Amory Lovins on Energy Efficiency

The McKinsey Quarterly has a good interview with the cofounder of the Rocky Mountain Institute.

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: More broadly, how do you think CEOs should be approaching energy efficiency today?

Amory Lovins:
Aggressively. They should think of energy and resource efficiency as a key source of competitive advantage. In my team’s latest redesigns for $30 billion worth of facilities in 29 sectors, we consistently found about 30 to 60 percent energy savings that could be captured through retrofits, which paid for themselves in two to three years. In new facilities, 40 to 90 percent savings could be gleaned—and with nearly always lower capital cost.

Moreover, seldom-counted side benefits can be far more valuable than the direct savings. For instance, a typical office pays about 160 times as much for people as for energy, so a 0.6 percent gain in labor productivity would have the same bottom-line effect as eliminating the energy bill. But we routinely see not a 0.6 but a 6 to 16 percent gain in labor productivity in efficient buildings with better thermal, visual, and acoustic comfort. When people can see what they’re doing, hear themselves think, breathe cleaner air, and feel more comfortable, they do more and better work. We also see 40 percent higher retail sales in well day-lit1 stores, 20-odd percent faster learning in well day-lit schools, and better clinical outcomes in green and efficient hospitals. These often overlooked side benefits are frequently worth tens or hundreds of times more than the actual reduction in energy costs.

For instance, a famous aerospace building designed for day lighting gave a far faster payback than expected, because it spurred 15 percent higher productivity and 15 percent less absenteeism. The higher productivity and reduced overhead of the green building gave the company a competitive advantage in a tough contract bid. Winning that contract generated enough profit to pay for the whole building. When the Wall Street Journal was writing its third article about the building, the Journal’s reporter called me and said, “They’ve clammed up. I can’t get any data. Can you find out what’s going on?” Well, the CEO had realized that the building was an important source of competitive advantage and that they’d already said way too much about it.

Lovins has this amazing capacity to connect technical ideas with the bottom line and that makes him a strong candidate to read for business people interested in this area.

When McKinsey starts interviewing Lovins we can see the interest in this area for the C-level executives.

We have covered Lovins before, here and here.


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