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Tunneling Through The Cost Barrier
NOTE: This article is perhaps the most valuable article on our website. Pay careful attention to the concepts contained here.

There is an ordinary-looking tract house in Davis, California that defies conventional wisdom.  It has no furnace.  Despite temperatures of up to 113F, it has no air conditioning system. It uses 67 percent less energy than comparable houses in the area, saving $490 annually.  It cost more to build because it was a one-off demonstration, but if it were built in the same quantity as other tract houses it would cost $1,800 less than they do.


The house, part of an experimental program sponsored by Pacific Gas & Electric, illustrates an important principle: big savings can be easier and cheaper to achieve than small ones if you combine the right ingredients in the right way.


The usual way to redesign a product is to analyze its components or subsystems separately and optimize the cost-effectiveness of each in isolation.  But components interact in ways that aren’t obvious when you’re looking at them separately, and optimizing one part may “pessimize” the whole.  Often you can reduce the total cost of a technical system by spending extra on certain components.


That’s what happened, many times over, with the Davis house.  To give just one example: Having reduced the building’s cooling requirements by two-thirds with various cost-effective measures, the designers found that other measures, previously screened out because they didn’t save enough energy to pay for themselves, were now worth doing because they could together eliminate the remaining cooling requirement. That saved $1,500 on the capital cost of air conditioning and ductwork.


The Davis house may be the shape of things to come.  It points toward a future in which engineering designs become simpler rather than more complex, cheaper rather than costlier, uniquely optimized rather than formulaic, and radically more efficient rather than incrementally so 


As RMI’s research is demonstrating, huge opportunities exist for re-engineering not only buildings but also cars, lights, motor systems, electric utilities, industrial processes, and almost anything that uses energy.



Most of us view efficiency as a process of diminishing returns.  Let’s say you’re trying to make an office building more efficient.  You prioritize all the things you could do, from the highest return on investment down to the lowest.  You work your way down the list until either your budget for improvements is used up, or the return on your investment is so small that you’d be better off spending the money on something else.  You’ve reached what we call the cost barrier.


This is a fine way to identify simple, cost effective improvements, but it’s limited in what it can do.  This approach would have eliminated two-thirds of the Davis house's cooling load, for instance, but it would have left the remaining third, which would have necessitated retaining the cooling system, leaving the whole house costing more, not less.  And if this approach comes unstuck with something as simple as a house, imagine how inadequate it is for redesigning a skyscraper or a car.


The fact is that, our major technologies are getting so complex that they’re outstripping our traditional methods for designing them.  Even with CAD workstations, designers tend to simplify the process by optimizing just one or two variables at a time.  Moreover, designers are now so specialized that they rarely understand all the workings of an entire system, and tend to confine themselves to optimizing their particular component or subsystem.


For decades, industry has preferred to keep design processes relatively simple while allowing products to become devilishly complex.  It will take a revolution in design sophistication to make products simple and efficient again.


Electronics and personal computers may be both harbingers and enablers of the coming changes.  Other enabling technologies such as photovoltaics, advanced polymer composites, and fuel cells have the potential, as they reach critical price points, to cause dramatic technological shifts.



Back to that cost barrier.  Conventional wisdom says you’ve got to stop when you get to your cost-effectiveness limit.  But as the Davis house demonstrated, there are times when, by allowing yourself to exceed that threshold temporarily, you can tunnel through the cost barrier and drop back down the other side for even greater savings at lower total cost.


Such breakthroughs happen all the time, usually thanks to new technologies.  But what we’re finding is that inspired design and whole-system engineering can often accomplish the same thing, even with old technologies.


Here’s another example.  An industrial process in the manufacture of carpet involves melting bitumen by means of a hot-oil pumping loop.  The engineers who design these loops typically optimize the pipe size in isolation by comparing the extra cost of fatter pipe with the pumping energy it can save.


Designing a system for a new Shanghai carpet plant, Dutch engineer Jan Schilham decided to optimize for total lifecycle cost, which includes capital as well as operational costs.  Since pipe friction falls as the fifth power of diameter, he used bigger pipes to reduce friction.  The pipes cost more, but the smaller pumps and motors to circulate the oil cost much less to buy, and to run.  Schilham’s other innovation was to lay out the pipes first, then the equipment they connect, not vice versa.  That resulted in straight pipe runs, further reducing friction, saving even more construction costs, and making it cost-effective to insulate the pipes more heavily, saving 72 kilowatts of heat.


