How can utilty companies manage financial risks in the energy sector? What could be the impact of distributed centres of energy generation on utility companies business' model? What mechanisms can lead to societal and market driven solutions to promote energy efficiency? How the design philosophy--to take nothing, waste nothing, do no harm--can create abundance by design?

1. Flagship Research Quarterly of the Indian School of Business
Transformations
in Technology
Services
Indian School of Business
e: editor_insight@isb.edu
w: www.isb.edu
Inthisissue:PROFESSORDEEPAMANIEXPLAINSTHENEEDFORACAPABILITYMATURITYINDEXFORGLOBALIN-HOUSE
CENTRES (GICS) IN INDIA • PROFESSOR AMITAVA CHATTOPADHYAY OFFERS INSIGHTS ON CRACKING THE EMERGING
MARKETS: LESSONS FROM THE INDIAN EXPERIENCE • VICE PRESIDENT, WHATSAPP, NEERAJ ARORA FEELS THERE IS
NO REASON WHY A WHATSAPP OR FACEBOOK CANNOT HAPPEN OUT OF INDIA • RBI GOVERENOR, RAGHURAM RAJAN
SPEAKS THE FUNDAMENTAL FINANCIAL SECTOR REFORMS NEEDED TO REACH DOUBLE DIGIT GROWTH
VOL 2 ISSUE 4 January – March 2015 Rs 400

2. Face to Face
FACE TO FACE 54 ISB INSIGHT January 2015 - March 2015
Nalin Srivastava: In your recent book ‘Reinventing
Fire’, you wrote that by 2050, energy consumption in
U.S. would go down by 70 percent of the present level.
How do you expect that to happen when the American
population is growing at about 0.9 percent per annum,
and by 2050 the U.S. economy would be 2.6 times the
current size?
Amory Lovins: We will quadruple the efficiency of
using the electricity. Our total use of electricity peaked
in 2007 and has been declining ever since. So, in the
past five or six years even though the economy grew
in four of those five or six years, we see downward
trends, in absolute terms. Staggered or declining
demand seems to be emerging as the new normal.
How would this declining demand impact the utility
companies?
Of course, if the revenue shrink, so would their
domain of financial stability; and they have a lot of
catch-up investment to be made for maintenance,
security improvements and so on. So I suspect a shift
away from big, slow lumpy investments towards small,
fast granular investments would be a very good tool
for managing financial risk.
Would that also mean mushrooming of distributed
centres of electricity generation?
Yes, both in supply and in the efficient or timely
use. The modular mass-produced technologies can
actually be deployed faster than central stations
that take many, many years to license and build and
then can only be built by specialised institutions.
Our experience so far in the last few decades is that
if you have small, fast modular investments that are
accessible to many different market actors the total
effect is greater and faster than a centralised system.
Wouldn’t this disrupt the utility company’s business
model?
It will destroy their business model. The main
European utilities have lost half a trillion euros
already because they bet against German energy and
they lost. And it was not because they did not know
about it. I personally briefed the directors of about
half those companies over the past decade telling
them you had better jump in and invest in this. But
they did not. So only about six or eight percent of
German renewables are owned by the big producers
of electricity and half are owned by individual citizens
and their communities and co-operatives.
Do you see the German model getting replicated in the
U.S.?
A lot of things are different, but in technical terms
if you allow distributed generators access to the grid
and if you do economic dispatch – as Germany does
by law to prioritise renewables – then the operators
of the grid can figure out the integration. In 2013
the percentage of electricity consumption coming
from renewables was 25 percent in Germany, but
about twice that in four countries, especially rich in
hydro power, namely 45 percent in Spain, 46 percent
Case for Faster,
Modular Approach to
Energy Investments
Physicist, Environmental Scientist, Writer and Chairman & Chief Scientist of Rockey Mountain Institute, Amory
Bloch Lovins is well known for his work on energy policy and related areas. Named as one of the world’s most
influential person by Time magazine in 2009, Lovins is also known as the father of the Negawatt Theory, which holds
that utility customers don’t want kilowatt-hours of electricity; they just want energy services. In conversation with
Nalin Srivastava, Director, Dean’s Office ISB. Lovins holds that a shift from slow, lumpy investments to small, fast
and granular projects would be very good for managing financial risk in the energy sector.
AMORY BLOCH LOVINS IN CONVERSATION WITH NALIN SRIVASTAVA

