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December 05, 2007

You Can’t Cut to Greatness

McKinsey & Company, the country’s preeminent source of outsourced-thinking, has the same kind of short-term advice for America on energy policy that it has traditionally given its corporate clients on almost any question they asked. According to a recent article in the NY Times, the McKinsey study recommends almost exclusive concentration on conservation at the expense of increasing supplies of non-polluting domestic fuels to address the twin problems of increasing CO2 concentrations and fuel costs.

“In contrast to improved efficiency, measures like capturing carbon dioxide from coal power plants and storing it would be relatively costly, and they account for less than 10 percent of the potential to cut emissions, the study said. The potential contributions from new nuclear plants and renewable energy supplies from wind or solar sources are also relatively modest….”

Instead they recommend:

“A broad public education program around wasteful energy consumption could be mounted. Modeled on the ‘Keep America Beautiful’ campaign of the 1960s, it could promote reduction in ‘carbon littering’ by increasing people’s awareness of the problem.”

Look. Conservation is a good idea; I‘ve written about it myself from time to time. Energy efficiency IS increasing and will continue to increase. But conservation will not make room for the energy aspirations of the billions coming out of poverty in China and India (and hopefully other places). Even if we were to shut down America completely, the energy we would free up is only a small fraction of their upcoming incremental demand.

So we need new sources of energy which neither increase the flow of money to the most unstable regions of the world nor potentially contribute to global warming. This means we need to sequester the carbon dioxide from our ample coal supplies; continue to increase our now substantial growth rate of solar and wind capacity; transition to a more electric economy; learn to make biofuels effectively; get serious about the storage of nuclear waste and quickly build some more nuclear plants. We need to be a leader in many of the technologies both for generation and efficient use. These technologies will be in demand both here and, of course, in the developing world.

Efficient use of the energy generated is important; but meaningless without a huge increase in available energy to meet growing demand.

McKinsey famously advised the old AT&T, which invented cellular phone technology, that there’d never be significant demand for a service based on that technology. AT&T dutifully exited the business before it was a business. Had to buy back in at huge cost not just once but twice. McKinsey was right for the very short-term and very wrong for the long-term.

When I was at AT&T in the mid 90s, I had to fight tooth and nail against McKinsey’s opinion that there was no reason to be in the Internet business until everyone had residential broadband (maybe I’m still smarting but did win the fight and launch AT&T WorldNet including dialup service). McKinsey thought that AT&T should 1) go into entertainment; 2) focus on the cost-cutting which Wall Street liked so much.

McKinsey was right that costs were bloated at AT&T. They were right that Internet demand would mushroom when broadband became available. They were dead wrong in thinking the company could cost-cut its way back to greatness. It had to succeed with Internet service before and during the growth in demand. It had to lead.

Sometimes you’ve got to look more than one year ahead.

We need to invest in new energy supplies which meet the twin constraints of reducing the amount of money spent importing hydrocarbons and the CO2 released to the atmosphere when they’re burned (unless and until we’re convinced that anthropogenic CO2 release does not have significant effect on climate).

BTW, a look at the sponsors of McKinsey’s report isn’t terribly reassuring as to its objectivity:

“The study.. was conducted by McKinsey & Company for DTE Energy (the parent company of Detroit Edison), Environmental Defense, Honeywell, National Grid, the Natural Resources Defense Council, Pacific Gas & Electric and Shell.”

Odd grouping but includes both those who have a stake in sticking with old energy sources and those who have traditionally favored conservation over increased production.

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