Creating Value from Steam Pressure

1. DISTRIBUTED ENERGY’S ROLE IN A SUSTAINABLE, CARBON-CONSTRAINED FUTURE Presentation to Tufts Clean Distributed Energy Workshop Medford, MA June 8, 2006 Sean Casten Chief Executive Officer 161 Industrial Blvd. Turners Falls, MA 01376 www.turbosteam.com Creating Value from Steam Pressure

2. Can do Cannot do (without help) • If no guarantee of cost recovery (e.g., non-utility owned) it will be more fuel and cost-efficient than that which it displaces. • Promotes competitive markets, greater electric sector efficiency (“rising tide”) • Reduces fuel consumption, T&D burden, GHG emissions, electric & gas prices. • Increases overall grid reliability • DE/CHP is fuel-agnostic, and is not categorically carbon-neutral or 100% sustainable • Faces similar pressures of central gen with respect to NIMBY, natural gas • Will always be a need for cost-ineffective, large scale investments (nuke, wires, etc.) and thus for a central grid manager. (but not necessarily centrally-planned market) What DE/CHP can and cannot do for future energy systems “The United States, and the world, must begin a decades-long transition to an energy system that will not run out, cannot be cut off, supports a vibrant economy, and safeguards our health and environment. Today’s patterns of energy production and consumption will not deliver these benefits for our children and grandchildren. The way we produce and use energy wastes money, threatens our environment, raises our vulnerability to accident, terrorism and economic shocks, and contributes to instability around the globe.” National Energy Policy Initiative In aggregate, DE/CHP is critically necessary, but not sufficient to fully meet the goals laid out by the National Energy Policy Initiative.

3. HOWEVER: DE/CHP is absolutely critical to the “begin[ning of] a decades long transition…” • At current fuel usage patterns, the only sustainable fuel that comes close to providing sufficient annual flow to offset current fossil fuel consumption rates (for chemicals & fuels) is biomass. • Shell Oil estimate – annual biomass energy uptake (globally) ~7X current fossil fuel consumption – but most of that is wet & single celled… • Thus, a sustainable future MUST start by focusing on greater fuel conversion efficiency, to reduce raw energy use, regardless of future fuel use patterns • Ayres estimate: only 3% of global energy use becomes useful work. Going to “only” 6% would cut raw fuel use in half! • All other paths to reduced energy consumption are economically painful • Numerous regulatory barriers to energy efficiency, and nowhere bigger than in the electric sector. • Removing these barriers ought to be the first step of a responsible energy policy. • DE/CHP is big enough to expose these barriers in a way that solar & other beneficiaries of barrier-removal cannot. • DE/CHP is therefore the place to focus our attention, and the metric of our success.

4. CHP is the (perhaps unfortunately) low-hanging fruit in a carbon-constrained future.

5. CHP is the (perhaps unfortunately) low-hanging fruit in a carbon-constrained future.

6. CHP is the (perhaps unfortunately) low-hanging fruit in a carbon-constrained future. TECHNICAL POTENTIAL FOR CHP IN THE NORTHEAST Source: Energy and Environmental Analysis

7. CHP is the (perhaps unfortunately) low-hanging fruit in a carbon-constrained future.

8. CHP is the (perhaps unfortunately) low-hanging fruit in a carbon-constrained future. Technology to serve new load CO2 release, lb/MWh CO2 reduction if technology is displaced by CHP, lb/MWh Natural gas-fired CHP (60 – 90% h) 517 - 775 N/A Avg US Power Grid (delivered) 1,772 997 – 1,255 Avg New England Power Grid (delivered) 1,881 1,106 – 1,364 Combined Cycle GT (delivered) 922 217 - 405 Simple Cycle GT (delivered) 1,264 489 - 747 Rankine Coal (delivered) 2,297 1,522 – 1,780 Source for emissions factors: Oregon Climate Trust. Delivered efficiencies factor in 9% average T&D losses From 23 GW technical potential, this implies a potential GHG reduction in the NE US alone of 5 – 122 million tons/year and potential fuel purchase reductions of 153 – 904 trillion Btu/yr, with the upper end far more likely. Resulting energy cost savings exceed $1 billion/year.

