Small is Profitable

The Hidden Economic Benefits of Making Electrical Resources the Right Size

Amory B. Lovins

• Publisher: Routledge
• Year: 2020
• eBook ISBN: 9781134258819
• Topic: Economics
• Subtopic: Ecology
• Index: Economics

Today's electricity industry - large power stations feeding a nationwide grid - will soon be a thing of the past. This book explains why and what will replace it - decentralized and distributed electrical resources which can be up to 10 times as economically valuable. The authors - all leading experts in the field - explain very clearly and thoroughly all the benefits, so the engineers will understand the economic advantages and the investors will understand the engineering efficiencies. Here's what industry experts are saying about Small is Profitable... 'A tour-de-force and a goldmine of good ideas. It is going to have a stunning impact on thinking about electricity.' Walter C. Patterson, Senior Research Fellow, Royal Institute of International Affairs, London. 'An amazing undertaking - incredibly ambitious yet magnificently researched and executed.' Dr. Shimon Awerbuch, Senior Advisor, International Energy Agency, Paris. 'Outstanding...You have thought of some [benefits] I never considered...A great resource for the innovation in energy services that will have to take place for us to have a sustainable future.' Dr. Carl Weinberg, Weinberg Associates, former Research Director, PG&E. 'This is a brilliant synthesis and overview with a lot of original analytics and insights and a very important overall theme. I think it is going to have a big impact.' Greg Kats, Principal, Capital E LLC, former Finance Director for Efficiency and Renewable Energy, U.S. Department of Energy. 'E. F. Schumacher would be proud of this rigorous extension of his thesis in Small is Beautiful. It shows how making systems the right size can make them work better and cost less. Here are critical lessons for the new century: technologies tailored to the needs of people, not the reverse, can improve the economy and the environment.' Dr. Daniel Kammen, Professor of Energy and Society and of Public Policy, University of California, Berkeley. 'Small is Profitable creates an unconventional but impeccably reasoned foundation to correctly assign the costs and true benefits of distributed energy systems. It has become an indispensable tool for modelling distributed energy systems benefits for us.' Tom Dinwoodie, CEO and Chairman, PowerLight Corporation. 'A Unique and valuable contribution to the distributed energy industry...Small Is Profitable highlights the societal benefits of distributed resources, and will be a helpful guide to policymakers who wish to properly account for these benefits in the marketplace.' Nicholas Lenssen, Senior Director, Primen. 'This book will shift the electric industry from the hazards of overcentralization toward the new era where distributed generation will rule.' Steven J. Strong, President, Solar Design Associates, Inc. 'Readers will understand why distributed resources are poised to fundamentally alter the electric power system. Its comprehensive review of the benefits of distributed resources [is] an important part of my library.' Dr. Thomas E. Hoff, President, Clean Power Research. 'The most comprehensive treatise on distributed generation.... Great job and congratulations.' Howard Wenger, Principal, Pacific Energy Group '..[D]ensely packed with information and insights...goes a long way to demonstrate that the former paradigm of electric power supply no longer makes sense.' Prof. Richard Hirsh, University of Vermont, Leading historian of the electric power sector. 'Amory Lovins was already the world's most original and influential thinker on the future of energy services in general and electricity systems in particular. This remarkable book is a very worthy addition to an extraordinary legacy.' Ralph Cavanagh, Energy Co-Director, Natural Resources Defense Council. 'This is a book every utility professional should have on the bookshelf.' Dr Peter S. Fox-Penner, Principal and Chairman of the Board, the Brattle Group, former Principal Deputy Assistant Secretary of Energy.

Part One
NEEDS AND RESOURCES

1.1 THE INFLECTION POINT

The electricity industry is widely considered the highest-investment sector of the economy, and among the most important and mature. Electricity now enables a vast range of societal functions, from the most mundane to the most sophisticated. Yet as often happens in the history of technology, just as this industry seems to be at the pinnacle of its achievement, its own structure, design assumptions, and technological content are also becoming fundamentally obsolete.

Providing electricity is an almost unimaginably vast enterprise. In the United States alone, its half-trillion dollars’ worth of net assets generates more than $220 billion of sales per year, or nearly 3% of GDP. It also consumes 38% of the nation’s primary energy. By burning fossil fuels, which produce about 70% of U.S. electricity, the industry also releases more than one-third of the total oxides of carbon and nitrogen and two-thirds of the sulfur oxides emitted in the U.S. For many years until the late 1980s, the electricity industry’s investments, plus roughly equal Federal subsidies (291–2), were about as large as those of the nation’s durable-goods manufacturing industries, and today on a global scale it consumes for its expansion approximately one-fourth of all development capital.

