ABL: Nuclear power continues to die of an incurable attack of market forces. A huge and capable propaganda campaign by the industry and its political allies is spinning an illusion of a renaissance that deceives credulous journalists but not hard-nosed investors.

The U.S. first got 19 percent of its electricity from nuclear power in 1988 [it] has fluctuated around that share ever since (peaking at 20.6 percent in 2001), and had a 19.4 percent share in 2006, officially projected to fall to roughly 15 percent in 2030.

Without those nuclear plants, current U.S. CO2 emissions would have been higher if coal plants had been bought instead, or lower if cheaper, low- or no-carbon resources – efficiency, cogeneration, and renewables – had been bought instead.

ET: If you believe nuclear power is such a poor investment, why are so many countries around the world (the U.S., China, India, and Finland among them) now planning or building new reactors?

ABL: New nuclear plants are bought (sparsely) only by central planners, not in free markets. America’s, China’s, India’s, and Finland’s powerful nuclear lobbies cling to life in noncompetitive intensive-care units. My bias is to trust capitalists in New York more than bureaucrats in Beijing; if yours is different, I can understand how you might reach different conclusions.

Not a single new nuclear project on earth has received a penny of private risk capital: they’re unfinanceable in the private capital market. The industry is therefore making strenuous efforts to get a $50 billion DOE blank check, and to shift to ratepayers, taxpayers, and unsophisticated officials of small public utilities (remember WPPSS?) the risks that private investors shun.

The new Finnish reactor was authorized by an odd political process based on a cooked and limited-access study, then financed from captive customers’ long-term power-purchase contracts via heavily subsidized and allegedly illegal deals with French and German subnational parastatals. Once the industry’s poster child, the plant is two years late (the more they build it, the behinder they get) and hideously over budget. The builders are reportedly trying to renegotiate their ruinous fixed-price contract.

The U.S. has had no new nuclear orders since 1978 (NRG’s Texas proposal isn’t an order—just a license application to establish subsidy priority), and every plant ordered since 1973 has been cancelled, despite decades of a cozy industry-designed regulatory system that bars effective public scrutiny and participation.

S&P found that new 2005 U.S. subsidies roughly equal to the next six units’ capital costs (on top of big prior subsidies) won’t materially improve builders’ credit ratings, because most of the risks that concerned the capital markets remain. This unprecedented bailout experiment will probably have the same effect as defibrillating a corpse: it will jump, but it won’t revive.

China has a world-leading nuclear goal of 40 GW by 2020 (enough to offset a tenth of global retirements meanwhile), but by 2006 had already installed a world-leading 49 GW of distributed renewables—seven times its 2005 nuclear capacity, increasing by sevenfold more GW per year. India gets 3 percent of its electricity from nuclear, but has far more wind power, ranking #3 in world wind expansion. No wonder: wind kWh are two to three-fold cheaper.

Here’s how I view the competitive landscape for electrical services. Only two careful nuclear cost studies rest on empirical data: the 2003 MIT study found nuclear can’t compete with coal or gas; the 2007 Keystone study found nuclear costs 8 to 45 percent higher still. My analysis compares nuclear power (at the lower MIT costs) with the empirical costs of “micropower” and “negawatts,” which are far cheaper and hence are walloping all central plants in the global marketplace. (Details are in my December 2005 Nuclear Engineering International article “Mighty Mice” (RMI Publ. #E05-15), its backup #E05-14, my Royal Academy of Engineering lecture #E06-04, and our micropower database #E05-04, all at www.rmi.org/sitepages/pid257.php.)

“Micropower” is The Economist’s term for cogeneration (two-thirds gas-fired and very efficient, saving over half the carbon), plus renewable generators, minus big hydro (greater than 10 MW). Worldwide in 2005, micropower:

- generated one-sixth of all electricity and one-third of all new electricity;
- generated from one-sixth to more than one-half of all electricity in 13 industrial countries;
- added 4 times as much electrical output and 11 times as much capacity as nuclear added.

Worldwide in 2006, micropower generated more electricity than nuclear power; nuclear power brought online 1.49 GW, less than photovoltaics did (1.74 GW) and a tenth what wind power did (15 GW). Nuclear lost 0.5 net GW (retirements exceeded additions) while micropower added roughly 34 GW. Distributed renewables got $56 billion of private investment while nuclear got zero.

Negawatts (saved electricity) rival micropower in annual capacity effect. Both together probably now provide more than half the world’s new electrical services; central stations – nuclear, fossil-fueled, and big hydro – have less than 50 percent market share. The revolution already happened – sorry if you missed it.

