1. RED | the new greenwww.recycled-energy.com 1 Trends in US Energy Markets: Challenges and Opportunities Presentation to Combined Heat and Power/Distributed Generation and Emerging Fuels Conference Sean Casten, President & CEO Recycled Energy Development, LLC June 26, 2007 Little Rock, AR

2. RED | the new greenwww.recycled-energy.com 2 The era of cheap purchased electricity is over. 2009 projection

3. RED | the new greenwww.recycled-energy.com 3 But higher prices have not led to a higher level of service.

4. RED | the new greenwww.recycled-energy.com 4 Underlying cause #1: 100 year collapse in electric-sector productivity. Implication: we are paying too much for electricity so that we can emit too much CO 2.

5. RED | the new greenwww.recycled-energy.com 5 Underlying cause #2 is inadequate T&D growth, but can be misleading… U.S. Transmission Infrastructure: 20 year History

6. RED | the new greenwww.recycled-energy.com 6 …because our current grid architecture puts the generation in the wrong place. US Average Capex ($/kW installed) Central Approach Local Generation $800 - $2,700 $1,000 - $3,000 $1,400 $140 1.44 1.07 GenerationT&D Line Loss & Redundancy Total $ per new kW load $1,140 - $3,140 $3,160 - $3,900 Local Gen. Capital Comparison Adds $200 to $2400 Saves $1260Saves.37 Saves $760 to $2,020 per KW

7. RED | the new greenwww.recycled-energy.com 7 Silver linings 100 years of building generation that is too expensive and too inefficient is a hard onion to unpeel to a sufficient degree to affect retail rates. Scale of industry requires massive investment to make modest change “Stranded cost” logic stands in the way of rapid reform But the rate of change need not be set by regulated utilities. Industrials in many industries can take control of their own destiny to deliver locally lower costs Keeping industrials competitive maintains local jobs & economy Encouraging clean on-site generation (or simply removing existing barriers thereto) leads to lower GHG emissions and lower costs. CHP, DG and opportunity fuels represent an enormous opportunity for industrials and policy makers, but only if they are willing to think beyond the current paradigm.

8. RED | the new greenwww.recycled-energy.com 8 How is this possible in a market economy? Economic theory teaches that in competitive markets, the quest for profits will drive benefits (in the form of lower prices and better service) to consumers. So how can the electric sector have been so deficient over the last century? Profit seeking behavior AND competition are prerequisites for the invisible hand to act. A market dominated by regulated monopolies satisfies only the first condition. In a regulated monopoly, shareholder and consumer interest are in direct conflict. Result: “cost-plus” processes that are supposed to align interest though commission oversight, but create incentives to increase costs, rather than lower price as occurs in markets

9. RED | the new greenwww.recycled-energy.com 9 But wait – didn’t we try deregulation? And didn’t it fail? Three part answer: 1.It did start to work. 2.What did get deregulated wasn’t deregulated very well. 3.We deregulated the wrong part of the grid.

10. RED | the new greenwww.recycled-energy.com 10 Deregulation did start to work. Rising coal & nuke capacity factors hedged most of the natural gas price increase over the past decade.

11. RED | the new greenwww.recycled-energy.com 11 …but this game is effectively over.

12. RED | the new greenwww.recycled-energy.com 12 What did get deregulated hasn’t been deregulated very well. California power crisis caused in part by the removal of consumer protection structures without a concomitant replacement of antitrust enforcement. Other restructured markets have some of the same characteristics, esp. where ISO/RTO sets price and creates a “dark spread” “Deregulation shifts the major burden of consumer protection to the competitive market, and therefore, in important measure, to the enforcement of antitrust laws.” Kahn, Alfred, Lessons from Deregulation: Telecommunications and Airlines after the Crunch, AEI-Brookings Joint Center for Regulatory Studies, Washington DC, 2004.