3. Face to Face
FACE TO FACEJanuary 2015 - March 2015 ISB INSIGHT 55
in Scotland, at least 47 percent in Denmark and an
astounding 58 percent in Portugal. The operators
have to think further about choreography of all the
variable power from photovoltaics and wind. The
other variables are dispatchable; you can take them
whenever you want. I heard one of the Danish grid
operators recently saying, “I hope we never go back
to the old system. It would be awfully dull after this.”
How reliable is the integration of renewables? And
wouldn’t the uncertainty in the renewable’s production
and demand require some form of bulk storage?
I think there was apprehension about reliability, but
as the operators gained experience they just keep
increasing their renewable fraction by half in those
four countries and at times even more. The question,
what if the Sun doesn’t shine and the wind doesn’t
blow and that we need a breakthrough in cheap bulk
storage of electricity is not correct. We can actually
forecast generation from photovoltaics and the
wind power at least as accurately, as we can forecast
demand. And just as the grid backups failed thermal
units. In case of working thermal units the grid can,
also, at lower cost, backup not working solar and
wind power with other renewables.
For renewables in United States, your book mentions,
that the captive cost is expected to be US$6 trillion.
Hence renewables, which have useful asset life of
25 to 30 years, would require investments of US$250
billion/year, whereas the United States’ entire energy
portfolio can be financed with investment that are
close to a percent of GDP, ~ US$100 billion/year. How
would you justify the very high differential costs of
renewables?
In renewable you are not paying for the fuel. So
what you need to look at, as the allocation of cost
varies between capital and operating, is the levelised
costs of the different options over their life span. In
the windy parts of the Midwest United States, wind
power contracts are now in the range of 2 - 2.5
cents a kilowatt. That is a fixed price for a 25-year
contract. And similarly the long term solar contracts
are coming in at or just below five cents. Both of these
are continuing to fall and in the more favorable parts
of the country, already beat a new combined cycle
gas plant. To make a fair comparison with efficiency
renewables that have constant price, you have to
account for the gas price volatility, which can be
estimated from an Options Straddle.
Energy efficiency can help reduce the demand.
What would motivate a consumer to initiate retrofit
of existing buildings or evaluate the total cost of
ownership over the capital cost of the building?
Source: The Volvo Environment Prize Foundation
In electricity consumption ‘Staggered or declining demand
seems to be emerging as the new normal.’