What part of this picture does anyone who takes markets seriously not understand? The small, fast options are triumphing in the global marketplace, because investors prefer their lower costs and risks. Their potential is enormous – for wind power alone, 35 times that of world electricity use – and they need less back-up than intermittent big thermal stations need now.

ET: You’ve spent much of your career arguing for increased energy efficiency. Over the past few decades, the U.S. economy has become dramatically more efficient but domestic energy consumption (and global energy consumption) keeps rising. Why?

ABL: Consumption rises when GDP grows faster than intensity shrinks. In 2006, U.S. intensity fell 4 percent, slightly faster than GDP grew, so U.S. energy, coal, and oil use fell.

ET: Further, although the U.S. has become dramatically more energy efficient over the past century, per capita energy use has risen. Doesn’t that argue against your primary point that efficiency will reduce energy use?

ABL: No. Efficiency has reduced energy use per household in places like Vermont that pay attention and invest properly. California has held per-capita electricity use flat for 30 years – saving 65 peak GW and more than $100 billion of power-system investment – while per-capita real income rose 79 percent, and is now accelerating those savings. But even these exemplars have barely scratched the surface. Fully applying modern efficiency’s potential would save half of U.S. oil and gas use at a sixth and an eighth of their respective prices (www.oilendgame.com), and three-fourths of electricity at an eighth of its price (www.rmi.org/images/PDFs/Energy/E05-16_EnergyEndUseEff.pdf, www.rmi.org/stanford, www.esource.com [Technology Atlas series]). I’m a practitioner, not a theoretician, and these findings are empirical: my team has lately redesigned more than $30 billion worth of corporate facilities in 29 sectors for superefficiency, generally at lower capital cost.

ET: The issue of energy efficiency and consumption has been argued for years. In 1865, W.S. Jevons predicted that increased energy efficiency would result in greater energy use. Since then, Jevons’ work has been confirmed by energy analysts like Mark Mills and Vaclav Smil. Are Jevons, Mills, and Smil wrong?

ABL: Broadly, yes on this point (and for Mills on most). The rebound effect exists but is empirically small. If your thesis were true, we should mandate inefficient equipment to save energy.

ET: If you think Jevons was wrong, then how are things different today?

ABL: His period’s new energy supplies and applications triggered a vast industrial revolution and incredible economic growth. Later advances were incremental, with more modest effects. There are many other more subtle fallacies in the rebound argument too.

ET: In 1984, you told Business Week magazine that electricity use was going to decline. You said, “We see electricity demand ratcheting downward over the medium and long term. The long-term prospects for selling more electricity are dismal….We will never get, we suspect, to a high enough price to justify building centralized thermal power plants again. That era is over.”

Since then, U.S. electricity use has gone up by about 66 percent. Why did you think electric use would go down? Why were you so wrong? And given your failed forecast, why do you continue to claim that efficiency will reduce demand?

ABL: I can’t check your quotation from the road (that widely misquoted article was a pastiche of snippets rearranged from an hour-long interview), but the general sentiment is correct in its historical context—my 1976 Foreign Affairs article, which used a 50-year time horizon. By 2000, that article’s heretical “soft path” graph was 4 percent below actual U.S. energy consumption in 2000, without – or 1 percent above, with – normalization to actual GDP growth. U.S. electric intensity is trending downwards (falling by at least 2 percent in 6 of the past 10 years) although 48 states rewarded utilities for selling more electricity and penalized them for cutting customers’ bills. That perverse incentive is now reversing. This plus cost and climate pressures and revolutionary techniques will, I believe, ultimately make electricity demand stabilize and then decline in most states as it has in some. Most electricity is now wasted, and ultimately, economics wins. New central plants are uneconomic and getting more so.

ABL: [Ed. Note: Lovins submitted this second response via email on October 22, 2007 and asked that it replace his initial response.] That widely misquoted article-snippets from an hour's interview-omitted the word “growth” when I said I expected “electricity demand growth ratcheting downward over the medium and long term.” But that's what happened, in context-the 50-year time horizon in my 1976 Foreign Affairs article, whose heretical “soft path” graph was 4 percent below actual U.S. energy consumption without, or 1 percent above with, normalization to actual GDP growth. U.S. electricity consumption growth averaged 2.82 percent per year in 1984-2000, 1.2 percent per year in 2000-05, and 0.1 percent in 2006. Electric intensity fell by at least 2 percent in six of the past ten years, even though 48 states rewarded higher electricity sales and penalized lowering customers' bills. Now this perverse incentive is starting to reverse. Cost and climate pressures and revolutionary efficiency techniques will ultimately make electricity demand stabilize and then decline in most states as it has begun to do in some. Most electricity is now wasted, and eventually economics wins. New central plants are uncompetitive and getting more so.

