Money Talks, Thermal Plants Walk

Deck: 

Why it pays for utilities to be more efficient.

Fortnightly Magazine - June 2007

Some environmentalists labels themselves “skeptics,” or refer to themselves as “reluctant.”

Not Amory Lovins.

The consultant physicist doesn’t embrace the term “environmentalist,” choosing to emphasize his expertise in, and advocacy of, energy efficiency. He’s no moral crusader. As calls for action to address climate change have become more strident, Lovins has taken a more detached approach that emphasizes the one thing all corporations want to bolster—the bottom line.

“The whole climate debate has been spoiled by a sign error—mixing up a plus sign and a minus sign,” Lovins told Public Utilities Fortnightly.

“Most politicians express concern about the cost, burden, and sacrifice required to protect the climate, but practitioners know that climate protection is extremely profitable because it’s so much cheaper to save fuel than to buy fuel. The same is true for electricity.”

Working as chairman and chief scientist at the Rocky Mountain Institute, the research institute he cofounded in 1982, Lovins continues to sell his ideas to a more receptive industry, and he doesn’t hesitate to go after counter-arguments with which he disagrees. (Indeed, Lovins last appeared in our pages in the May 1, 2003, issue, in a hard-charging letter to the editor that took on a Fortnightly article that had appeared a month earlier.)

In our interview, Lovins took a more measured tone—the sound of someone confident that the industry has at last warmed to the ideas he’s been promoting for several years.

Fortnightly: Have you seen Al Gore’s movie, “An Inconvenient Truth”? How closely do Gore’s views on climate change hew to your own?

Lovins: He gets the science right. I wish the film had a chance to provide the profitable solutions to the problem he correctly describes. It doesn’t matter if you agree with him about the science or not. You should do the same things anyway to make money, because it’s cheaper to save fuel than to buy fuel.

If the two parallel universes of politicians and practitioners ever converge, I think the political resistance to protecting the climate will melt faster than the glaciers. We’ll suddenly realize that we’re going to make money on the deal. Many large companies already are making billions substituting efficiency for fuel. There’s no reason it should be different for the rest of us.

Fortnightly: What role do politicians have in either encouraging, or legislating, behavioral changes?

Lovins: I don’t propose legislating behavioral change, and I’m not sure I know anybody who does. It depends what you mean by “behavioral change.” Most people would interpret that to mean, “The government is going to tell me how to live—what I should drive, what kind of house I can live in, what activities I can undertake.” As far as I know, that’s not on anyone’s legislative agenda, and properly so.

What is mainly driving climate protection is the profit motive, competitive strategy, and technological innovation. Legislation is playing a slow catch-up game and is being very much overtaken by events in the private market. That, too, is as it should be.

The Kyoto Protocol is a worthwhile start, and I think we will end up with a carbon cap-and-trade system. I hope we won’t indulge our penchant for ancestor worship through grandfather clauses, because economic theory correctly tells us that a CO2 molecule emitted by an incumbent is exactly the same as a CO2 molecule emitted by a newcomer. They should both have to pay the same for the privilege of emitting it.

That said, although I think pricing carbon is correct and helpful, we can achieve most of the same results simply by helping markets work properly.

Fortnightly: Do you still believe that we can attain a green future and save money at the same time, or are you resigned to the idea that reforming the world’s energy policy will prove to be very expensive?

Lovins: The costs are negative. We’re going to make trillions of dollars on the deal, as quickly as we care to implement.

Most economic theorists assume that global energy intensity will continue to decline by about 1 percent a year. If we could make that 2 percent a year, we’d stabilize carbon emissions, and if we could make it about 3 percent a year, we’d stabilize the climate rather quickly, to the extent that irreversible changes aren’t already underway.

Could we actually contemplate 2 or 3 percent a year reduction in global energy intensity? Yes, indeed. The United States has routinely done about 2.5 to 3.5 percent a year without trying. Last year we did 4 percent. Attentive companies routinely and very profitably reduce their energy intensity by 6 or 8 percent a year. So, since we have so many examples of diverse entities reducing energy intensity 2 to 3 times as fast as needed to stabilize the climate, and since they all make money on the deal, why should 2 or 3 percent a year be hard, or costly? There’s no empirical evidence whatsoever that either of those should be true. They’re simply theoretical assumptions, contrary to all the facts we have.

Fortnightly: You’re a consultant for Wal-Mart. You also consult for the Department of Defense. What can utilities learn from those entities?

