Advances in Energy Policy: New Opportunities for Japan

Amory B. Lovins CEO (Research), Rocky Mountain Institute, www.rmi.org Director, The Hypercar Center, www.hypercarcenter.org Chairman, Hypercar Inc., www.hypercar.com

Energy Policy Working Group (Kaya Yoichi-sensei, Chairman), MITI

MIITI, Tokyo, 27 November 2000

Copyright © 2000 Rocky Mountain Institute. All rights reserved. Noncommercial distribution by the Working Group is permitted for its and participants’ internal use. The Brownian Random Walk of World Real Oil Price, 1881–1993 Year-to-year percentage price % change, y ea r (-12 ,+255) n -1 to n changes with a one-year lag in 1974 8 5 between the axes. If the price movements showed a trend, 6 5 the “center of gravity” would 4 5 favor a particular quadrant. All that 2 5 % ch an g e, y ear n to n +1 happened after -5 5 -3 5 -15 5 25 4 5 65 85 5 1973 is that volatility tripled; (+255,+4) -1 5 in 197 3 changes stayed perfectly random, -3 5 just as for any

-5 5 other commodity. Graph devised by H.R. Holt, USDOE Market surprise: world crude-oil real price vs. oil consumption, 1970–1Q2000

50 1981 1983 45 1980 40

35 1985

30 1979 1991 25 1974 2000 1997 (1Q consumption) 20 1987 15 1989 1998 10 price (Saudi 34°API light,1992 $) 1999 5 1970 1973 0 45.0045 50.0050 55.00 55 60 60.00 65 65.00 70 70.00 75 75.00 80 80.00 consumption, million barrels per day Data source: http://www.doe.eia.gov, downloaded 24 October 2000 By 2050, an affluent world could meet or beat a 3–4´ C reduction goal ´ 2 ´ 3–4 ÷ 2–4

population ´ affluence per capita ´ carbon intensity C = energy conversion eff. ´ end - use eff. ´ hedonic eff. ´ 1.5 ´ 4–6 ´ 1–2? or ~1.5–12´ lower emissions despite assumed 6–8´ growth in Gross World Product. (A 1993 UN study* found 1.35´ and 8´ respectively, 1985–2050.) Great flexibility is thus available. The future is not fate but choice. *Johansson, Kelly, Reddy, Williams, & Burnham, Renewable Energy, 1177 pp., Island Press, Washington DC. This analysis, though mostly excellent on the supply side, assumed relatively weak end-use efficiency opportunities. PrinciplesPrinciples ofof NaturalNatural CapitalismCapitalism

1.1. RadicallyRadically increasedincreased resourceresource productivityproductivity 2.2. Biomimicry:Biomimicry: closedclosed loops,loops, nono waste,waste, nono toxicitytoxicity 3.3. ShiftShift economyeconomy fromfrom productionproduction ofof goodsgoods toto creationcreation ofof flowflow ofof services,services, rewardingrewarding #1#1––22 4.4. ReinvestReinvest inin naturalnatural capitalcapital Natural capitalism • A way of doing business as if nature were properly valued...but without needing to know what it’s worth • Far more profitable even when natural capital, as now, is valued at zero • Introduced 30 September 1999, US/UK • Published so far in English, German, Portuguese, Chinese (simplified char.) • Forthcoming in Japanese, Danish, Estonian, Italian, Korean, Russian,…. • Being rapidly adopted in private sector USUS hashas savedsaved $200$200 billion/yearbillion/year inin energyenergy costscosts sincesince 11973973——butbut stillstill wasteswastes $300$300 billionbillion aa yearyear – Power-plant-fuel to incandescent-light efficiency: 3% – Efficiency with which a modern 12 km/L car converts fuel energy into driver motion: <1% U.S.U.S. powerpower plantplant wastewaste heatheat == totaltotal JapaneseJapanese energyenergy useuse EvenEven JapanJapan’’ss economyeconomy isis <10%<10% asas energy-efficientenergy-efficient asas physicsphysics permitspermits Major Linked Surprises Are Coming • Negawatts (emphasizing electricity) – Huge overhang…starting to be bought? – Dramatic shifts of (not just along) demand curves can yield expanding returns – Energy price may become less relevant • HypercarsSM – The biggest industry-changer since chips – A nega-OPEC, decoupling cars from CO2 – Soon a major distributed power generator – Key to a rapid hydrogen transition • Distributed utilities – Microturbines, renewables, fuel cells,... – Distributed benefits, twelve driving forces US Primary Energy Consumption Is Now Within 2% of the 1976 “Soft Energy Path”

250

primary energy consumption (quadrillion BTU/year) 200 "hard path" projected by industry and government around 1975 150 actual total consumption reported by USEIA "soft path" proposed by 100 Lovins in 1976

coal coal oil and gas 50 soft technologies oil and gas (which do not include big hydro or nuclear) nuclear renewables 0 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Efficiency can work quickly

• US doubled its new-car efficiency 1973–86 (only 4% of that saving came from making cars smaller, 96% because they’re smarter) • US cut oil use 4.8%/y and Persian Gulf imports by 87% 1977–85 — saving one Alaska, or twice Gulf imports • US in 1996–99 nearly beat its all-time record for the 3-year speed of saving energy (averaging 3.2% per year) despite record-low and falling energy prices • Japan used to be the fastest energy-saver among all industrialized countries Efficiency can work quickly

• In 1983–85, 10 million people served by Southern California Edison Company were cutting its 10-years-ahead forecast peak load by 81/2% per year, at ~1% of long-run marginal supply cost • In 1990, New England Electric System got 90% of a small-business retrofit pilot program’s market in 2 months • Pacific Gas and Electric Co. got 25% of its 1990 new-commercial-construction market in 3 months, raised its 1991 target…and got it all during 1–9 January • New delivery methods are even better Old Methods of Marketing Negawatts (can maximize participation and savings per participant) • Information, exhortation, education – General public – Targeted or technical: builders, designers,… • Financing – Low- or no-interest loans – “Full financing” (gifts), usually cheaper • Pilot and demonstration projects • Third-party investors, Energy Service Companies (can be utility-owned) • Leasing (¥20/lamp-month?…) Old Methods (continued) • Rebates – Targeted, then generic per kW or kWh – To buyer, wholesaler, retailer, manufacturer, other trade allies,…; leverage markups – Plus scrapping inefficient old devices – For beating minimum standards • Equipment, buildings,… • Standards really work, but are relatively static – Not for equipment but for efficient design • “Golden carrots” to elicit innovation New Methods Make Markets in Negawatts (can also maximize competition in who saves and how) • Competitive bidding processes – Industrial modernization grants – Generalized (“all-source”) auctions • Fungible savings (with grid credit) – Morro Bay example for saving water – Wheeling savings between customers, utilities, States, even countries (P.Q./VT) – Arbitrage between negawatts and megawatts – Spot, futures, & options markets in both New Methods (continued) • Peak-load-limit commitments – Can be traded in secondary market – Value reduced demand uncertainty • Efficiency cross-marketing (el./gas) • Market transformations, e.g. BC Hydro • Performance-linked “feebates” to hook up new buildings – Don’t become obsolete like standards – Reward and elicit continuous improvement • Performance-based design fees • Targeted mass retrofits • Systematic “barrier-busting” How Much Electricity Can Be Saved? • Late-1980s technologies could save 3/4 of Danish buildings’ el. or 1/2 of all Swedish el. at ¥1.7/kWh; 4/5 of German home el. with ~40%/y aftertax ROI (w/fuel-switching) • Similar findings worldwide 1979–97 • Full retrofit of best mid-1980s technologies could save ~3/4 of US electricity at average ’86 cost ~¥0.65/kWh (better now) • This RMI finding is broadly consistent with EPRI’s assessment in our joint 1990 Sci. Amer. article (the differences are almost all methodological, not substantive) RMI’s >1000-technology 1987 analysis of US 75%-saving retrofit potential… . .

