October 27, 2011
Oil and coal have created modern civilization; yet their rising costs are starting to erode and outweigh their benefits. Is there a better way to fuel and power the world’s advanced industrial societies than digging up and burning roughly four cubic miles a year of the rotten remains of primeval swamp goo?
Now there is—and rapidly scaling this transition will determine winners and losers among firms and nations. America could be the biggest winner if it shed its old energy system’s costs and risks.
The United States pays about $2 billion a day for oil, half imported, plus twice that in hidden costs—a half-trillion dollars a year each from oil dependence’s macroeconomic costs, oil-price volatility’s microeconomic costs, and the cost of military forces earmarked for Persian Gulf interventions. Thus oil costs over a sixth of our GDP, plus any harm to security, stability, national autonomy and image, health, and environment.
Coal’s annual hidden costs, mainly to health, are at least $180–530 billion. Natural gas’s externalities are smaller but nontrivial. Oil and power plants each emit over two-fifths of fossil carbon, which the U.S. may ultimately price as China is starting to.
Yet counting all externalities at zero, just private internal cost now makes a compelling business case for getting off oil and coal with an average IRR of 14%—including building a secure, resilient, and at least 80%-renewable electricity system.
The tipping point is behind us: solar and windpower have become market winners. New windpower is selling for as little as ~3¢/kWh, net of a 1¢-levelized subsidy. Solar power is winning utility auctions in California. Twelve states’ entrepreneurs can install it on your roof and give you a positive cashflow from day one.
As its prices plummet, renewable power has added half the world’s new generating capacity in the past three years. In 2010, renewables excluding big hydroelectric dams got $151 billion of private investment worldwide, passed nuclear power’s total capacity, and added 60 billion watts. By the end of 2011, that’s how much solar capacity will be manufacturable each year.
Despite its capital, technology, and entrepreneurship, America has slipped from first to third in clean-energy investment in the past three years. The main culprits are a lack of coherent vision and the false assumption that business must wait for gridlocked government, whose inconsistent policies add risk and cost. Last year, Congressional intrigues halved U.S. windpower installations while China added nearly half the world’s new windpower, about doubled capacity for the fifth year running, and blew past its 2020 windpower target. During 2005–10, the renewable share of U.S. electricity edged up from 8.8% to 10.3% while Portugal’s soared from 17% to 45%.
Germany has fuller employment today than before 2008, thanks significantly to its strategy of paying its own efficiency and renewable engineers, manufacturers, and installers rather than buying Russian gas. Japan is shifting this way too. The U.S. must catch up with this multi-trillion-dollar business opportunity or buy forever from others the technologies it largely developed.
Fortunately, our most dynamic and effective institution—business, accelerated by military innovation—can end-run our least effective institutions. This month, Rocky Mountain Institute’s fresh and independent energy vision explains how. Reinventing Fire: Bold Business Solutions for the New Energy Era, introduced by the CEO of Shell Oil and the Chairman of Exelon, maps competitive strategies for winning the clean energy race, driven not laws but by business logic, not by K Street but by the C-suite.
This transition needs no new federal taxes, subsidies, mandates, or laws. The policy innovations needed to unlock and speed adoption need no Act of Congress, but only administrative or state action. Utility regulators in 14 states have already decoupled electric utilities’ profits from their sales. States could adopt feebates, a revenue-neutral way to expand auto-buyers’ choices and apply societal discount rates. In just two years, the biggest of five European feebate programs tripled the speed of raising new autos’ efficiency.
If General Eisenhower couldn’t solve a problem, he enlarged its boundaries to embrace new options, degrees of freedom, and synergies. Reinventing Fire, too, integrates innovations in not just technology and policy but also design and strategy. It also integrates all four energy-using sectors—transportation, buildings, industry, and electricity—because, for example, the auto and electricity problems are easier solved together than separately.
How? Eight firms’ new manufacturing methods for advanced-composite structures can make ultralight but ultrasafe autos cost-competitive: simpler automaking and smaller powertrain pay for the costlier materials, slashing plant investment by 80%. Shrinking the powertrain 2–3-fold for the same acceleration then makes electrification affordable. (Three German automakers plan 2012–13 volume production of carbon-fiber electric autos; BMW confirms the carbon fiber is paid for by fewer batteries.) Three steep and synergistic learning curves—in carbon fiber, automaking, and electric powertrains—create gamechanging autos. By 2050, those plus tripled-efficiency trucks and planes, and more productive use of all vehicles, permit 90% more automobility, 118% more trucking, and 56% more flying with no oil and $4 trillion lower NPV cost. Swapping electrons and information between smart vehicles, buildings, and grids then makes electric autos not a burden on the grid, but a valuable flexibility and storage resource, helping reliably integrate wind and solar power.
Similar integrative design often yields expanding returns to efficiency investments in other sectors. As buildings triple to quadruple their energy productivity with an average 33% IRR and industry doubles its energy productivity with a 21% IRR, efficient and timely use of electricity can gradually shrink demand despite electrified autos. This simplifies the supply shift to cogeneration, reused saved gas, and renewables. The resulting efficient, diverse, dispersed, renewable, resilient electricity future costs about the same as business-as-usual but manages all its risks, including accidental or deliberate blackouts.
America’s elderly, polluting, and insecure electricity system will be gone by 2050. Replacing it will cost about $6 trillion NPV to 2050 no matter what technologies we adopt. So let’s redesign and recraft it to power not just electricity-using devices but also business advantage, profitability, jobs, national security, environmental stewardship, and public health. And let’s focus on outcomes, not motives, because whichever of those results most interests you, Reinventing Fire’s strategy makes sense and makes money.
Our civilization’s greatest-ever infrastructure shift is underway. Humans are inventing a new fire: not dug from below but flowing from above, not scarce but bountiful, not local but ubiquitous, not transient but permanent, not costly but free—and save for a little biofuel, grown in ways that sustain and endure, flameless. Efficiently used, the new fire can do our work without working our undoing. And business leadership can make it so.
Amory B. Lovins is Chairman and Chief Scientist of Rocky Mountain Institute (www.rmi.org), an independent, nonpartisan, entrepreneurial, nonprofit think-and-do tank that collaborates with the private sector to drive the efficient and restorative use of resources. Lovins’s and RMI’s business book Reinventing Fire is published by Chelsea Green (www.chelseagreen.com/bookstore/item/reinventing_fire) on 27 October 2011, when www.reinventingfire.com posts extensive technical support and portals to RMI’s sectoral implementation initiatives. RMI invites your support and engagement.