HIGHERGROUND 2006 -2007 Annual Report HIGHERGROUND From the Chairman This year, an exciting and welcome storm broke over our heads: showers of recognition, flashes and rumbles of acceptance, and a flood of global demand for our help in taking solutions to scale. RMI spent the year racing for higher ground—expanding our capabilities and effectiveness to step up to what the world now requires of us. Our steadfast vision of a secure, just, prosperous, and life-sustaining world (“Imagine a world…”) strikes an ever-deeper chord with diverse people and organizations everywhere. RMI’s roadmap for this half-century of change is continuing to unfold in a series of gratifying shifts now snapping into focus. For example, to much industry mirth in 1991, I suggested that a four-seat carbon-fiber car could weigh just 400 kg and get over 100 mpg. This October, Toyota showed such a car; the world’s top maker of carbon fiber announced a factory to mass-produce ultralight auto parts; and our Fiberforge spinoff’s new manufacturing process entered production at an aerospace plant. This summer, two trans- formational RMI car projects with the auto industry exceeded expectations. With leadership from Boeing in airplanes, Wal-Mart in heavy trucks, and the Pentagon in military energy efficiency, RMI’s 2004 Winning the Oil Endgame journey off oil is underway, and we’re focused intently on driving it faster, especially in automaking. In 1976, I foresaw a dramatic market shift toward the decentralized production of electricity. Today, a sixth of the world’s electricity (slightly more than comes from nuclear energy) and a third of the world’s new electricity is so produced. Micropower and “negawatts” (saved electricity) provide most of the world’s new electrical services; central plants now provide less than half. In 2006, nuclear power added less new capacity than solar cells, or a tenth as much as windpower; bigger retirements cut global nuclear capacity by half a billion watts while micropower added about 34 billion watts. Decentralized renewables in 2006 got $56 billion of private risk capital; nuclear, as usual, got zero (only central planners buy it). China has seven times as much decentralized renewable capacity, rising seven times as fast, as nuclear capacity. Next comes the “Smart Garage,” linking battery-electric, plug-in-hybrid, or fuel-cell cars to the grid as power stations on wheels, with far more total generating capacity than all utilities own. By selling even a small fraction of parked cars’ spare power back to the grid (as I suggested in 1991), all the coal and nuclear plants could be put out of business. RMI is working with industry to develop both the “smart garage” and a competitive plug-in hybrid vehicle. Nearly half of energy use and greenhouse-gas emissions occur in buildings, but that’d approach zero if buildings were optimally designed (some of our latest building designs are even net producers of renewable energy). RMI’s “Cooling the Warming” Initiative, reinforced by work with some of the world’s leading cities, developers, and design firms, aims to speed the green-building revolution we’ve led since the early 1990s, and to deploy new ways to be comfortable without the inefficient air conditioning that drives half the coal-plant construction in China. In vehicles, industry, or buildings, we’ve discovered how to make huge energy and resource savings cost less than small or no savings. That integrative design approach, codified in my Stanford University School of Engineering lectures will next create a vivid casebook of Factor Ten Engineering that will bring our breakthrough results—so far in 29 sectors of the economy—to eager designers everywhere. These and many other paths continue to converge on a bright future of abundance by design. The journey is arduous but rewarding. All of us at RMI treasure your companionship on this “road less traveled by”—a choice that will make all the difference. AMORY B. LOVINS / Cofounder, Chairman, and Chief Scientist 1 HIGHERGROUND From the Chief Executive Officer For RMI, 2007 was a breakthrough year in many ways. We grew in scale, prominence, and impact. As the world awakened to the need for efficient and restorative use of natural resources, demand for our services and support for our research and outreach efforts hit record levels. In response, we worked hard to leverage this demand and support into increased mission impact. The RMI team is striving to simultaneously expand our capacity, while focusing our efforts on projects that have the greatest impact. RMI’s unique “entrepreneurial non-profit” model—where we leverage philanthropy to fuel research and outreach, then use client funding to support implementation—is amplifying our efforts in numerous industries. These successes are attracting more engagements as well as talented practitioners who relish the opportunity to make a bigger difference with the help of RMI. As a result, our research and consulting team roughly doubled in size in the last twelve months. Accordingly, fiscal 2006-2007 