. . . Sorry, but it’s conventional among non-economist efficiency analysts to show end-use efficiency as a “resource” with a “supply curve”.

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TF 22.X.88 ...is now known to be conservative in both quantity and cost New Tools for Capturing the Vast Overhang of Unbought Negawatts • Technical guides (www.esource.com) • For designers, developers (www.rmi.org) • Cheaper capital (www.ipmvp.org) • ~60–80 market failures in buying energy efficiency can be turned into business opportunities; see prospector’s guide* • Side-benefits worth far more than kWh – ~6–16% higher labor productivity**, 40% more retail sales, ~20–26% higher school test scores, more/better industrial output,…

*“Climate: Making Sense and Making Money,” www.rmi.org, at pp. 11–20 **“Greening the Building and the Bottom Line,” from www.rmi.org Perhaps the Most Potent New Tool: Use Empirical, Not Theoretical, Costs

• Virtually the entire literature assumes that greater end-use efficiency incurs increasing marginal costs • This assumption is often empirically untrue even for simple components • Design can make it generally untrue by optimally combining components • In theory, theory and practice are the same, but in practice they’re not Old design mentality: always diminishing returns... High Efficiency Doesn’t Always Raise Even Components’ Capital Cost • Motor Master database shows no corre- lation between efficiency and trade price for North American motors (1800-rpm TEFC Design B) up to at least 200 kW

E SOURCE (www.esource.com) Drivepower Technology Atlas, 1999, p 143, by permission • Same for industrial pumps, most rooftop chillers, refrigerators, televisions,… • “In God we trust”; all others bring data New design mentality: expanding returns, “tunneling through the cost barrier” NewNew designdesign mentality:mentality: anan industrialindustrial exampleexample RedesigningRedesigning aa standardstandard ((supposuppo-- sedlysedly optimized)optimized) industrialindustrial pumpingpumping looploop cutcut itsits powerpower fromfrom 70.870.8 toto 5.35.3 kWkW ((––92%),92%), costcost lessless toto build,build, andand workedworked betterbetter inin everyevery wayway No new technologies, just two design changes

1.1. BigBig pipes,pipes, smallsmall pumpspumps (not(not thethe opposite)opposite) No new technologies, just two design changes

1.1. LayLay outout thethe pipespipes first,first, thenthen thethe equipmentequipment (not(not thethe reverse)reverse) 2.2. OptimizeOptimize thethe WHOLEWHOLE system,system, andand forfor multiplemultiple benefitsbenefits New design mentality: why this example matters • Pumping is the biggest use of motors • Motors use 3/5 of all electricity • Each unit of friction saved in the pipe saves 10 units of fuel at the power plant • Applying whole-system design principles to almost EVERY technical system that uses energy—fans, heat exchangers, insulation, lights, etc.—yields ~3–10´ savings and costs less Compounding Losses…or Savings— So Start Saving at the Downstream End Recent building examples

• Grow bananas with no furnace at –44°C, 90% household electric saving • Comfort without air-conditioning at 46°C • Both cost less to build; 90% a/c saving in a new Bangkok house cost nothing extra • Big office buildings: 80–90% less energy, ~3–5% less capital, 6 months faster, superior comfort and market performance • 75% energy savings retrofittable in Chicago office tower, costs same as renovation • 97% a/c saving retrofitted in Calif. office Rocky Mountain Institute • At 2200 m nr Aspen • “Winter and July” • Integrated design • Superinsulated • Thermally passive • Air heat recovery • 95% daylit • 50% water saving • Very efficient lighting & equip’t.

Savings (1983 tech.): • 90% in home el. • 99% in space & water heating Grow bananas with • 10-month payback no furnace at –44°C • Market-avg. cost Rocky Mountain Institute 10-10-for-one-benefitfor-one-benefit ofof ““superwindowssuperwindows””

1.1. SavedSaved energyenergy 2.2. RadiantRadiant comfortcomfort 3.3. Downsize/eliminateDownsize/eliminate HVACHVAC 4.4. LowerLower constructionconstruction costcost 5.5. NoNo perimeterperimeter zonezone heatingheating 6.6. ReducedReduced fadingfading fromfrom UVUV 7.7. ReducedReduced noisenoise 8.8. LessLess condensationcondensation 9.9. ImprovedImproved daylightingdaylighting 10.10. HumanHuman productivityproductivity +45+45°°CC 2 -PG- Mature-marketMature-market&E ACT House Davis, California (hot & dry) buildingbuilding costcost $1800$1800 lowerlower -- Present-valuedPresent-valued main-main-tenancetenance costcost $1600$1600 lessless -- DesignDesign energyenergy savingssavings ~82%~82% belowbelow CaliforniaCalifornia TitleTitle 2424 standardstandard -- LastLast 77 improvementsimprovements justifiedjustified onlyonly byby savingssavings ofof energyenergy Japanese buildings

• Extraordinary cultural heritage, esthetic refinement, and union with nature • Correct emphasis on comfortable people, not “comfortable buildings” • Widespread belief that buildings are already as efficient as they can be • But every time we think we’ve made buildings as efficient as we can, we find a new technique or design method that allows major further improvements Two Ways to Tunnel 1. Multiple benefits from single expenditures – Superwindows have 10 benefits, high-efficiency motors & ballasts 18; why count just one? – Arch at RMI HQ does 12 things, incurs 1 cost – One refrigerative ton can cool not ~20–40 but 100–120 m2 of office, and can have a COP of not 1.2–2.1 but 6–35+ – But must do the right things in the right order • Downstream before upstream, passive before active, quality before quantity, people before hardware, shell before contents, application before equipment.,... – Many small savings in succession can multiply to produce a big cumulative effect 2. Take advantage of other retrofits Example: Renovating a 19,000 m2 office • 20-y-old curtainwall tower near Chicago • Failing seals require reglazing • Superwindows + efficient lights & plug loads cut cooling from 750 to 173 tons • 4´ smaller, 4´ more efficient cooling costs $200k less than renovating old one • That $200k pays for everything else • Design would save 75% of energy; much better comfort; –5 to +9 month payback • Owner didn’t execute; lost property Four Times Square New York City · 150,000 m2; 47 stories · non-toxic, low-embodied-energy materials · 50% energy savings/m2 despite doubled ventilation rates · Gas absorption chillers · Fuel cells · Integral photovoltaics in spandrels on south and west elevations · Fiber-optic signage (signage required at lower floor(s)) · Experiment in Performance Based Fees • Market average construction cost Integrated office design