By many measures, these prodigious commitments of resources have been successful. Although electricity is only 16% of all energy delivered to final users in the United States, it is such a high-quality, versatile, convenient, controllable, clean-to-use, and generally reliable form of energy that it has become a disproportionately pervasive and essential force in modern life. Though electricity has so far been beyond the reach of the two billion people who still lack it (except for costly batteries), widespread aspirations to get it symbolize the path to modernity. Its use in the United States has grown each year but three (1974, 1982, and 2001) for the past half-century. During the second half of the twentieth century, the U.S. population grew 86% while electricity usage grew by nearly tenfold, so average per-capita use of electricity more than quintupled (191, 200). (Remarkably, there are no government statistics for total U.S. generation or consumption of electricity before 1989, because previous records were not consistently kept on production or disposition by non-utility entities, and electricity industry statistics don’t exactly match government data.)

Producing and delivering electricity is extremely capital-intensive––several times as capital-intensive as the average manufacturing industry. Per unit of delivered energy, the electricity system is about 10–100 times as capital-intensive as the traditional oil and gas systems on which modern economies were largely built (414). Generating electricity by traditional means is also very fuel-intensive. Classical power stations that raise steam to turn turbines that run generators that ultimately deliver electricity through the grid necessarily consume 3–4 units of fuel per unit of electricity delivered, and even the most efficient combined-cycle plants decrease this ratio to only about 1.8. Electricity is therefore a far costlier form of energy than direct fuels: in 2000, for example, the average kilowatt-hour (kWh) of U.S. electricity was delivered at a price of $0.0666—the same price per unit of heat content as oil at $114 per barrel, about 3–6 times the recent world price of crude oil (not yet refined and delivered).

Electricity is only one-sixth of the quantity, but two-fifths of the cost, of all energy delivered to final users in the United States. This high price makes electricity an unjustifiably costly way of doing low-grade tasks like heating space or water. Yet the higher-quality services that electricity best provides, such as running motors and electronics, are a bargain. For example,¹ the lifecycle cost of an electric motor per horsepower-hour is on the order of 5% that of equivalently powerful horses. It is thus not surprising that a modern American household, or even a car, may easily contain several dozen motors. Modern life without electric light, shaftpower, and electronic equipment would be very different—for most people, much worse. Ultimately, electricity’s value depends entirely on how it is supplied and used. New approaches to both the supply and the use of electricity therefore offer enormous and rapidly expanding opportunities for innovation and improvement.

¹ A horse is about as powerful as seven strenuously exercising or twenty ordinarily laboring people. But a 50-horsepower motor might cost only ∼$50/hp to buy and around $2/h to run, while 50 good draft horses with equivalent nominal total power and operating life might cost on the order of $1,500/hp to buy and $38 per working hour to feed (426). How one values the relative functionality, intelligence, feeding and waste characteristics, reliability, conviviality, self-reproducing and -repairing abilities, etc. of these options is a far more complex question.

Despite this vast global industry’s remarkable success, and because of its recent history, its competitive and regulatory structures are rapidly shifting in many countries. Meanwhile, an even more fundamental change is emerging largely unnoticed: a shift in the scale of electricity supply from doctrinaire gigantism to the right size for the job. As one industry team stated in 1992, “From the beginning of [the twentieth] century until the early 1970s, demand grew, plants grew, and the vertically integrated utilities’ costs declined. There is evidence that this trend may be fundamentally reversing in the 1990s.” (629) Looking back on the 1990s, it is now obvious that this reversal has actually occurred. In 1976, the concept of largely “distributed” or decentralized electricity production (412) was heretical; in the 1990s, it became important; by 2000, it was the subject of cover stories in such leading publications as the Wall Street Journal Economist, the, and (229, 234) New York Times the; and by 2002, it was emerging as the marketplace winner.

This change is exactly the sort of “inflection point” described by Andrew Grove of Intel in his 1996 book Only the Paranoid Survive: How to Exploit the Crisis Points That Challenge Every Company and Career (278). Grove describes an inflection point as a pivotal, wrenching transformation that sorts businesses between the quick and the dead. If properly understood and exploited, an inflection point is the key to making businesses survive and prosper. In the technical system that invisibly powers the modern world, the shift of scale now underway has profound implications, both in its own right and as a harbinger of similar shifts toward appropriate scale in many other technical and commercial systems.