ET: Following up on that question, U.S. electricity demand is now growing by 2.7 percent per year. And the electric power industry is already projecting a shortage of power unless more central power plants are built. How should the U.S. be meeting this huge surge in demand? Aren’t more thermal power plants essential in order to avoid blackouts?

ABL: No. More and bigger power plants and power lines are a key cause of more and bigger blackouts; roughly 98 to 99 percent of U.S. power failures and glitches originate in the grid, not from inadequate supply. CCGT power plants are cheaper and more reliable than the grid, so affordable and reliable power should now be generated at or near the customers. My Economist Book of the Year, Small Is Profitable (www.smallisprofitable.org), documents how the same decentralization that has swept telephony and computing can make electricity roughly 10 times more valuable by capturing 207 “distributed benefits”: e.g., less financial risk from small fast units than big slow ones, and lucrative fuel-price hedging from renewables.

USEIA reports U.S. electricity sales averaged 1.15 percent per year of growth from 2000-06, [and] 0.1 percent in 2006. But if they did grow quickly, the cheapest and fastest remedies would be efficient use and demand response, then micropower.

ET: You have long talked about the issue of global carbon dioxide. In 2006, China expanded its electric generation capacity by 102 gigawatts, 90 percent of which is coal fired. How should the countries of the world be responding to the surging energy use in China and the rest of the developing world? Do you favor a carbon tax? If not, what’s the global solution to dealing with rising carbon dioxide emissions, particularly those coming from the developing countries?

ABL: Industrial countries should set a good example of least-cost energy investment, and help spread best not worst buys. More nuclear plants would worsen global warming by displacing 2 to 10 times less coal per dollar, more slowly, than negawatts and micropower (see “Mighty Mice”). I favor internalizing carbon costs (incumbents too must bid for allowances), but correct prices are less important than ability to respond to price, via “barrier-busting” (Climate: Making Sense and Making Money, www.rmi.org/images/PDFs/Climate/C97-13_ClimateMSMM.pdf).

The U.S. can hardly criticize China: America heavily promotes and subsidizes coal and coal-fired power stations, hasn’t (as China did until 2001) cut its energy intensity over 5 percent per year for a quarter-century, and doesn’t (as China has) make energy efficiency its top strategic priority. Like Thomas Friedman, I expect China will become a leader in energy efficiency (as it already is in renewables) and in climate protection, because otherwise it can’t afford to develop.

Cutting global energy intensity not by the usually assumed 1 percent per year but by 2 percent per year would stabilize carbon emissions; 3 percent per year would stabilize climate (if it’s not already irreversibly damaged). But smart companies routinely and very profitably cut their carbon intensity or even their absolute carbon emissions 6 to 9 percent per year. I don’t see why 3 percent per year is hard, nor why it should be costly, since essentially everyone who buys energy efficiency makes money. Efficiency costs less than energy, so climate protection is not costly but profitable.

We can solve the climate, oil, and proliferation problems at a profit – led by business – if we simply let all ways to save or produce energy compete fairly, at honest prices, regardless of their type, technology, location, size, or ownership. Who’s not in favor of that? Are you? If so, you can join me in looking forward to a nuclear-free future and a richer, fairer, cooler, safer world.

Ed. note: These are follow up questions from Robert Bryce based on Lovins’s original response.

ET: In your response to my question about carbon taxes, you wrote: "I favor internalizing carbon costs." Sounds to me like you favor penalizing all carbon fuels...

ABL: Fossil fuels, and the point is not to "penalize" anyone but simply to charge social cost, according to sound economic doctrine, for the private use of a public good.

ET: With some sort of levy. Why not say that explicitly?

ABL: Because cap-and-trade (auctioning all the emissions rights, not giving them to incumbents) works as well, and I didn't have space to explain or discuss the various ways to achieve internalization.

ET: Further, given that you appear to favor "internalizing" carbon costs, what then, should the tax be?

ABL: You're assuming it's a tax; I'm not. Cap-and-trade discovers the market-clearing price; it ensures that the market will clear but at a price that can't be known in advance, whereas setting a tax gives certainty about its level but not about how the market will respond to it.

ET: $30 per ton? $40 per ton?

ABL: In my opinion, over the long run, an efficient carbon market will clear at very low if not negative costs. The McKinsey supply curve shows a potential to abate 46 percent of global business-as-usual 2030 emissions of greenhouse gas at an average cost of 2 Euros per tonne CO2 equivalent. That analysis is very conservative -- it understates the quantity and overstates the cost of energy efficiency -- so once that's fixed, the average cost will almost certainly become negative, as my supply curves have been showing for more than 20 years.