saw a substantial jump in revenues for the second year in a row. To support this growth, we have attracted a number of new senior team members, and are investing in the infrastructure needed to support an enduring institution. We expanded our offices in 2007, and have an even bigger expansion planned for 2008. Our technology infrastructure is being refined and upgraded. And we have added a number of key executives with experience from various prominent organizations. More demand, more support, more resources, more talent—these are the makings of a virtuous cycle that can create the changes we all have worked so long to effect. We are faced with a huge opportunity and an awesome responsibility to future generations. We at RMI—our staff, our clients, our supporters—must be prepared to rise to the occasion. Accordingly, our focus in fiscal year 2007-2008 will be on Increasing our Impact. We are building on our strong reputation for innovation and thought leadership, and increasing the leverage of our work through a number of important changes. We are creating a dedicated research function in order to ensure a steady supply of innovations. And we are developing an entirely new communications strategy to make RMI insights and innovations more accessible to decision makers. Most importantly, we are concentrating our research and consulting efforts around visionary strategic objectives. Winning the Oil Endgame, our 2004 roadmap to help the U.S. end dependence on foreign oil, led by business for profit, has already created substantial impact—and provides a template for similar dramatic changes in other industries such as buildings, utilities, and industrial processes. In 2008, we will apply all of our big thinking to these “high potential” areas. More than ever, the world needs the leadership that RMI can offer to help foster the efficient and restorative use of natural resources. We have an extraordinary opportunity to make a positive impact in a time of great change—and we are grateful to have you on this journey with us. MICHAEL POTTS / Chief Executive Officer 2 HIGHERGROUND 25 YEARS AND COUNTING: RMI REACHES FOR HIGHER GROUND This past year saw the celebration of RMI’s 1982 founding, when the “abundance by design” concepts that RMI espouses seemed radical, daunting, perhaps even unachievable. Today we are witnessing a sea change in U.S. and world opinion regarding the efficient and restorative use of resources. Fortune 500 companies, local, state, and federal governments as well as individuals, are embracing concepts deemed radical not so long ago. Much can shift in 25 years. The year was one of significant organizational change for RMI, highlighted by the transition of Amory B. Lovins to Chairman of the Board and Chief Scientist and the hiring of Michael Potts as Chief Executive Officer. This shift allowed Mr. Lovins to focus solely on strategic influence and special projects while placing an experienced entrepre- neur with a strong non-profit background in charge of RMI’s day-to-day operations. Across the board, RMI deepened its research and consulting bench with new hires. These internal changes will help RMI reach higher ground in its pursuit of the efficient and sustainable use of resources, a mission that has been furthered by the many accom- plishments over the past year. Whether it was working with utilities to identify alternatives to fossil-fuel-based electricity generation, local governments to help institutionalize sustainability in their daily operations, architects to help incorporate sustainable design elements into their buildings, engineers to test the feasibility of plug-in hybrid electric vehicles, or the U.S. military on continued implementation of Winning the Oil Endgame, RMI’s accomplishments during the past year are impressive. Capping it all off was the hugely successful RMI25 celebration in August. With more than 800 attendees at the August 10th gala, it was a proper tribute to RMI’s groundbreaking work throughout the last 25 years as well as a spectacular launch for our continued success in the years to come. Energy and Resources Team Over the past year, RMI’s Energy & Resources Team continued its work helping utilities across the United States incorporate elements of efficiency, renewable energy, distributed generation, and transmission and distribution upgrades into their resource planning. Working with mainstream, integrated utilities that have traditionally relied on coal for power generation, RMI helped them reduce the nation’s reliance on fossil fuels. RMI’s work with Nebraska Public Power District, Duke Energy, and Kansas City Power & Light involved developing resource plans and identifying regulatory barriers to investments in energy efficiency and distributed resources. Our work with the Hawaiian electric utility sector has been the most comprehensive—spanning legislative and regulatory developments and community outreach as well as consultations with the Oahu, Maui, and Hawaii utilities—and we helped create a blueprint for utilities in other states.