Schilham’s loop is expected to reduce pumping energy by an amazing 92 percent, compared to a standard system designed earlier for the same plant by a top engineering firm.  Capital cost and construction time went down; reliability, controllability, and maintainability went up.



Tunneling through cost barriers is as much an art as a science. There’s no formula for doing it, but here are four principles that we at RMI find helpful:


1. Capture multiple benefits from single expenditures.

This might seem obvious, but the trick is properly counting all the benefits.  It’s easy to get fixated on optimizing for energy savings, say, and fail to take into account reduced capital costs, maintenance, risk, or other attributes (such as mass, which in the case of a car, for instance, may make it possible for other components to be smaller, cheaper, lighter, and so on).  Another way to capture multiple benefits is to coordinate a retrofit with renovations that need to be done for other reasons anyway.  Being alert to these possibilities requires lateral thinking and an awareness of how the whole system works.


When prioritizing efficiency measures, the standard method is to pursue those that pay the highest rates of return first, then work down the list until the “cost-effectiveness limit” is reached. This method does not work well.


2. Start downstream to turn compounding losses into savings.

Think pipes again.  An engineer looks at an industrial pipe system and sees a series of compounding energy losses: the motor that drives the pump wastes a certain amount of electricity converting it to torque, the pump and coupling have their own inefficiencies, and the pipe, valves, and fittings all have inherent frictions.  So the engineer sizes the motor and pump to overcome all these losses and deliver the required flow.


But starting downstream—at the pipe instead of the pump—turns these losses into compounding savings.  Make the pipe more efficient, as Jan Schilham did, and you reduce the cumulative energy requirements of every step upstream.  You can then work back upstream, making each part smaller, simpler, and cheaper, saving not only energy but also capital costs.  And every unit of friction saved in the pipe saves about nine units of fuel and pollution at the power station.


3. Get the sequence right.

Achieving big energy savings is a process of multiplying little savings.  That means breaking the task down into many steps and tackling them in the right sequence.


Amory Lovins has created a list of six guidelines for doing this, which he’s reduced to sound-bite brevity:


1. People before hardware;

2. Shell before contents;

3. Application before equipment;

4. Quality before quantity;

5. Passive before active; and,

6. Load reduction before supply.


We don’t have enough space here to explain each of these best-buys-first principles, but here’s an example that illustrates some of them.


Suppose you’re considering making your office lighting more efficient.

First you should improve seating and surface configurations (people before hardware),

Reduce glare (quality before quantity),

Harness natural light (passive before active) through better window and building design (shell before contents), and only then

Improve the technical efficiency of your lights and how thoughtfully they’re used and maintained.


4. Optimize the whole system, not parts.

Optimizing an entire system takes ingenuity, intuition, and close attention to the way technical systems really work.  It requires a sense of what’s on the other side of the cost barrier and how to get to it by selectively relaxing your constraints, as the designers of the Davis house did when they decided to pay extra for better windows.


Whole-system engineering is back-to-the drawing-board engineering.  It doesn’t rely on rules of thumb, which are typically based on single components, operating costs only, old prices, and very high discount rates.  Nor does it rest on theoretical assumptions (for instance, that efficient components must cost more—they often don’t).  And, importantly, it incorporates “feedback” to make the design process intelligent, cyclical, and capable of continuous improvement based on measured performance.



One of the great myths of our time is that technology has reached such an exalted plateau that only modest, incremental improvements remain to be made.  The builders of steam locomotives and linotype machines probably felt the same way about their handiwork.


The fact is, the more complex the technology, the richer the opportunities for improvement.  There are huge systematic inefficiencies in our technologies; minimize them and you can reap huge dividends, for your pocketbook and for the earth.



Why settle for small savings when you can tunnel through to big ones? Think big!




Copyright 2012 Ronald Sauve All Rights Reserved

This page was last modified on April 06, 2012

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