ET: As for my question on China, you didn't answer it. I'll ask it again: How should the countries of the world be responding to the surging energy use in China and the rest of the developing world?

ABL: I did answer it: "Industrial countries should set a good example of least-cost energy investment, and help spread best not worst buys. More nuclear plants would worsen global warming by displacing 2 to 10 times less coal per dollar, more slowly, than negawatts and micropower (see "Mighty Mice")." I then went on with an additional paragraph about China:

"The U.S. can hardly criticize China: America heavily promotes and subsidizes coal and coal-fired power stations, hasn't (as China did until 2001) cut its energy intensity over 5 percent per year for a quarter-century, and doesn't (as China has) make energy efficiency its top strategic priority. Like Thomas Friedman, I expect China will become a leader in energy efficiency (as it already is in renewables) and in climate protection, because otherwise it can't afford to develop."

Given more space, I could have elaborated based on my experience in China (including teaching at Peking U). For example, recently addressing an Asia Society conference on exactly this subject, I noted that Japan's potential (according to the best recent analyses there) to triple its energy productivity profitably would imply a potential for more than a 20 times long-run decrease, also profitably, in Chinese energy intensity.

I then had two paragraphs addressing the erroneous perception, implied in your question and repeated in your new question 5 below, that there's not much point in the West's saving carbon when China, India, et al will emit lots more. The rate of decrease in global energy intensity required to stabiize or reduce carbon emissions is respectively one or two percentage points faster than the canonically assumed business-as-usual trajectory. Global includes all developing countries too.

Note that China did not adopt energy efficiency as its top strategic priority for national development (in the eleventh Five-Year Plan) because of a treaty; rather, because Hu Jintao, Wen Jiabao, et al. know that otherwise, China can't afford to develop, because the supply side will eat the budget.

ET: You claim that China's top priority is energy efficiency. If that's so, why are they building so many big power plants?

ABL: Two-thirds of the new coal plants being built in China are "bootleg" units unauthorized by Beijing. As the Chinese proverb says, "Heaven is high and the Emperor is far away": national policy takes time (in this case starting less than two years ago) to seep into national practice. Provincial cadres tasked to achieve a high economic growth target, but lacking the tools, knowledge, and often authority to enforce or encourage energy efficiency, are typically told by their advisors to build coal plants, or look the other way while someone else builds them, because in China they're relatively cheap, fast, and ubiquitous (though dirty and inefficient), and are reinforced by potent bureaucratic and industrial momentum. Better buys take more knowledge, infrastructure, and foresight than are typically common today at that decisional level.

ET: Even if efficiency is their top priority, last year, China built 102 gigawatts of new power plants, nearly all of them coal fired. If micropower is as great as you claim, why are the Chinese building coal plants instead of the micropower plants you propose? Are they just dumb?

ABL: They're not dumb, and coal plants are/were built in addition to, not instead of, distributed renewables and efficient end-use. As I said, China is adding 7 times more GW per year of distributed renewables than of nuclear. But in essence, building central plants and coal infrastructure are centrally planned activities at the level of the country or, more commonly, the province or region, and are typically done by state-owned enterprises with heavily distorted [low] prices or shadow prices for capital, land rights, and other key factor inputs, whereas distributed renewables are more (and for windpower, largely) emerging entrepreneurial activities. China in 2005 tied Germany for the world lead in renewable energy investments, and ranked #5, just behind India, in windpower additions: today at least 30 Chinese firms, mostly domestic, are in the wind-turbine business.

My expectation is that in due course, many of the new Chinese coal plants will be idled as the unsustainable "coal rush" collides with reinvigorated efficiency efforts and burgeoning micropower. Both efficiency and renewables are starting to become flourishing private enterprises. If Chinese reforms continue to encourage more transparent investment decisions and more competitive power markets, less electricity will be needed than currently forecast, more of it will come from smaller and more benign sources, and many of the coal plants already built, let alone more of them, will become superfluous. China has gone through power boom-and-bust before, and seems to be heading into that cycle again -- especially in light of President Hu's speech to the National Congress yesterday, clearly signaling a shift of national development strategy away from the 2002 to 06 binge on energy-intensive basic-materials industries and toward a more balanced and diversified development model that will be dramatically less energy-intensive.

ET: Won't these myriad Chinese power plants (as well as the ones being built in India, Vietnam, Thailand and elsewhere) simply swamp any reductions in carbon emissions that might be made in western countries?

ABL: No. Nor does it makes sense (or money) to misallocate our capital just because some others misallocate theirs. For those who, like me, favor conservative economic principles, best-buys-first is the right approach whether or not everyone follows it. And as previously noted, I definitely do not believe Party bureaucrats are the best source of investment wisdom.