13. RED | the new greenwww.recycled-energy.com 13 We deregulated the wrong part of the grid. Current paradigm locates generation in the wrong place. Easy to move electricity across country; not practical to move thermal energy or opportunity fuels more than a few miles. Most significant cost savings accrue when you can use zero/low cost fuels and/or recover the ~2/3rds of fuel otherwise lost as heat. Without allowing market access at “end of wire”, the only thing deregulation can achieve is second-order benefits from fuel switching and generator dispatch. No deregulatory processes to date have removed barriers to market entry at the most beneficial end of the wire. Standby rates still allowed that charge discriminatory rates to those who purchase from competitive power sources. All 50 states impose felony penalties on anyone who runs a private wire across a public thoroughfare. 13 states (including Arkansas) ban third-party sales of electric power at retail level, effectively preventing arrival of energy outsourcers.

14. RED | the new greenwww.recycled-energy.com 14 Prediction: the next big wave of price increases will be in the non- restructured (coal) states. CAIR, CAMR and recent Supreme Court rulings combine to impose significant pollution controls on pre-Clean Air Act coal plants that have formed much of the low-cost power on the grid. Capex now going through rate cases in most cases exceeds the initial (amortized) plant capital And going up – price for scrubbers has doubled in the last 12 months. Approx. 60% of the coal fleet will is presently out-of- compliance, needs to modernize by 1/1/09. Parasitic loads alone will add ~2% to US power consumption. Several utilities indicating they will shut down small (<400 MW) coal plants; will drive up clearing price as we lose baseload power from grid. Conservative estimate: retail power prices will go to 9 c/kWh by 2009, with the dominant increases coming in the “coal belt”

15. RED | the new greenwww.recycled-energy.com 15 The really good news: we have good choices… Generation Cost (Cents / kWh) 0 5 10 15 20 Average Fossil Heat Rate (Units of fossil fuel per unit of delivered electricity) 3 (33% ) 2 (50% ) Central Generation Options 1 (100% ) 0 Renewable Energy Options Recycled Energy Options Average Industrial Power Price 5.5 c/kWh Average Retail Power Price 8.1 c/kWh Existing Coal – no new T&D New Coal New Combined Cycle Gas Turbine New Coal Gasification CCGT Remote Wind Coal gasification + CO 2 sequestration Solar PV Balanced CHP Recycled Industrial Energy

16. RED | the new greenwww.recycled-energy.com 16 …that are big enough to impact Arkansas energy prices/emissions. Traditional CHP: 1,537 MW (3,273 sites) Recycled Energy: 169 MW (20 sites) Total Clean Energy Potential: 1,706 MW (3,293 sites) Compare 1: Total generation in AR: 14,966 MW (48 sites) CHP+RE could serve 11% of Arkansas peak load, substantially ease peak pricing for electric and gas on margin with power that is cleaner & cheaper than current base (or proposed capacity additions) Potential to vastly increase the number of generating “nodes”, boosting system reliability & reducing system vulnerability Compare 2: Current AR CHP: 479 MW (12 sites) Identified potential to quadruple this base

17. RED | the new greenwww.recycled-energy.com 17 So what can you do? Industrials: Take control of your energy future On-site generation is a natural hedge: retail rates are going up, and on- site generation innately avoids the underlying structural causes Significant IRRs possible due to low utility productivity Economic arguments much stronger with rising real electric rates Policy Makers: Remove the barriers that unwittingly prevent cheaper, cleaner technologies from coming on line. Re-craft rates (e.g., decoupling) to remove conflict between utility shareholders and consumers. Remove bans on private wires Remove ban on third-party electric sales (without this removal, industrials ability to affect change is limited to the strength of their balance sheet and owners willingness to deploy capital on non-core assets) Actively seek ways to level playing field; deregulation is one path, but not the only one (monetizing externalities, provision of balancing loan guarantees, etc. all head in right direction)

18. RED | the new greenwww.recycled-energy.com 18 Thank you for your time.