• RMI led design for Hines and Gensler • Tightly integrated state-of-the-shelf choices – Deep daylighting, superefficient direct/indirect lighting, very efficient plug loads and HVAC – Underfloor displacement ventilation – No or almost no dropped ceiling – Tuned superwindows, careful shading/mass – Optimized structural bays and surface optics Integrated office results

• Energy –50% without, or –75% with, influence over tenant loads (approx.) • 6 stories in 23m lowrise limit,higher ceilings • Superlative lighting, acoustic, thermal, & air quality; each worker controls temperature • Reconfiguration costs almost eliminated • Same or slightly lower capital cost • Simpler construction, six months faster Industrial opportunities • Save half of motor-system electricity (3/8 of all industrial electricity) with retrofit ROI approaching 200%/year • Radical new process designs • Materials productivity (less stuff, last longer, reuse more) lets less manu- facturing deliver more service • Higher labor productivity (~6–16%), industrial output & quality, retail sales (40%), learning (20–26%),…often worth far more than saved resources Profitable Corporate Climate Protection • STMicroelectronics (#8 chipmaker worldwide) 2010: zero net carbon; can cut carbon/chip by 92% profitably now, 98% soon; fabs work better, can be built faster and cheaper • DuPont 2000–2010: revenue +6%/y, energy use + £0%/y, hence energy productivity + ³6%/y; 10% of energy and 25% of raw materials renewable; greenhouse emissions = (1990 – 65%) • All in the name of shareholder value What drives energy savings? • Price does matter…but ability to respond to it can matter even more – Seattle in 1990–96 paid 2´ Chicago’s electricity price, yet saved kWp 12´ as fast and kWh 3640´ as fast, due to utility differences • Price is only one of many ways to get attention: e.g., U.S. E/GDP 1996–99 fell 3.2%/y during record-low & falling prices • Prices without barrier-busting do little – DuPont’s European factories are as inefficient as U.S. ones despite long exposure to prices 2´ as high The Limited Role of Proper Pricing

• Higher prices, though appropriate and useful, are neither necessary nor sufficient for very efficient energy use – Not necessary because well-designed retrofits at low 1999 US prices typically yield ~100–200%/y aftertax returns—yet are still relatively rare, due to the ~60–80 barriers – Not sufficient because the barriers would still be there and block most firms’ action • Price can even be made nearly irrele- vant, because other factors are far more influential, some unexpected... Unoccupied Apartment: Air- Conditioner Operation Validates the Engineering Theory of Thermostats

Kempton et al.,”I always turn it on super,” En. Bldgs. 18(3):177–191(1992) Apartment Whose Occupants Are Told the Air-Conditioner and Electricity Are Free: No Obvious Relationship Between Air-Conditioner Operation and Comfort

Both graphs from E SOURCE (www.esource.com), SIP-1, 1992, by permission Air-Conditioner Use: Four Paradigms • Utility load dispatcher • Comfort theorist • Econometrician • Energy anthropologist

• #4 is by far the most powerful explainer • #2 and #3 are not simply incomplete; they’re seriously misleading • Similarly for space heating, hot water; little is known about most other uses Price May Well Become Less Important • On the demand side, end-use efficiency will be bought mainly for qualitatively improved services (joint products) • On the supply side, distributed and renewable resources will be bought mainly for distributed benefits • Outcomes will therefore become de- creasingly predictable from economics • Key new technologies may be driven by factors unrelated to fuel price and regu- lation: the Hypercar example... Obstacles that Prevent Buying Energy Efficiency

• Over 60 specific market failures of 8 types – Capital misallocation, value-chain risks – Organizational & informational failures – Regulatory failures, perverse incentives – False or absent price signals, absent markets • Proven methods can turn each of these obstacles into lucrative business opportunities; most are probably adaptable to Japan • Barrier-busting should top the policy agenda A 1987–88 RMI analysis for Shell found a retrofit potential to save ~80% of U.S. oil at an average levelized cost ~US$2½bbl...

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. . . Advanced aircraft and operations • Advanced engines, props, wings, aero, and ultralights (e.g. 95%-carbon fighter plane) can save ~2–3´; slower? bigger? • Re-engine old fleets; emission/noise fees • Operational gains: towing, GPS point-to point routing, faster hubless systems,... • Containerized airships for cargo • Sensible modal splits; aviation fuel tax

• LH2-fuel-cell-electric aircraft could eliminate CO2 (not H2O, but they could operate at lower altitude); cars key to H2 Hypercar SM: The Next Car Industry • Synergistic fusion of ultralight, ultra-low-drag, hybrid-electric platform; highly integrated design, radically simplified, software-dominated • Any body style, size, • ~3´–6´, even 8´, efficiency; segment — can be big ZEV; yet cost and all customer attributes are the same or better • Will sell because it’s superior and uncompromised (like CDs) • Key competitive advantages: up to ~10´ reduction in capital investment, product cycle time, assembly effort and space, body parts count,… What’s Now Possible • Sport-utility, hauls 500 kg up 30% hill; curb mass 825 kg • 5+ adults, >2.5 m3 cargo • Mercedes safety (even when hitting one) and comfort • Sporty: 0–100 km/h in 8.5 s • Pickup-truck traction • ~47 km/L* as direct H2 • 565 km range on 3.1 kg H2 • Zero-emission (hot water) • Ultra-reliable, flexible,wire- less, software-dominated • Competitive cost expected • Decisive mfg. advantages

*A similar family sedan can do ~100 km/L Unusual Commercialization Strategy 1990–91: Hypercar invented

1993: RM I put it in the public domain (free-software model) where no one could patent it Nissan Prize ’93, World Tech- nology Award (Economist) ’99 1993–99: Maximized competition in exploiting the idea By 2000, >30 firms committed ~US$10b, doubling every 11/2 y Yet automakers’ cultural barriers left key competitive gaps to be exploited by the agile and

uninhibited, so RM I spun out Hypercar Inc. in 1999 to do that Hypercars: Design Strategy Dramatically reduced loading: Key: manufacturable • Aerodynamic & rolling resistance advanced-composite • Heating, cooling, accessory loads autobody • Most important, vehicle mass ¸ 3 Clean, efficient hybrid-electric drive —preferably direct-