Lovins: There’s something to learn from DOD in efficient use, but even more on the supply side, because the Pentagon is the biggest global buyer not only of oil but also of renewable energy, and aims to become more so, partly for reasons of resilience and security of supply. Most bases depend on the public power grid for their electricity, and the military is concerned that’s not good enough to ensure mission continuity.

Wal-Mart is a great example of private-sector leadership. We worked on both their heavy trucks (of which they have the biggest private fleet) and their stores. In the case of trucks, based on our work they simply announced that they’re going to double the efficiency of their fleet. The suppliers have re-sponded magnificently in figuring out how to do that profitably for all concerned. Wal-Mart will make billions on the deal, so they’re highly motivated.

This is a small example of the efficiency bonanza that awaits the attentive. My team has lately redesigned $30 billion worth of facilities in 29 sectors. We consistently find savings around 30 to 60 percent in retrofits with paybacks averaging 2 to 3 years. In new installations, we generally find savings around 40 to 90 percent, with almost always lower capital costs. This is across 29 very diverse sectors of the economy. We haven’t found a sector yet where you can’t produce this sort of performance.

Fortnightly: There’s a new openness in the industry to the idea of nuclear power. Have your views on nuclear power shifted any in recent years? Wind energy also is generating great interest. How big a piece will wind be in the green future?

Lovins: Wind is the fastest-growing energy source in the world, other than solar cells, which start from a much smaller base. Wind has over 75 GW installed. Germany and Spain each install 2 GW of wind a year.

The supposed storage problem of variable renewables like wind and solar is actually not a significant problem, even at a very large scale, because the backup needed for grid stability is less than the backup we’ve already installed and paid for to cope with the intermittence of large thermal stations, which have typically a 6- or 8-percent forced outage rate and fail unpredictably for a long time in gigawatts chunks.

All sources of electricity are unreliable—for different reasons, with different degrees of predictability and different scales and durations of outage. If you properly diversify variable renewable technologies and disperse them over hundreds of kilometers, and forecast them and integrate them with your supply-side and demand-side resources, their variability is not a significant issue, even at very high penetrations.

As a student of nuclear issues for about 40 years, I continue to feel more than ever that nuclear power is unnecessary and uneconomic, so we don’t even need to argue whether it’s safe and nonproliferative. Micropower—cogeneration and renewables other than big hydro—in 2005, the last full data year we have, added worldwide four times the output and 11 times the capacity that nuclear added worldwide. Micropower in 2005 provided one-sixth of the world’s electricity and one-third of the world’s new electricity. In fact, in 2006, micropower surpassed nuclear power in global kilowatt-hours produced, as it had surpassed nuclear in installed capacity in 2002.

For those who think that the real competitors to nuclear are coal plants: Sorry, the revolution already happened, and you missed it. All kinds of central thermal plants are uneconomic, and the market is telling us that very clearly by buying other stuff instead for the majority of its service needs.

Fortnightly: This is the 25th anniversary of your co-founding Rocky Mountain Institute. What has been the institute’s crowning achievement?

Lovins: I think we’ve substantially shaped a shift toward energy and resource efficiency in thought and action, especially in the private sector. We will see a lot more of that at a rapidly accelerating pace.

Here’s an indicator of where the juicy potential is. From 1975 to 2006, primary energy use per dollar of real GDP in the United States fell by 48 percent, but within that, oil intensity fell 54 percent despite stagnant light-vehicle efficiency; direct natural-gas intensity fell 64 percent, but electric intensity fell only 17 percent.

Why did electric efficiency lag, even though it’s the most expensive form of energy and therefore the most lucrative kind to save? Because, I suggest, it’s the kind of energy most often priced at embedded historic average costs, not on the margin; it’s by far the most heavily subsidized form of energy. It has the most split incentives between builders and buyers, landlord and tenants, etc. It has particularly opaque bills. And most of all, in 48 states, we reward distribution utilities for selling you more electricity and penalize them for cutting your bill. This is just as dumb as a possum and it’s got to stop. It puts utilities cross-wise with their customers’ interests, as well as their own. The reintroduction of decoupling and shared savings will be huge benefit to both the industry and its customers. Then we will start to catch up to that huge overhang of unbought efficiency.

We have technology now that can save three-quarters of the electricity we use, at an average cost of around 1 cent a kilowatt-hour—obviously cheaper than just running a thermal plant, even if building it costs nothing. Anyone who builds costly power plants, betting that efficiency won’t get bought, risks serious disappointment.