9. Opportunities Challenges • Energy efficiency is the only economically beneficial GHG control strategy • Nationally, we extract useful work from only ~3% of our raw energy consumption. • Ample room for EE increases, and therefore opportunity for economically painless GHG reduction • Our electric infrastructure is predisposed to inefficiency. • Electricity regulation disincentivizes energy efficiency (throughput bias). • Necessary changes require great political courage. • Most current energy/envtl policy is woefully short on political courage. CO2 is unlike other pollutants – with the possible exception of SOx – and therefore demands unique regulatory controls. The only cost-effective way to reduce CO2 release is to burn less fossil-fuel. Cannot tweak engine control (like NOx) or capture from tailpipe (like PM) without severe negative economic consequences. This creates opportunities for innovative regulation, but also implies great challenges in light of existing regulatory models

10. Problems with RGGI as currently formulated Potential solutions? • Economics 1: Allocation of credits (as opposed to auction) will substantially delay the arrival of carbon market signal. This delay is entirely inappropriate given the scale and urgency of global warming. • Participation 1: “Only” encompasses <1/3 of carbon sources in region • Participation 2: Offset structure does not (yet) provide transparent way for cost-effective approaches to participate • Offset model could address some of current problems. Key will be structuring to make sure that “a ton is a ton is a ton”, all with equivalent value for maximum economic efficiency. Offsets should be indexed to the same $/ton value as other RGGI policies for economic efficiency. • Accounting links could allow participation for those excluded by RGGI, effectively creating a single international framework independent of local nuances. RGGI: “Great baby. Crummy bathwater.” Key point: for now, it’s not clear if/how most DE/CHP would realize incentives via RGGI. This is a big problem!

11. At the most general level, there are five core barriers to greater deployment of CHP/DE • 16 recognized benefits accrue from CHP/DE deployment, but only 3 create direct financial value for CHP owners. Unrewarded externalities cause inefficient resource allocation. • Volume-based utility revenue models coupled with monopoly power impose responsible for most regulatory barriers to CHP (interconnect, tariff design, etc.) • Grid managers generally don’t understand or acknowledge unregulated generators (or the benefits they create) • Implicit conflict between utility shareholders and utility customers confuses and delays intelligent policy debate. • Private sector capital allocation processes impose extremely low risk/reward ratios for non-core investments

12. Most benefits from DG do not accrue to DE/CHP owners. Benefits Created by CHP – Only 3 accrue to CHP Owners • Benefits that accrue to CHP Owners • Energy cost savings • Increased on-site power reliability • Enhanced economic competitiveness • Benefits that accrue to society • Enhanced overall grid reliability • Reduction in greenhouse gas emissions • Reduction in criteria emissions • Reduction in fresh water consumption • Deferral of rate-base transmission & distribution investments • Deferral of rate-base generation investments • Reduction in market-clearing prices for natural gas • Reduction in market-clearing prices for wholesale electricity • Introduction of competitive efficiencies to regulated utilities • Less grid vulnerability to terrorism & other disruptions • Economic development – job creation • Economic development – industry creation • Economic development – greater national/regional competitiveness

13. Interestingly, there are markets for many of the externalities – an obvious policy action would therefore be to link CHP/DG to those markets. • Examples (incomplete list only to get brain-juices flowing) • ISOs provide cash payments for capacity, spinning reserve, voltage support, etc., but rules do not currently allow for behind the fence base-load generation to directly participate. Allowing participation, or else allowing for bilateral contracts independent of ISO & utility could resolve. • Favorable tax treatment for pollution control devices generally not provided to CHP/clean DE. Could change tax rules to accommodate. • Lack of output based standards and/or thermal credits therein fail to recognize pollution reduction from CHP/DE. Correction would directly save CHP/DE owners $ that must otherwise be spent on more costly emissions control. • Renewable portfolio standards generally favor path over goal, focusing on specific technologies rather than larger environmental/sustainability goals. A more holistic approach to RPS would create new revenue streams for CHP.

14. Thoughts on remaining barriers • Throughput bias: Revenue decoupling removes disincentive; if coupled to well-thought out PBR structure could also add positive incentives, removing this monopoly/throughput barrier • Grid Managers Can’t “see” unregulated generators: Many argue that ISOs should manage grid, but not markets. Replacing market management function with allowances for bilateral contracts would solve many (all?) problems. • Private Sector Capital Allocation: Make sure rules allow for energy outsourcers – remove bans on private wires and third party electric sales (primarily SE US). Removal of other barriers will also help lower risk/reward ratio, thereby easing the proximate barrier, but ultimate problem is not going to go away so long as businesses that aren’t in the electric power sector have an opportunity to self-generate. (Rising energy costs also make this barrier less problematic, but for the wrong reasons.) • Utility Customer/Shareholder Conflict: Hardest barrier to remove, for reasons having to do with politics, contracts and 100 years of judicial/legal/corporate history. That said, deserves much more thought & discussion than it gets. Enormous mistakes made in hindsight… but can you put the toothpaste back in the tube?