H2 fuel cell (the fuel tanks are now small enough to package) Integrated advanced control systems, data management, and wire- less communications Two ways to drive 12 km in the city 15% Efficient Conventional Aero Drag Engine & Driveline (fuel to C A = 0.76 m2 “Avcar” D wheels) production One Liter 12% Rolling Drag platform gets to Fuel r0M+ƒ = 200 N (U.S. 1994 wheels average) Braking 85%lost as M = 1443 kg 2–4% used for heat and 0% Recovered emissions Accessories Aero Drag 24% Efficient Complete 2 CDA = 0.42 m Near-term Hypercar Hybrid Driveline (fuel to wheels) Rolling Drag with interior space 0.33 l 23% equivalent to Avcar Fuel gets to r0M+ƒ = 69 N (~2001–2003) wheels Net Braking 76%lost as M = 600 kg heat and 48% Recovered 0.5–1% used emissions for Accessories In highway driving, efficiency falls because there is far more irrecoverable loss to air drag (which rises as v3) and less recoverable loss to braking. Hypercars: Fundamental Change Hypercars represent a fundamental change from: • metals to composites • hard to soft tooling • hardware to software • liquid to gaseous fuel

• fully mechanical to hybrid-electric drive • mechanicals/hydraul- ics to electronics STEEL & IRON ALUMINUM & OTHER METALS • complexity to radical GLASS, RUBBER, & OTHER MATERIALS POLYMERS & COMPOSITES simplicity FUEL, OIL, & OTHER FLUIDS Ultralight But Ultrasafe

• H. Ford: “You do not need weight for strength” • Advanced-composite crush structures can ab- sorb 5´ as much energy/kg as steel; e.g., 3.2 kg can cushion 900-kg car-into-wall at 100 km/h • By crushing smoothly, not jerkily, they can use the crush stroke 2´ as efficiently • These attributes can more than offset 3´ lighter mass, even when hitting a heavy steel car; well established by European crash tests • Layered defense against different crashes • Also accident prevention, easy extrication • Familiar example: Indy car hitting wall Hydrogen Is Safer Than Gasoline

• H2 3–4´ as efficient, so 3–4´ less energy – 2.7´ more J/kg, so ~10´ fewer kg of H2 • Tank is the strongest part of the car; un- graceful tank failure not yet achieved

• Inherent safety of H2 compared with gasoline – Though low ignition energy, 4´ richer mix is needed, and very hard to detonate – 52´ more buoyant, 12´ more diffusive – Nonluminous flame doesn’t burn you faraway – The 35 deaths in 1937 Hindenburg disaster weren’t from a H2 fire; hence 62 survivors – Still hazardous, but less than gasoline Elements of HypercarsSM Are Emerging

• 12/91: GM shows the Ultralite (halved weight and drag, carbon-fiber 4-seat concept car), but didn’t know someone else had done it two years earlier. • 11/96: GM says it’s developing “radically” more efficient cars with halved weight and drag and hybrid-electric drive, rightly calling them “hypercars.” Nihon Keizai Shimbun reports Toyota will sell in Japan, in late 1997, tens of thousands/y of a 3.6 L/100 km hybrid sedan— decades earlier than most experts had expected. • 3/97: The Wall Street Journal confirms that this Toyota “Prius” saves 50% of fuel and 90% of emissions; and, separately, that by 10/97, Ford will test-drive “P2000” all- aluminum midsize sedans with 40% less mass, 3.4–3.9 L/ 100 km, ultra-low emissions, and two kinds of hybrids. • 4/97: Ballard and Daimler-Benz invest US$350M to put fuel cells in cars, pledging 100,000 cars/y by 2005. Ford says it’ll test a fuel-cell P2000 by 2000. • 9/97: Chrysler unveils a modest $6k molded-composite 4-seat compact “China car”: 540 kg (half the weight of a Neon, but roomier), 15% cheaper, meeting all profitabili- ty requirements, with 5´ less investment and 7´ less factory space, and 3.9 L/100 km without hybrid drive (or, one can estimate, <2.4 with it). Honda announces it’s developed a ~3.4 L/100 km hybrid lighter than the Prius. • 10/97: Toyota announces 12/97 Japan launch of its Prius hybrid, and predicts hybrids will gain a 1/3 world market share by 2005. Toyota’s President, asked about Daimler-Benz’s 100k/y-by-2005 fuel-cell-car goal, says he’ll beat it. • 10–11/97: Audi announces the light A2 and VW the Lupo, both ~3 L/100 km, for 1998 production. Volvo, Nissan, and others announce they’re developing commercial hybrids. • 12/97: Toyota’s Prius hybrid dominates the Tokyo Motor Show, wins two coveted Car of the Year Awards, enters the Japanese market at ¥2.15M ($16.3k), presells 3k units, and heads for U.S. launch ~2000. GM retorts that it will be “second to none.” Ford adds >$420M to the Daimler/Bal- lard fuel-cell project. Honda and Subaru show ~3.4 L/100 km ultracapacitor-buffered concept hybrids. Mazda says

its fuel-cell hybrid will use H2 gas, not reformed liquids. Mercedes announces limited production of methanol-fuel- cell cars in 2002. Nissan and Toyota show concept versions of such cars; Nissan, the first public Li-battery car. • 1/98: GM unveils gas-turbine, diesel, and fuel-cell 4-seat hybrid versions of its low-drag EV-1—relatively heavy, but 2.9–3.9 L/100 km, 0–100 km/h in 6–8 s, and ranges >560 to >890 km—and promises production-ready hybrids by 2001 and fuel-cell versions by 2004 “if not sooner.” Front- page Wall Street Journal and New York Times stories confirm Detroit’s revolutionary shift and stress GM’s “deadly serious” intent. Automotive News says the Ford P2000 “could be in dealerships by 2000.” Chrysler shows the Pronto Spyder composite concept sports-car (whose U.S.-crashworthy 6-piece body could cut factory investment 3´ and car cost 2´), saying it could enter production “as soon as 2003,” and the 3.4-L/100 km light- weight composite ESX hybrid concept car. • 2/98: VW says it’ll make 3-, then 2-, then 1-L/100 km cars. • 3/98: Ford’s head of advanced materials and manufac- turing, asked if he isn’t concerned that someone else might make Hypercars first, replies, “Yes, we’re absolute- ly terrified—that’s why we’re working so hard on it!” • 5/98: At least five automakers plan to start selling 3-L/100 km cars before 2000. Toyota nears breakeven two years early on strong Prius sales (temporarily suspended while production caught up)—and says it hopes to market fuel- cell cars “well before 2002” (now officially 2003). Volvo, Lotus Engineering, Alcan, and Cranfield University show a 600-kg, 2-L/100 km concept hatchback. • 6/98: Chrysler accelerates Spyder production to 2001. • 7/98: Toyota confirms 2000 U.S./Eur. Prius release. Zevco