The change of scale dissolves the old pattern of the electricity industry; yet a clear vision of the new pattern is still struggling to be born. The shift has so far been motivated less by an understanding of appropriate scale’s opportunities than by unpleasant experience of inappropriate scale’s dangers. But with a more balanced appreciation of the opportunities that spring from making electrical resources the right size, the transition could be far faster, smoother, and more profitable. This book explores the issues that will define the new pattern as they emerge from radical changes of technology, analytic methods, and institutional attitudes already well underway. Properly understood, these issues could greatly accelerate and intensify the shift of scale by revealing many unexpected forms of value waiting to be captured by alert practitioners.

1.2 CONTEXT: THE PATTERN THAT CONNECTS

The electricity industry, to a degree still only dimly realized by many of its participants, has ended a long and illustrious chapter and is beginning the next. As we shall see, its history has created powerful forces that now compel this shift from highly centralized toward highly distributed—decentralized—physical and organizational patterns.

The shift of scale in electricity systems is accompanied by a shift toward renewable energy sources, and toward those that might not be renewable (such as fuel cells using hydrogen derived from fossil fuels) but can still be environmentally benign, either at the point of use or throughout the fuel cycle.² Not all renewables are either distributed or benign, but since all three shifts are occurring simultaneously, and many renewables are both distributed and benign, this discussion inevitably blends elements of all three. Its main focus, however, is on the size and interconnection of generating units.

² For example, a fuel cell using hydrogen derived from natural gas can be climate-safe throughout its fuel cycle if the carbon dioxide produced when a reformer separates hydrogen from the natural gas is stored underground or in some other “sink.”

1.2.1 A dozen drivers of distributed utilities

The electricity industry is starting to experience what might be ironically called the “market-driven withering away of the state.” The vast arenas being prepared for the gladiatorial combat of wholesale power competitors may soon become echoing, windswept shells populated by the ghosts of long-dead economic theorists—blind-sided yet again by technology.

As often happens, the generals are re-fighting the previous war, and the planners are too distracted by one recent change in technology to notice the even greater next change bearing down on them. Just as we are getting used to the idea that cheap, fast-to-build, factory-produced, and extremely efficient combined-cycle gas turbines (§ 1.2.4) are already finishing off classical central steam power stations, an even greater threat to both old and new generating technologies is creeping up unseen. Far smaller-scale ways to save, store, and make electricity are becoming spectacularly cheaper and more valuable.

These “distributed resources” could displace new bulk power generation, bulk power trade, and even much transmission³ as new technologies, market forces, institutional structures, analytic methods, and societal preferences propel a rapid shift to “distributed utilities,” operating on a scale more comparable to that of individual customers and their end-use needs. At least a dozen such forces are now massing to create an expanding and cavernous discontinuity:

1. Efficient end-use. Big savings of electricity can now often cost less than small savings, thanks to whole-system engineering that milks multiple benefits from single expenditures and hence “tunnels through the cost barrier.”, (288, 429, 433)
2. Small-scale fueled (co)generation. Commercial gas-turbine co- and tri-generation can deliver electricity at an effective price of ~$0.005–0.02/kWh net of waste-heat credit. These benefits can be captured by microturbine, engine-driven, and, imminently, increasingly affordable packaged fuel-cell technology systems (88, 132–4).
3. Cheap kilowatt-scale fuel cells. Exploding volume and plummeting cost both seem inevitable for proton-exchange-membrane (PEM) fuel cells, driven by the interaction between two huge markets—buildings, where the waste heat can provide building services often about big enough to pay for natural gas and a reformer, and vehicles, at first standalone and later easily connected to the grid as portable generators when parked (440, 758).
4. New fuels. The traditional fuel slate is about to be transformed by adding more biofuels, and soon natural gas converted at the wellhead to pipeline hydrogen (with the added benefit of cheaply sequestered CO₂); renewable hydrogen; and hydrogen made at old hydro-electric dams (“hy...

Table of contents

• Cover
• Title Page
• Copyright Page
• Dedication Page
• Contents
• Executive Summary
• Preface
• Part 1 Needs and Resources
• Part 2 Benefits of Distributed Resources
• Part 3 A Call to Action: Policy Recommendations and Market Implications for Distributed Generation
• Table of defined terms
• Table of illustrations
• References
• About the authors
• About the publisher