4. Face to Face
FACE TO FACE 56 ISB INSIGHT January 2015 - March 2015
Most of our effort in that sphere is in commercial
buildings where the transaction costs are much lower.
And we have figured out a package and a methodology
–Deep Retrofit – that saves at least 60 percent of the
energy and often is very cost-effective. There are
about 60 or 80 well-known market failures in buying
energy efficiency like why should I fix the building if
the landlord owns it? Why should the landlord trace
it if I pay the energy cost? But each of those obstacles
can be turned into a business opportunity and all that
stumbling blocks into stepping stones. But let me run
through the numbers on why customers should be
interested in efficiency. We found that a whole fleet
of U.S. buildings could, by 2050, triple or quadruple
its energy productivity with 33 percent IRR. We are
not counting far more valuable external benefits like
greater productivity, efficient offices, faster healing,
more retail sales pressure, well maintained shops and
so on. Those are often worth an order of magnitude
of the energy savings. But with IRR, I am counting
only the energy savings, very much understating
the benefit. In industry we found out that energy
productivity could be doubled with a 21 percent IRR.
With mobility, because the U.S. could go completely
off oil for about US$ 25 a barrel, it is a 17 percent
IRR, no compromise whatsoever in any of these cases
in the service provided, in fact it often gets better. And
you can do all of the above and make the electricity
supply system 80 percent renewable, half distributed
and highly resilient for a 14 percent IRR. If, of course,
you care about profit drops and competitive advantage
this is a strong argument. But maybe you care more
about national security, environmental protection,
public health, and climate stability. Just focus on
outcomes. So I would like to see it become general
practice that we pay electricity and gas providers for
cutting your bill and not for selling you more energy.
This is an interesting paradox. I was reading recently
about a water utility, that due to drying of its existing
aquifers, bought the nearest aquifer about 60 miles
from town and laid pipelines that costed them a sizable
sumofmoney.Meanwhile,ithadintroduceddifferential
tariffs – that grew steeper with increasing usage,
consequently residents curtailed their consumption
and soon adjusted to their new ways. Now the utility
is running out of money as it has invested heavily in
securing and channeling abundant supply but is faced
with diminished demand.
Of course, because if you buy supply resources and
deliver efficiently and in the end you get both, then
you don’t have the revenue to support the supply
investment. It is a very big risk for the energy supply
industries too. This is what happened in the mid-80s
where the supply industries invested heavily to expand
supply. Meanwhile the price - and the concerns about
energy that they had not paid much attention to,
led many customers to buy efficiency and the two
collided head-on and many of the providers went
broke. And part of the reason for this is that efficiency
investments are fast. So by the time you get your slow
investments the market is gone. And you might think
of efficiency as the rest of the iceberg, it is mostly
below the water. The world is investing, says the IEA,
over US$300 billion a year in efficiency, but nobody
is measuring carefully how much is being saved and
probably 99 percent of energy statistics are about
supply and less than one percent about efficiency. So
if you can’t see all that below the waterline stuff you
can run into it and sink and never know what hit you.
This is really interesting. What sort of mechanisms can
create a win-win situation?
Suppose we get policy innovation, at a State level,
called the feebate; so when I go to buy a new car,
within that size class of the kind of car I want there
are more less efficient models. And if I buy one less
efficient than the norm for that size in that year,
then I pay a corresponding fee. But if I buy one
more efficient than the norm for that size I receive
a corresponding rebate, feebate for the rebate. Now
think of this as arbitrage on the discount rate between
society and the private buyer. Earlier the private buyer
had such a high implicit real discount rate that they
Both of these (wind and solar energy) are continuing to
be less expensive and in the more favorable parts of the
country, already beat a new combined cycle gas plant.