announces 1999 fuel-cell London taxi demo—H2 by Shell. • 8/98: Shell agrees to provide its liquids-to-H2 reformer technology to the Daimler/Ford/Ballard fuel-cell group. • 8/98 (cont’d.): Fifty-year-old Huatong Motors (Sichuan) differentiates itself in the crowded Asian market by announcing ~1999 production of 5,000 (30,000/y by 2002) 3.9-L/100 km molded-plastic-and-composite-monocoque hybrid “Paradigm” cars designed by a small Texas firm. Singapore’s Asha/Taisun plans ’99 China polymer taxis. • 10/98: VW announces early-2000s production of a 2- L/100 km, 590-kg carbon-fiber subcompact. GM shows a fuel-cell concept minivan, market-ready in 2004, and says fuel-cells-plus-electric-drive integration has “more potential than any other known propulsion system.” • 12/98: Honda will sell a 2-seat ~3.6-L/100 km U.S. hybrid- assist coupé in 12/99 for $19,500. The 47%-lighter aluminum “Insight” also has 1/3 less air drag than normal. • 1/99: Ford says it’s designed an aluminum MeOH-fuel- cell sport-utility and built a Taurus-performance fuel-cell P2000 sedan. Ford also cites studies showing that small, ...factory-built electrolytic or steam-reformer hydrogen generators can make H2 competitive with gasoline. Daimler-Chrysler shows the big, high-performance, gasoline-hybrid “Citadel” crossover vehicle; Jeep, the reformer-fuel-cell-hybrid “Commander,” a large, active-suspension sport-utility with 40% mass reduction via carbon-fiber body and composite/aluminum frame. DOE announces a PNGV project to cut inverter cost by at least 95% in the next three years. • 3/99: Mitsubishi announces a hybrid to sell in late 2000 at half the price of the Toyota Prius ($20k in US). • 4/99: Honda abandons battery cars to concentrate on hybrids. GM and Toyota launch a big 5-year collabor- ation on fuel cells, electric drive, and hybrids. Swatch explores US hybrid-car coproduction in 2002. BMW teams with Delphi on solid-oxide-fuel-cell cars. • 5/99: Toyota announces a hybrid van and SUV; the Big 3 consider tripled-efficiency SUVs for PNGV. Lotus announces a light composite Boxster-competitor and a 2000 Opel-badged Elise. Formosa Plastics commits $2b to make 500k/y polymer electric cars, including a hybrid. Honda commits $0.4–0.5b to fuel-cell cars for 2003. • 6/99: Toyota follows suit. Ford’s Chair says customers “can have any vehicle they want, as long as it is green.” • 7/99: Toyota projects 40k Eur./US sales of the Prius hybrid, and plans three more hybrid models by 2001. • 10/99: Three Japanese automakers show 2.6–2.7-L/100 km city cars. GM shows a halved-air-drag sedan (CD 0.163), reveals a “G” program based on “dramatic weight savings (mainly via aluminum spaceframes),…aerodynamic shapes,…and smaller, lighter, more efficient drive- lines,” and shows the Chevy Triax light urban SUV with a 0.66-L-engine-hybrid option. • 12/99: Ford shows the 3.3-L/100 km Prodigy fuel-cell hybrid for 2003 production; Honda, a carbon-fiber hybrid concept SUV; Mitsubishi, a hybrid SUV; Ford and Nissan, fuel-cell hybrids; and Toyota, a hybrid van. • 1/00: Ford announces diverse mainstream IC-engine hybrid vehicles for 2003. IMPCO ships prototype 345- bar H2 composite storage tanks. Ballard’s Mark 900 75- kW fuel cell cuts mass 30% and bulk 50%. Honda says its Insight-style hybrid driveline will be in all its 2005 cars (except fuel-cell models due in 2003). GM shows the 5-seat, 2.2-L/100-km Precept fuel-cell concept car. Volvo, Radian, and Lockheed-Martin join to develop a hybrid heavy truck with DOD funds. • 2/00: DaimlerChrysler shows the 5-seat, 3.3-L/100 km, thermoplastic/aluminum ESX-3 with 1.5-L Diesel hybrid, lithium-ion buffer battery, and estimated $28.5k price ($7,500 premium, half the 1998 level). • 3/00: Ballard announces an automotive PEMFC goal of $20/kW stacks and $80/kW systems. GM aims for 10% of its 2010 new cars to be fuel-cell-powered. • 4–5/00: Three German firms offer H2-fuel-cell buses for sale. Ford announces the doubled-efficiency Escape hybrid SUV for 2003 production. • 5/00: Honda, with Insight demand far outstripping supply, announces 2001 Japan release of its first mass- market Civic hybrid, using engine drive until fuel-cell models become available starting 2003. GM says its “long-term vision is of a hydrogen economy.” A Deutsche Shell director predicts 50% of all new vehicles, and 20% of the existing fleet, to be hydrogen vehicles by 2020; Germany’s Transport Minister foresees 10% of new German cars by 2010. BMW shows 15 LH2-fuel-cell-auxiliary-powered cars. Texaco enters the fuel-cell/H2 business with ECD/Ovonics. • 5/00 (cont’d.): Germany’s TES consortium switches its default fuel choice from methanol to direct hydrogen, which DaimlerChrysler says will fuel its NeCar 6 concept car; methanol and natural gas are now mere backup options. Daimler-Chrysler plans fuel-cell fleets in 2004. Shell and RWE say it would take at most two years to convert thousands of German gasoline stations to offer hydrogen too. • 6/00: IFC joins with Hyundai to demonstrate low-pres- sure, passively humidified SUV fuel cells. CSIRO’s consortium with >80 Australian component-makers shows a low-cost, doubled-efficiency engine-hybrid concept car with ultracapacitor load-leveling. Opel shows a liquid-hydrogen fuel-cell Zafira wagon. Ford confirms its Chairman's view that 20% of cars on the road by 2010 will be hybrid-electric. GM aims to make "hundreds of thousands of fuel-cell vehicles annually before the end of the decade." • 7/00: Sheikh Yamani (Saudi Oil Minister 1962–86) says world oil prices will plummet in ~5 years, and later crash durably, because of competition, chiefly from hydrogen fuel cells. "This is coming before the end of the decade and will cut gasoline consumption by almost 100%." Saudi Arabia, he says, "will have serious economic difficulties". "Thirty years from now there will be a huge amount of oil—and no buyers. Thirty years from now, there is no problem with oil. Oil will be left in the ground." Ford vows to improve its sport-utilities' efficiency (av. 18 mpg) by nearly 5 mpg over the next five years, with similar gains in vans and pickups. • 8/00: GM says it'll always stay ahead of Ford in this regard, and confirms that within a few years it will be selling hybrid-electric full-sized pickup trucks. Environ- mentalists cheer the combatants on. Several California cities confirm commercial orders for fuel-cell buses. • 9/00: VW’s Chairman targets 2003 production of the 1 L/ 100 km city car, mainly carbon fiber and apparently an engine hybrid. Toyota’s announces a full line of engine hybrids, from city cars to luxury sedans and sport-utilities to big trucks; first is a 4WD drive minivan in 2001. • 10/00: GM sells its first hybrid buses, and tests a diesel Precept at 2.95 L/100 km gasoline-equivalent. Daimler- Chrysler gets 3.27 in an ESX-3 family sedan, slates a 20%- more-efficient Dodge Durango hybrid for 2003 market, and shows a doubled-efficiency luxury fuel-cell SUV. Ballard’s Chairman confirms several automakers will start 2003 low- volume production of fuel-cell cars. If that’s what they’re announcing…imagine what they’re up to behind the curtain! (They are. The global competition RMI and Hypercar Inc. are fomenting leaves them no choice.) Hypercars Will Ultimately... • save as much oil as OPEC now sells • displace 1/8 of the steel market early, ~7/8 eventually (as carbon fiber becomes cheap): getting out of the Iron Age • spell the end as we know them of the car, oil, steel, aluminum, coal, nuclear, and electricity industries…and the start of more profitable and benign successors WHEN? Within your planning horizons! • Hypercars will be widely available in ~5 y, dominant in ~10 (see open-source chrono- logy at www.rmi.org/sitepages/pid414.asp) • The old car industry will be toast in 20 y; what about the old utility industry? Distributed Generation Can Compete • A conventional cogen/trigen with good gas turbine can deliver a few MW of US electricity at ~¥0.53–2.2/kWh net of heat credit (total h ~ 0.90) • ~30%-efficient 30-kWe natural-gas microturbines; engine generators • A recent microturbine retrofit design would give a 1-y payback against ¥5.9/kWh utility power (h ~ 0.92) • Windpower widely profitable in good sites (~¥4.2/kWh); ~¥2.8/kWh is expected from 2002 machines (5.6 m/s) New Technologies Are Entering Rapidly • Wind is now the fastest-, photovoltaics the second-fastest-growing world energy resource (except efficient end-use) • Wind >13 GW, doubling every 2–3 y • PVs are nearing very rapid “liftoff” • Fuel cells are already commercial (200- kWe phosphoric-acid), $2–3k/kW • Proton-exchange-membrane fuel cells (PEMFCs) are about to be much cheaper • Hydrogen is no longer futuristic; fuel cells make district heating next stranded asset Hypercars Can Greatly Accelerate the Hydrogen Transition • Make cars ready for direct hydrogen

