McKinsey Interviews Amory Lovins  

The McKinsey Quarterly has an interview with energy efficiency guru Amory Lovins.

The Quarterly: Given the economic benefits of saving energy, why haven’t companies already seized all the opportunities available to them?

Amory Lovins: Most chief executives assume that smart engineers are already doing everything they should to cut costs. CEOs don’t see all the market failures operating both in the C-suite and several levels down.

For example, most companies behave as if they’re capital constrained, so they defer or simply don’t approve these investments. Even without risk-adjusting your discount rates, saving energy is among the highest-return investments anywhere. But it tends not to get attention, because energy is only 1 or 2 percent of the cost of doing business, unless you’re doing something like smelting aluminum. It just doesn’t rise to the priority level most strategists care about.

And I’m astonished how often chief executives confuse the top and bottom lines. Years ago, I was talking to the head of a Fortune 50 company and was able to tell him about an engineer who had just cut $3.50 per square foot per year off the energy costs in one of the company’s plants. The CEO quickly and correctly translated that into $3.5 million in cost savings. But in the next breath, he said he couldn’t get excited about energy, because it was only 2 percent of his cost of doing business! He forgot where saved overhead goes—straight to the bottom line.

I had to do the arithmetic and show him that if he hypothetically achieved the same result in his 92 million square feet of facilities worldwide, his total net earnings would rise by more than 50 percent. That got his attention. He promoted the engineer, who spread his practices all over the company. Until then, that idea had never occurred to top management, because energy wasn’t an important factor cost. ...

The Quarterly: So if your boss doesn’t know about it and you’re not getting paid more for it, what’s the incentive to suggest improvements?

Amory Lovins: It’s why you became an engineer in the first place: the joy of doing great engineering and coming up with really cool stuff that works better and costs less. When engineers experience whole-system design—optimizing not just parts but entire systems, giving rise to higher savings at lower cost—they’ll never do things the old way again. It irreversibly rearranges their mental furniture. They’re really being creative and not functioning as mere cogs. Unleashing human creativity is an irreversible process.

Creating a culture of curiosity and measurement is immensely important. Here’s an example. I was once in a building that had a 50-kilowatt load of unknown origin. We had to trace all the wires to find the cause: an electric snow melter, under the parking lot, that was running 24/7, every day of the year, including the blazing summer, just eating electricity. Nobody knew it was there. Such waste is all over the place! And until you have a culture of measurement and curiosity, you won’t find it. ...

The Quarterly: What should companies be thinking about when it comes to alternative energy?

Amory Lovins: I don’t think most executives realize that a sixth of the world’s electricity and a third of new electricity now come from micropower—by which I mean on-site or decentralized energy production, such as waste-heat or gas-fired cogeneration, wind and solar power, geothermal, small hydro, and waste- or biomass-fueled plants—rather than from central thermal stations. Micropower is beating the central model because it’s cheaper and has far lower financial risk; it now provides from one-sixth to over half of all electricity in 12 industrial countries. The United States lags with 6 percent.

What about the alleged nuclear renaissance? In 2006, nuclear’s added net capacity—1.44 gigawatts—was less than that of solar cells and a tenth that of wind power. Micropower added 43 to 58 gigawatts and surpassed nuclear’s output. Distributed renewables alone got $56 billion of private risk capital. Nuclear, as usual, got nothing: it’s only bought by central planners. The world now has more wind capacity than the United States has nuclear capacity. In addition, the United States in 2007 added more wind power than it has added coal power in the past five years combined—or than the world added nuclear power over the same period. For anybody who takes the market seriously, what part of that story don’t you understand? These market trends also are good for our climate because new nuclear power buys you two to ten times less coal displacement per dollar than does micropower or improved end-use efficiency, and at a pace that is significantly slower.