, cuts to DOD’s energy innovation programs may be more or less severe depending on how the DOD prioritizes projects. These estimates don’t attempt to prioritize programs, rather give a sense of how an across-the-board sequestration would impact DOD energy innovation. Nonetheless, to make the numbers work, DOD will almost certainly have to scale back its energy innovation investments to the detriment of its long-term ability to meet its energy security goals.

And at least up until now, DOD has shown an interest in not cutting some of its energy innovation investments. For example, it recently announced a new round of procurement for next-generation biofuels as part of its effort to diversify its liquid fuel options. It’s also moving forward with its planned $7 billion Multiple Award Task Order Contract program through the Army Corp of Engineers. The DOD is contracting renewable energy companies to build and maintain renewable electricity generation projects and in exchange, DOD will sign a long-term power purchase agreement (PPA). DOD just signed agreements for geothermal-based electricity generation projects and will announce other renewable sources later this year.

Only time will tell whether the DOD decides to cut $381 million from its budget elsewhere or decide energy innovation must take a big hit. As ITIF has written before, decisions like these are being made across the federally funded innovation enterprise, as sequestration could potentially cut $12.5 billion from public research budgets. DOD’s ramp-up of investment in energy innovation in recent years shows the significant interest of the defense industry to accelerate the development of energy options for security and mission flexibility. Sequestration could slow – or even stop – these efforts.

Originally posted on Energy Trends Insider.