RED | the new greenwww.recycled-energy.com 1 The Economic Opportunity of Climate Change: Profitably Recycling Waste Energy Presentation to Distributed Generation / Combined Heat and Power Conference Sean Casten, President & CEO Recycled Energy Development, LLC September 23, 2008 Richard Ivey School of Business Toronto, ON

RED | the new greenwww.recycled-energy.com 2 Climate syllogisms 1.Burning fossil fuel emits CO 2 2.Fossil fuel costs money 3.Therefore, avoiding fossil fuel combustion saves money and CO 2 emissions. This logic is largely absent from our climate debate, which assumes that CO 2 reduction will be economically painful.

RED | the new greenwww.recycled-energy.com 3 Understanding the linkage between the economy and GHG emissions. Economy Fossil fuel in Useful Stuff out Wast e CO 2 EmissionsEconomic Activity Indirect linkage

RED | the new greenwww.recycled-energy.com 4 Two massive opportunities for profitable CO 2 reduction Economy Fossil fuel in Useful Stuff out Wast e 1. Modify processes to reduce fossil fuel use per unit of production (energy efficiency, including CHP) 2. Recycle waste energy into useful electric and/or thermal input

RED | the new greenwww.recycled-energy.com 5 Economically / politically optimal GHG policy understands this linkage The ratio of [useful stuff] : [fossil input] isn’t fixed! Good GHG policy = good economic policy. Lower GHG emissions Lower manufacturing costs = more competitive businesses Lower fossil fuel purchase = enhanced balance of payments Greater overall standard of living

RED | the new greenwww.recycled-energy.com 6 DG is the primary beneficiary of an efficiency-focused GHG policy. The biggest cost-effective opportunities to lower GHG emissions are in the power generation sector. Utility regulation does not incentivize efficiency Well-run businesses do not invest in high-return energy projects The only way to significantly increase generation efficiency is to site generation at/near the load. We have identified opportunities to generate 40% of US electricity from such local sources, which would profitably lower US CO 2 emissions by 20%. We have identified 11,400 MW of opportunity in Ontario; have not yet done analysis for all of Canada. BUT: the goal of good policy is not to deploy DG, but to profitably reduce CO 2.

RED | the new greenwww.recycled-energy.com 7 Local generation has an innate operating cost advantage.

RED | the new greenwww.recycled-energy.com 8 Local generation has an innate capital cost advantage. US Average Capex ($/kW installed) Central Approach Local Generation $1,000 - $3,500 $1,000 - $3,000 $1,400 $ GenerationT&D Line Loss & Redundancy Total $ per new kW load $1,140 - $3,360 $3,460 - $7,000 Local Gen. Capital Comparison Adds $200 to $3,200 Saves $1260Saves 0.37 Saves $100 to $5,860 per KW 92% of US Grid 8% of US Grid; only 4% of this (0.32% total) by regulated utilities

RED | the new greenwww.recycled-energy.com 9 If it’s such a good idea... well- managed businesses probably haven’t done it already. Annual $ Savings Rate of Return Industrial IRR threshold for energy investments ~ 40% Industrial IRR threshold for core investments ~ 15% Industrial $ threshold = meaningful fraction of EBITDA PROJECTS THAT GET BUILT BY INDUSTRIALS CO 2 -ABATEMENT OPPORTUNITIES WITH ABOVE-MARKET RETURNS

RED | the new greenwww.recycled-energy.com 10 And yet, much of our GHG conversation remains focused on who should lose. Virtually all of the “solutions” presented as a part of the GHG solution will raise energy costs. Carbon sequestration adds capital cost and depresses the operating efficiency of power plants; will raise rates of coal fired power by ~$50 – 70/MWh. No government has ever succeeded in building nuclear without massive public subsidies; the capital costs cannot be justified by a competitive market. Conventional renewables have high capex/kW and low load- factors All of these may well have a role to play in a carbon constrained future – but they aren’t the first choice of a world rationally allocating scarce dollars to GHG reduction.

RED | the new greenwww.recycled-energy.com 11 Ontario is no less guilty of favoring the status quo over true reform. The provincial Clean Energy Standard Offer Program set out to replace coal plants, but fails to encourage least cost clean energy solutions. Ignores the transmission and distribution costs associated with central power. Models the cost of nuclear power at a 4% cost of capital, mis- representing financial markets, and/or mandating an additional tax-payer subsidy of nuclear power. Significantly understates the efficiency and load-factor of locally sited CHP (54% and 58% respectively). Compares the cost of power generation rather than the cost of delivered energy, thereby ignoring the transmission, reliability and reserve margin savings innate to local generation. Provides long-term contracts to non-regulated investments only for power plants <10 MW.