5. Face to Face
FACE TO FACEJanuary 2015 - March 2015 ISB INSIGHT 57
are only looking at the first year or two fuel savings.
But if the car lasts for 15 years; society cares a lot
about the 15 years for air pollution and climate and
oil dependency and a lot of other things, such as,
price volatility, etc. So if we use the feebate then the
private buyer can use the social discount rate and look
at the full lifecycle value of buying a more efficient
model. Six countries are doing this; five in Europe
and Singapore not in exactly the way I described. The
biggest one in France in the first two years tripled the
efficiency of improving, tripled the speed of efficiency.
How do you see a surge towards the development of
smart cities?
We certainly are getting a lot more distributed
intelligence as sensors and telecommunication
become almost free. However, we should not get
carried away with the ability to conduct pretty much
a remote conversation with a washing machine. And
although complex buildings with complex controls
definitely need very careful design and execution of
the controls, I actually prefer buildings that are passive
so that they don’t need controls. In my banana farm
in Colorado, the house originally had no controls, no
thermostats. If it was too hot you opened the window,
if it was too cold you closed the window and the
building would simply return to a comfortable range
by itself.
You may know that the State of Andhra Pradesh would
soon be developing several Smart Cities and at least
one new capital city. What could be some of the things
that the Chief Minister should focus on, as he has the
opportunity to create something from scratch?
I think that is wonderful. I think they should look very
carefully at zero net-energy buildings that produce as
much energy as they consume, they are very efficient
and they have solar power built in on the top of the
building, something which is fairly widely done now
especially in Europe and the economics can be very
good. If they are building a capital from scratch, they
can design it around people and not cars, and build
smart roads so that people can walk or just bike a few
minutes to where they want to be instead of having to
get into a vehicle. This greatly reduces needed mobility
and infrastructure investment and it can achieve the
same densities as high-rise super blocks and a much
better way to live, and much happier people, stronger
families, closer communities. They could consider
integrating agriculture into the fabric of the city. They
could design the urban services around customers.
They can also probably avoid a lot of normally
required infrastructure. So for example, if a building
not only captures its own energy, it also conserves
water and uses it with elegant frugality, that saves you
laying lots of pipes and water works. You can process
the waste on-site and can actually produce value. So
I think the general design philosophy should be to
take nothing, waste nothing, do no harm. In other
words the philosophy of Ray Anderson interface and
create abundance by design. This is not about costing
more. It will cost less because efficient buildings need
so much less if possible done with no no mechanical
equipment. It is not about sacrifice and deprivation.
On the contrary, it gives you buildings that create light
when entered, serenity, productivity and health when
occupied, and regret when departed. So they could
really do something magical if they harness the best
of India’s design talent. It would have a very powerful
replicable business case I think it would serve as a
beacon to the whole union.
On a closing note what would be your key
message to our readers?
I work for the Chinese Central
Government to inform the 13th Five
Year Plan, finding a potential to quintuple
the Chinese economy by 2050 while
using about the same energy as today
and getting about 70 percent of it from
renewables. That implies at least a fifteen
fold - carbon productivity and maybe
I think the general design philosophy should be to take
nothing, waste nothing, do no harm. In other words
the philosophy of Ray Anderson interface and create
abundance by design.
Nalin Srivastava, Director,
Dean’s Office, Indian
School of Business (ISB).

6. Face to Face
FACE TO FACE 58 ISB INSIGHT January 2015 - March 2015
20 or even possibly 25. That could be enough to put
the world back on a two-degree trajectory. So the
quintuple energy efficiency or energy productivity, we
are finding very cost-effective in China is bigger than
the tripled energy efficiency in the U.S. because China
is less efficient to start with and is building more of
its infrastructure. But in India the potential may be
even larger than in China because China has cut its
energy intensity by 5 percent a year for a quarter
century through 2001 and is nearly back at that
pace. So although India has made some good energy,
China’s are probably even bigger. So there is still more
to do in India and you are building much more of
your infrastructure in India than China. It is easier
to build things right than fix them later. So for those
two reasons it is possible that Reinventing Fire in India
may show an even bigger efficiency potential aided,
of course, by the extraordinary entrepreneurship and
technical skill of the Indian people.

7. Flagship Research Quarterly of the Indian School of Business
Transformations
in Technology
Services
Indian School of Business
e: editor_insight@isb.edu
w: www.isb.edu
Inthisissue:PROFESSORDEEPAMANIEXPLAINSTHENEEDFORACAPABILITYMATURITYINDEXFORGLOBALIN-HOUSE
CENTRES (GICS) IN INDIA • PROFESSOR AMITAVA CHATTOPADHYAY OFFERS INSIGHTS ON CRACKING THE EMERGING
MARKETS: LESSONS FROM THE INDIAN EXPERIENCE • VICE PRESIDENT, WHATSAPP, NEERAJ ARORA FEELS THERE IS
NO REASON WHY A WHATSAPP OR FACEBOOK CANNOT HAPPEN OUT OF INDIA • RBI GOVERENOR, RAGHURAM RAJAN
SPEAKS THE FUNDAMENTAL FINANCIAL SECTOR REFORMS NEEDED TO REACH DOUBLE DIGIT GROWTH
VOL 2 ISSUE 4 January – March 2015 Rs 400