– Packageable ~350-bar compressed-H2 tanks – No liquid-fuel reformer needed – 3´ lower tractive load needs 3´ fewer kW – Tolerates 3´ higher ¥/kW, reached far earlier • Integrate stationary and mobile uses to leverage both (both markets very big) • Make the H2 transition profitable at each step, starting now, by a sequence RMI has published*, already being adopted by major energy/car companies

*“A Strategy for the Hydrogen Transition,” Natl. Hydrog. Assoc., 4/99, www.rmi.org Four Steps to a Hydrogen Economy • Fuel-cell cogeneration in buildings, mak-

ing H2 from nat. gas or offpeak el., soon makes fuel cells affordable for Hypercars

• Fuel them from nearby buildings’ extra H2, sell back power from parked cars, earn $$

• Put cheap H2 appliances in “gas stations” • Build up H2 market justifying bulk prod’n. – From wellhead-reformed natural gas (w/CO2 reinjection) or renewable electricity (greatly improving its economics); maybe others? – Two sources, two scales, robust competition – Climate-safe, practical, profitable, mkt-driven Key to H2: Transform Automobility

Redesign the car so it’s ready for hydrogen, not the reverse! Start with Stationary Cogen Applications • PEMFCs for buildings enter mass market in 2001 – At least 84 firms now active; some giants still quiet – Early mass-production factories being built 1999–2000 – Equipment/system distribution by big, capable firms

• 70°C waste heat’s bldg. services help pay for H2

– Reformer or electrolyzer appliance makes H2 onsite – Thermal credit makes premium el. net-cost-effective • Special benefits could justify even handmade-by- PhDs PEMFCs ($3k/kW) in many niche markets – El. distribution grid congestion can cost >$1k/kW to fix – Industrial niche markets can justify FC retrofits now • Buildings use two-thirds of all US electricity • Volume + Design for Mfg. & Assembly = cheap From Stationary to Mobile Applications

SM • At ~$100/kWe, put PEMFCs in Hypercars – 2–3´ conventional cars’ $/kWe limit, so years earlier • At least 8 major automakers plan volume production of fuel-cell cars by 2004–05 (some may enter earlier)—some direct-H2 – High efficiency permits H2-gas tank, eliminates reformer • Less weight, cost, bulk; further mass decompounding • High driveline efficiency, lower Pt loading, instant response • If you had a good reformer, better to take it out of the car!

– 20–45-kWe power plant on wheels, parked ~96% of time – Lease first to workers in or near FC-powered buildings

– Park, plug into grid & building H2, sell back power • At real-time price, when and where power is worth the most • Can often earn back one-third to one-half of car’s lease fee

– US Hypercar fleet will ultimately total ~3–6 TWe—~5– 10´ the total generating capacity of the national grid Orderly Buildup of H2 Infrastructure

• The H2 appliances soon to be ubiquitous in buildings can serve nearby vehicles too, obviating special fueling stations & supplementing revenues

• Distributed H2 appliances can be freestanding too – Modular, scalable electrolyzers & reformers mass-pro- duced (for buildings) would become affordable (Ford) – A corner “gas station” could use gas or el. or both • People now build gasoline stations to earn tiny margins and be dominated by refiner & distributor; H2 is just the opposite; it’s also not easy for governments to tax homebrew H2 • Use surplus offpeak capacity of natural-gas & electric grids already built & paid for; strong H2 price competition

– This can support a PEMFC price path to <¥5000/kWe— then the hydrogen provider gives you the fuel cell! Last of All, Benign Upstream H2 Production and Distribution

• Making H2 now uses ~5% of US natural gas – Mature infrastructure available, more rapidly emerging

• Two known, climate-safe ways to make bulk H2 – Electrolyze water using renewable electricity

– Reform natural gas at the wellhead and reinject CO2 – Other options may also prove practical & worthwhile • Biofuels and biosystems (algae,…) producing hydrogen • “Synthetic photosynthesis” molecules • Direct photolysis (sunlight plus catalyst) – Even if not, the two conventional methods are both practical and profitable, and their competition will drive further improvements in both A New Market for Renewable Electricity... Hydro dams can earn far more profit as “Hydro-Gen” plants—just ship each electron with a proton attached

• 1 J of direct H2 in a fuel-cell car can produce 3–4´ as much traction as 1 J of gasoline in today’s cars • At the wheels of the car, ¥36/L ($1.25/gal) gasoline

has the same tractive value as H2 efficiently electro- lyzed with ~¥10–15/kWh electricity — vs. today’s ~¥1.7/kWh Pacific NW bulk electricity market price; all severalfold better still at Japan’s gasoline prices! • This margin typically exceeds the cost of producing and delivering the hydrogen, so dam’s profits rise

• Cheap local H2 storage can convert intermittent renewables (wind, photovoltaics,…) into firm dispatch- able resources that are far more valuable …and a Long Natural-Gas “Bridge”

• Bob Williams (Princeton): reform CH4 at

gas wellhead, reinject CO2 into gasfield • Triple profit potential • Ship hydrogen as premium product for fuel cells • Enhance hydrocarbon recovery by repressurizing • Sell carbon resequestration to a broker

