1. COMBINED HEAT AND POWER, RECYCLED ENERGY AND THE GOLDILOCKS OPPORTUNITY Presentation to the Energy Efficiency Finance Forum April 12, 2007 Sean Casten President & CEO Recycled Energy Development, LLC March 14, 2007

2. How to deploy more CHP is not a productive question independent of consequences. But CHP is the answer to deep societal questions. The wisdom of David Lee Roth, as applied to 2007 energy policy. More meaningful questions: –Can we lower GHG emissions without driving up the cost of energy? –Can we serve new load growth without facing NIMBY fights and driving up cost? –Can competition work in the electric sector?

3. Back to the future? Cost-effective GHG control is neither an oxymoron nor dependent on R&D. Challenge & Opportunity (U.S. only) ~$100 billion potential energy savings/revenue from if we return to 1920s model (~37% rate reduction) Would reduce GHG emissions by 1 billion tons/yr No other GHG reduction approach comes close in terms of economics or market potential.

4. BUT – current business models are not structured to capitalize on this opportunity. 0 MW 200 MW+5 MW15 MW Number of Direct Selling Companies POTENTIAL RANGE OF CUSTOMER-SITED GENERATION ASSETS INCREASING PROJECT COMPLEXITYINCREASING HURDLE RATES EQUIPMENT MANUFACTURERS IPPS & ENERGY MERCHANTS Estimated $350BN Capex Opportunity (US only)

5. “Extraordinary claims require extraordinary proof” – Carl Sagan Potential for such massive potential conflicts with conventional wisdom – how is this possible in a market economy? –Biggest industry in country is not subject to competitive pressure. Markets give you what you reward – and cost-plus rewards cost. –“Stick to your core” drive industrials away from >2 year paybacks on energy, and outsourcers have not filled gap.

6. Why haven’t outsourcers emerged to date? Regulatory obstacles –Utilities have neither the incentive, thermal expertise nor entrepreneurial culture to pursue. –Rate structures, interconnect rules and bans on third party electric sales all erect barriers to entry. –Subsidies and demographic trends caused real, delivered energy prices to fall every year until 2000*; lowered incentive for EE. These barriers are falling. * With the exception of brief disruption in late 1970s after OPEC price shocks

7. Electricity price history – end of an era?

8. Why haven’t outsourcers emerged to date? Financial & Business obstacles –Bulk of space is ~$2 – 20 MM projects –Too big for “spiderweb” contracting inherent to OEM model –Too small for high transaction costs inherent to merchant/PF model –Too much $ for industrials or 3 rd parties to self-finance (esp. without losing control) –But $350 billion is a lot of porridge… Significant returns will accrue to the enterprise that can overcome these obstacles

9. Understanding the industrial perspective Rule of thumb: non-core investments must deliver < 2 year paybacks to gain capital approval (and only then if $ is available) BUT: purchasing processes reluctant to enter long-term agreements that have a higher WACC than industrial. Creates the gap and opportunity (see next)

10. Understanding the industrial perspective Annual $ Savings Rate of Return Industrial IRR for non-core Industrial IRR for core = 3 rd party IRR for customer non-core Industrial $ threshold Threshold with 3 rd party PF High Return Opportunities that don’t get built with current models

11. Conventional finance doesn’t work for CHP/RE projects. Asset-backed debt not well structured for large, custom-engineered facilities Cash-flow secured project finance too transaction-intensive for <$50MM projects Time-to-cash is too long for private equity without liquidation of business, in spite of rapid capital paybacks (once built) –~1 year project development time –~1 – 2 year project construction time –~3 – 5 years to pay off (required) debt Family history – PE-level returns incompatible with new construction?

12. “Energy Investment Trust” - The ideal financial structure? CHP/RE project development has more in common with REITs than conventional PE –Value creation is in acquisition and earnings enhancement during first few years –Projects generate high-return annuities –Once developed, assets have value based on long-term earnings. –Projects can be sold independent of parent enterprise at attractive multiples Structure so that projects can be funded with 100% equity, then leveraged post- acquisition to minimize transaction costs and deal-fatigue.