RED | the new greenwww.recycled-energy.com 12 Profitable GHG reduction in Gary, IN. 95 MW of power recovered from the exhaust of 268 coke ovens. Saves host ~$40 million/year with no marginal fuel combustion or CO 2 release. Generates more clean power in 1 year than all the world’s grid- connected solar panels (with less CO 2 /MWh!) Courtesy Primary Energy

RED | the new greenwww.recycled-energy.com 13 Profitable GHG reduction in Alloy, WV. RED will recycle hot gas to generate 45 MW of power from waste heat on 120 MW furnace Competitive with West Virginia (coal) power prices.

RED | the new greenwww.recycled-energy.com 14 Getting GHG policy right is a two- pronged approach. Monetize externalities Replacing our subsidy for dirty energy with a financial incentive to be clean will shift capital allocation in beneficial directions. This is also true for many non-environmental attributes (locational pricing, etc.) Remove barriers to market access Monetization alone is not sufficient, given the high discount rate placed on energy projects by non-energy experts. Electric regulation has been built on monopolies; these rules limit third party’s access to customers, distribution and capital. Removing these barriers has no fiscal cost, and significant gain. But they are politically hard.

RED | the new greenwww.recycled-energy.com 15 How big are our efficiency reserves? (= how long before we must tap unprofitable GHG reductions?) 1.What are the thermodynamic constraints? If we are at/near the limits of fossil fuel conversion from an energetic or mass-balance perspective, the opportunity is small. A: We’re not even close. 2.How dependent is the economy on extractive industries? The only sector of the economy that does not grow with fossil fuel conservation is fossil fuel extraction. If an economy is dominated by extractive industries, efficiency will slow economic growth. A: This is not true of any first world economy. 3.How quickly can the private sector respond? Addressing the threat of global warming requires urgent action. Can the private sector alone respond quickly enough? A: Faster than you think.

RED | the new greenwww.recycled-energy.com 16 Why we’re nowhere near thermodynamic constraints. Regulated electric sector (approx. 1/3 rd total CO 2 emissions) is not rewarded for fuel conservation. Monopoly franchises have kept profit-maximizing capital out of the energy space. Thermal energy consumers (approx. 1/3 rd total CO 2 emissions) place an extremely high return threshold on energy efficiency investments. Many opportunities to lower GHG with >20% returns Long-lived existing capital stock was built in a much lower energy cost environment. Assets optimized for 1990 fuel costs are suboptimal at 2008 fuel costs.

RED | the new greenwww.recycled-energy.com 17 Canada’s economy shows a net gain from conservation. 10 jobs are at risk as energy prices rise for every 1 job that benefits. $4 of GDP are at risk as energy prices rise for every $1 that benefits. Source:

RED | the new greenwww.recycled-energy.com 18 Top 10 CO 2 Sources (67% of total emissions) …as do all other first-world economies. Source: G8

RED | the new greenwww.recycled-energy.com 19 Many jurisdictions are coming to realize the potential for negative cost (=profitable) GHG policy... Clean Cars Appliance Efficiency Standards Carbon Intensity Targets Electricity Pricing DG & CHP Reduce Land Conversion Truck Speed Limit Increase Reforestation Building Codes DSM RPS

RED | the new greenwww.recycled-energy.com ,000 jobs …to create $billions of GDP growth and jobs. Source: Estimates of the net impacts of stabilizing atmospheric CO 2 between now and 2020 suggest an NPV of over $1 trillion globally, even before consideration of environmental externalities. Source: Ken Colburn

RED | the new greenwww.recycled-energy.com 21 The private sector can respond rapidly once barriers are removed. Source: US DOE, Energy Information Administration ( Energy Policy Act opens competitive markets FERC Order 888 mandates non-discriminatory transmission access Final FERC rehearing of 888 to clarify initial rule in 1998

RED | the new greenwww.recycled-energy.com 22 Conclusions The opportunity for profitable GHG reduction is massive. The obstacles to profitable GHG reduction are primarily regulatory – not technological. Local power generation would be a significant beneficiary of a policy that rewarded profitable CO 2 reduction – but it is the path, not the goal. Given the right signals, the private sector has an ability to act much faster than is appreciated. There is no reason not to act.