• Can often fit in twice as much CO2 as there was CH4 • This profit opportunity is already attracting major energy firms (Shell, BP, Norsk Hydro,…)

• 200+ years’ CH4 resource then becomes profitably usable without harming the climate Hydrogen for Fun and Profit • A robust future waiting to be unlocked

– Could profitably ameliorate ~2/3 of US CO2 – Strong retail price competition – Four main ways to make hydrogen • From electricity or natural gas, upstream or downstream • Not betting on the [random] price of one automotive fuel or the stability of its sources: highly diversified portfolio • Resource base ranges from huge to inexhaustible • Climate impacts modest short-term, soon reaching zero • Expensive to delay – ~$1 trillion in capital cost for the next global car fleet and its fueling infrastructure is at issue – Caution: “fuel neutral” is code for “status quo” • Policy is barely starting to catch up Fuel Cells Capture “Distributed Benefits” • Small Is Profitable: The Hidden Economic Benefits of Making Electrical Resources the Right Size (RMI, late 2000; now in draft) • Codifies and quantifies ~75 “distributed benefits” that increase economic value of decentralized generation by typically ~10´ • Four kinds: financial economics, electrical engineering, miscellaneous, externalities • Vital new role for financial economics, long neglected in the electricity industry Where does the order-of-magnitude typical value increase come from?

• Financial-economics benefits: often nearing ~10´ renewables, ~3–5´ others • Electrical-engineering benefits: normal- ly ~2–3´, far more if the distribution grid is congested or if premium power reliability/quality is required • Miscellaneous benefits: often around 2´, more with thermal integration • Externalities: indeterminate but may be important; not quantified here ~75 Distributed Benefits: ~10´ Value (Actual Value Is Very Technology- & Site-Specific) • ~101´: Minimizing regret (financial ecs.) – Short lead times and small modules cut risk • Financial, forecasting, obsolescence • Overshoot and “lumpiness”

Smaller, faster grid-support investments are worth more Tom Hoff’s analy- 3,000 tic solution shows 2,500 10 kW (upper) and 1 MW (lower) that it’s worth 2,000 paying ~2.7´ more 10 MW 1,500 per kW for a 10- 1,000 50 MW kW overnight 500 resource than for 0 0 1 2 3 4 5 a 50-MW 2-y lead time (years) resource Financial-Economics Benefits (cont’d)

– Portable resources are redeployable • Benefits’ expected value rises, risk falls – Rapid learning, mass-production economies – Constant-price resources vs. volatile prices • Risk-adjusted Effects of Discounting Avoided Costs discounting can At Risk-Adjusted Discount Rates 10% 0% nearly double the 8% 2% 6% 4%

present value of a Risk (%/y) 4% 6% premium

2% 8% (%/y) if base rate is 10%/y discount rate Risk-adjusted gas cost stream 0% 10% 1 2 3 4 5 for fair compari- Levelized Value of Avoided Cost (Index)

son w/windpower Over 15 years Over 20 years – Genuinely diversified supply portfolios – “Load-growth insurance” of cogen & eff. Distributed Benefits (continued) • ~2–3´ (sometimes 10´): Utility investments & operations (el. engineering) – Onsite generation or DSM reduces loads • Reduced or deferred grid investments – Some distribution bottlenecks cost >$2000/kW – New-hookup breakeven distance can be not km but m • Reduced grid losses – Shorter haul length, hence less R – Lower I2, onpeak heating, hence R; also fewer VARs • Improved reliability/resilience of supply • Can extend transmission/distribution eqpt. life – Cooler operation, fewer tapchanges • Better distribution circuit mgt. & cap. utiliz’n. can further cool eqpt. for lower losses & longer life Distributed Benefits (continued) • Resources nearer loads facilitate isolation and bypassing of distribution faults • Inverter-driven resources can provide free reactive power support, improve stability • Isolated generators can give special users premium power quality and reliability • Smaller units cut reserve margin – Also spinning reserve and keep-warm fuel • Many distributed resources match loads • Lower av. system cost may reduce buy- back tariffs to independent generators Distributed Benefits (continued)

• ~2´ (more for co-/trigen): Other values – Thermal integration (heat, cool, dehumidify, chemical process heat,…), FC pure hot water – Potential use of local fuels/wastes – Photovoltaic roof integration, shading – Lower prices for rural land without utilities – Scores of other small terms • Externalities (“NEEDS”) – Environmental, social, institutional, etc.

– Some are (L.A. NOx) or may be (CO2) internalized – Hard to quantify but may be politically decisive Twelve Drivers of Distributed Utilities

• “Distributed benefits” sharply raise value • Supply-side advances – Superefficient end-use ® less/cheaper supply – Onsite cogen/trigen: microturbines, PAFC,… – PEMFCs in buildings, plug-in Hypercars,…

– “Hydro-Gen,” renewable H2, wellhead-reformed natural gas, sustainable biofuels – Building-integrated/“vernacular” PVs, cheap windpower, other competitive renewables – 96+%-efficient electric storage, reversible FCs Twelve Drivers (continued)

• Grid and control advances – Advanced switches/telecom let automation of the distribution grid shift topology from unidirectional tree to omnidirectional web – Pervasive real-time energy and stability pricing, customer communication; “out-of- control” distributed intelligence? • Control can disperse at least to substation level • Perhaps even to customer or device level Twelve Drivers (continued) • Market/institutional advances – Competition values many previously unmonetized distributed benefits – So does unbundling power quality & reliability, grid stability, cost control,… – New market entrants better understand needed disciplines (financial ecs.,…) – Local Integrated Resource Planning (being done by >100 North American electric utilities) prospects for distributed benefits • Ontario Hydro’s first 3 experiments cut capital needs up to 90%, saved C$0.9b The Distributed Utility Revolution • All twelve drivers reinforce each other, regardless of restructuring outcomes • The shift to distributed generation is rapidly accelerating – US new units mainly at 1940s scale (106–7 W) – Will soon be at 1920s scale (103–4 W) • Most restructuring ignores this reality • Important rules remain unresolved • But market demand will probably force simpler interconnects, net metering (now in ~30 US states),... Much El. Liberalization Problematic • Wholesale price competition is sound • But retail competition is unnecessary • Commodity mentality is mistaken at retail level; reverses proper incentives • Incumbents gain an unfair advantage over competing efficiency providers • Conversely, serious obstacles to full competition because DSM, gas, and distributed generation not liberalized • Very few good, proven models — but many serious errors to learn from Who Should Compete? • Two big benefits: competitive generation and efficient end-use. Get both! (#2 is worth ~5–10´ more than #1) • Wholesale competition is enough to reward least-cost generation; its benefits can only be captured once • That doesn’t need retail competition – Retail competition might increase choice • But “second-best” also works very well – It tends mainly to benefit big users and bewilder small ones – It risks “big dogs eat first” (gross inequity) What’s the Right Size for Generation? • Optimal scale should be a market choice • So the rules must let all scales compete – Simple, transparent interconnection rules • Net metering desirable; time-of-use both ways • Ensure safety without burdensome obstacles – New Mexico’s brief example: compliance with Underwriters’ Laboratory, National Electric Code, and IEEE standards is sufficient and automatically acceptable – Texas, New York are “pre-qualifying” equipment – Ensure no obstacles to thermal integration – But don’t give district heating unfair advantage – Modernize H2 installation, use, safety rules • No protection for sunk costs: be serious about liberalization What Mistakes Should Be Watched For? • UK mistake #1: $/kWh, not $/month bills • UK mistake #2: split monopoly into duopoly • US mistake: incumbent monopolists use political power to reinforce their advantage, gain unfair cost recovery, exclude entrants • NZ mistake: split up a vertically integrated system without expecting it to try to find its way back together again; let distributors use anti-efficiency tariff structures • CA mistake: efficiency pause, price gaming • Everyone’s mistake so far: ignore distributed resources, assume central generation What Should Be Rewarded? • The classical method of forming retail el. prices is preoccupied with the price of kWh (tariffs) and ignores the cost of electrical services (bills) • It rewards distribution companies for selling more electricity, and penalizes them for reducing customers’ bills • Thus its commodity mentality rewards just the opposite of what society wants! • Fixing this defect is the most important possible reform in the power sector What Should Be Rewarded? (continued)

