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Trends in US Energy Markets: Challenges and Opportunities

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. The era of cheap purchased electricity is over.

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Trends in US Energy Markets: Challenges and Opportunities

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

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

  3. But higher prices have not led to a higher level of service. RED | the new green www.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 CO2. RED | the new green www.recycled-energy.com

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

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

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

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

  12. “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. 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” RED | the new green www.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. RED | the new green www.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. 2/3rds of the coal fleet is out of CAIR/CAMR compliance (% upgraded depends on SIP). • Parasitic loads alone will withhold ~2.5 GW of power from markets. • Several utilities indicating they will shut down small (<400 MW) coal plants; will drive up clearing price as we lose baseload power from grid. • Next wave of price increases will be concentrated in the coal-intensive, unrestructured parts of the country. RED | the new green www.recycled-energy.com

  15. Solar PV New Combined Cycle Gas Turbine Remote Wind Coal gasification + CO2 sequestration New Coal New Coal Gasification CCGT Balanced CHP Recycled Industrial Energy Existing Coal – no new T&D The really good news: we have good choices… 20 Central Generation Options Renewable Energy Options 15 Generation Cost (Cents / kWh) 10 Recycled Energy Options Average Retail Power Price 8.1 c/kWh Average Industrial Power Price 5.5 c/kWh 5 0 3 (33% h) 2 (50% h) 1 (100% h) 0 -1 Average Fossil Heat Rate (Units of fossil fuel per unit of delivered electricity) RED | the new green www.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 RED | the new green www.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) RED | the new green www.recycled-energy.com

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

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