• Necessary reforms have been demonstra- ted in ~9 of the United States and can be applied in very diverse circumstances • Typically done in two linked steps – Decouple distributors’ profits from kWh sales – Share profits from reducing customers’ bills • Aligns customer and shareholder goals • Rewards least cost (economic efficiency) • Transforms utility culture What Should Be Rewarded (Example) • In 1992, the largest investor-owned US utility (PG&E) invested >$170M to help customers save electricity more cheaply than it could be made, even in old plants – Created $300–400M present-value saving – Customers got 89% as lower bills – Shareholders got 11% as higher profits – Both had an incentive to achieve savings – Utility received its 2d-biggest profit item (>$40M) at no cost and at no risk – Such rewards transform the utility culture The Oil Endgame Is Starting • Many oil majors wonder whether to say so; the chairs of four already did • In light of all demand- and supply- side alternatives, oil will probably become uncompetitive even at low prices before it becomes unavailable even at high prices • Don Huberts (head of Shell Hydro- gen): “The Stone Age did not end because the world ran out of stones, and the Oil Age will not end because the world runs out of oil.” The Oil Endgame (continued) • Like uranium already and coal increas- ingly, oil will become not worth extrac- ting—good mainly for holding up the ground—because other ways to do the same tasks are better and cheaper • Driven by E&P, efficiency, & substitution – Coal is already in absolute decline worldwide: China’s output in 2000 is back to the 1986 level, with a very rapid shift to gas – Wind and PVs are the fastest-growing energy sources worldwide (>20%/y); renewables, the fastest-growing supplies in Europe The Oil Endgame (continued)

– The half-renewables-in-2050 Shell global scenario now looks likely, even conservative

– GDP and CO2 are rapidly decoupling

• World: 1998 GDP +2.5%, CO2 –0.5%; ’99 even better

• US: economy growing ~5–10´ as fast as CO2 – And all this without new technology, systematic barrier-busting, tunneling through the cost barrier, or natural-capitalist business models (Natural Capitalism, 1999, www.natcap.org) • But this cornucopia is the manual model— you must actually go turn the crank! Summary for Japan: Demand • Japan’s leadership in energy efficiency can be extended much further in all sectors — most of all in buildings – Potential savings, especially in industry and transport, may be modestly smaller and costlier than in some other countries, but the differences are not important – As of a few years ago, Japan was the only major industrial country with zero public R&D funding for end-use efficiency (except one small project on car engines) – Nearly all R&D was on conversion efficiency Summary for Japan: Supply • Japan is poor in fuel but rich in energy – From my first studies ~1970 to modern ones by Tsuchiya-san and others, Japan has the greatest range of renewable energy opportunities of any major industrial country – This is seldom perceived because of the psychology of dependence on imported fuel – To a foreign eye, the strong emphasis on supply over efficient use seems unbalanced (for example, solar demonstration houses) – Better integration of the two is needed Summary for Japan: Institutions • Emphasis has been strongly on supply, chiefly central-electric — predominantly nuclear, which gets no investment in open economies • Energy policy institutions need more diversity of views and adaptability to change, so this Working Group has been much needed • More competition, flexibility, diversity, speed, and entrepreneurship seem essential • Need more ESCOs and transparent pricing • Japan’s extraordinary technical skills seem much underused in the energy sector, but... • If revitalized, it could work very quickly — and perhaps help more in China & eastern Russia Thank you! And please visit...

• www.rmi.org (general information) • www.hypercarcenter.org (public information about Hypercars) • www.hypercar.com (the new technology development company) • www.naturalcapitalism.org or www.natcap.org for short (the wider context—making business far more profitable by behaving as if nature and people were properly valued): see Natural Capitalism (Little Brown, NY, & Earthscan, London) About the author: A consultant experimental physicist educated at Harvard and Oxford, Mr. Lovins, 53, has received an Oxford MA (by virtue of being a don), six honorary doctorates, a MacArthur Fellowship, the Heinz, Lindbergh, World Technology, and Heroes for the Planet Awards, the Happold Medal, and the Nissan, Mitchell, “Alternative Nobel,” and Onassis Prizes; held visiting academic chairs; briefed 13 heads of state; published 27 books and several hundred papers; and consulted for scores of industries and governments worldwide. The Wall Street Journal’s Centennial Issue named him among 39 people in the world most likely to change the course of business in the 1990s, and Car magazine, the 22nd most powerful person in the global automotive industry. His work focuses on whole-system engineering; on transforming the car, energy, chemical, semiconductor, real-estate, and other sectors toward advanced resource productivity, and on integrating resource efficiency into the emerging “natural capitalism.” About Rocky Mountain Institute: This independent, nonpartisan, market-oriented, technophilic, entrepreneurial, nonprofit organization was cofounded in 1982 by its co-CEOs, Hunter and Amory Lovins. RMI fosters the efficient and restorative use of natural and human capital to help create a secure, prosperous, and life-sustaining world. The Institute’s ~50 staff develop and apply innovative solutions in business practice, energy, transportation, climate, water, agriculture, com- munity economic development, security, and environmentally responsive real-estate development. RMI’s ~$5-million annual budget comes roughly half each from programmatic enterprise earnings (mainly private-sector consultancy) and from foundation grants and donations. Its work is most recently summarized in Natural Capitalism (with Paul Hawken; Little Brown, 9/99; forthcoming in Japanese, 2000–2001, Nihon Keizai Shimbun). About Hypercar, Inc.: Rocky Mountain Institute transferred most of the technical activities of its Hypercar Center—whose public outreach function continues—to this partly-owned for-profit subsidiary, its fourth spinoff, in August 1999. Funded by private investors, Hypercar, Inc. pursues business opportunities related to the Hypercar concept developed at RMI since 1991.