Climate Change & Clean Energy: Business Opportunities

1. Friday Energy Panel Climate Change & Clean Energy:Business Opportunities Andrew Paterson, EBI Environmental Industry Summit 2007 San Diego, CA 619 – 807-3267 Environmental Business International www.ebiusa.com

2. Friday Panel: Climate Change & Clean Energy • Climate Change & Clean Energy: Overview • Andrew Paterson, EBI – moderator • Campaign: “Climate Clean” (VERF) • Stanley Field, Climate Clean, LLC • Carbon Offsets • David Shearer, California Environmental Associates • Case Study: Toyota’s Hybrid Vehicles • Mary Nickerson, Toyota Motor • Capital Market Perspective(s) • Walter Howes, EBI Capital Advisors

3. Controversial Overview / Overview of a Controversy • AN “ALTERNATIVE” VIEW • Climate Change is real on many fronts, but “scientific consensus” is an oxymoron, and proof the debate is political. • Man-made emissions are a key “trigger” and must be reduced. • - Plus, the same measures that reduce carbon emissions enhance OECD energy security • Mandates, like the Kyoto Protocol, are not the only way, and bureaucratize solutions. • The way forward must engage the big developing economies: China, India, Brazil, N.America • A cap creates regional losers. • THE “CONSENSUS” VIEW • Climate Change is real. There is scientific consensus. • Man-made emissions are the leading cause. • “With the Kyoto Protocol, at least we have a path forward.” • Lack of participation by the USA is irresponsible. • Not taking near term action threatens the global economy. • However, a new regime is required for the post-2012 timeframe. • But, big developing economies need to grow to survive.

4. Global Primary Energy Needs Outstripping Supply As climate change worsens, we might go to war on resources… are we? “Gringo Mentality”: Telling big developing economies to curb their demand while we consume 5x-10x as much energy per capita will not work. World Energy Scenarios, IIASA-WEC, 2000

5. “We don’t have an energy crisis, we have an energy investment crisis. We will need billions invested… make that trillions.” Skip Bowman, President - Nuclear Energy Institute, 2005 IEA: An Energy Investment Challenge World Energy Outlook 2006 calls for $20T to invest globally by 2030. IEA forecasts that roughly $1,000 billion needs to be invested in North Americaeach decade to meet energy demands, half of it in the electric sector. World Energy investment Outlook, 2003 For U.S. & Canada $Billions Investments in energy efficiency offer options.

6. U.S. Energy Expenditures as a % of GDP, 1970 – 2030 The economy can support higher expenditures on energy to cover carbon capture costs. Before the oil embargo of 1973-74, total energy expenditures were equal to 8% of U.S. GDP, (5% on oil, and 1% on natural gas. Following the price shocks of the 1970s and early 1980s, those shares rose dramatically—to 14% overall (8% for oil and 2% for gas in 1981). Since then they have fallen consistently, to 2004 levels of about 7% for total energy expenditures, 4% for petroleum expenditures, and just over 1% for natural gas expenditures. http://www.eia.doe.gov/oiaf/aeo/economic.html Although recent developments in the world oil market have pushed the shares upward, they are projected to decline from current levels: in 2030, total nominal energy expenditures are projected to equal 5% of nominal GDP (3% for oil, 1% for natural gas expenditures. Figure 28). The overall decline in energy expenditures relative to GDP has resulted in large part from a decline in world oil prices (in real dollar terms) from their peak in 1981, combined with enhanced efficiencies.

7. EIA: U.S. Oil Production Declining(AEO 2006) American Energy Security speech (August 2006): In 1985, when I first came to Congress, we imported 4.3 MBD – about 27% of total consumption. Today, we import nearly three times that much and imported oil is now nearly 60 percent of our domestic appetite. It accounts for a third of our trade deficit. America spends $200,000 each minute on foreign oil imports. Rep. Pete Visclosky (D-IN) AEO 2006: “Oil prices also determine whether unconventional oil production (such as oil shale, CTL, and GTL) is economical, as illustrated in the alternative price cases. CTL production is projected in both the reference and high price cases; however, GTL production and syncrude production from oil shale, both of which require higher prices before they become economical, are projected only in the high price case.

8. “Fat, dumb, and happy” is not sustainable Vulnerability on Oil Imports: USA still #1 ! Energy Vulnerability: Absolute Total Oil Imports (Size of Circle), plotted on GNP per Capita vs. Per Capita Oil Consumption (energy demand) [ Red circles denote volume of net exports of oil: Canada, U.K., Mexico, Russia, Iran, Colombia ] Most Vulnerable Some major oil suppliers not shown Vulnerable Measure of “what nations have to lose” GNP per Capita, 2005 Vulnerability rises with imports and “value at risk” Per Capita Oil Use (bbls/yr) Source: ADPaterson Consumption per capita (dimension of personal addiction)

9. Situation Briefing: Vulnerable Oil Sources Big Oil is National Oil: supply decisions can be politicized further. Unstable Sources U.S. imports ~ 60% of oil. Vulnerable Transit Tanker “Prestige” off coast of Spain, Nov. 2002 Source: Economist

10. Transportation Sector Vital for Progress FORD HYBRID “Tonight, I am proposing $1.2 billion in research funding so that America can lead the world in developing clean, hydrogen-powered automobiles.” President Bush, Jan. 2003 TOYOTA PRIUS IPHE International Partnership for the Hydrogen Economy

11. Baseline: U.S. Carbon Emissions by Sector, 2000 Power sector drew early attention, but transportation is crucial. Source: EIA, AEO 2003 Electricity broken out by end-use sector.

12. EIA: U.S. Carbon Emissions by Sector, 2010 Sources of GHG emissions change very slowly: power, transport. Source: EIA, AEO 2003

13. EIA Forecast: Carbon Emissions by Sector, 2010 DOE’s Climate VISION Focus: Reductions in carbon emissions can be achieved through: 1) broader conservation and efficiency in transmission and end-use of electricity; 2) shifts in electricity generation toward high-efficiency “clean coal” gasification systems or to nuclear and low carbon generation (e.g., wind, biomass blending with coal); and 3) shifts in transportation away from fossil fuels (e.g., through biofuels, hybrid engines, ultimately hydrogen fuel cells).

14. Carbon Emissions from Coal-fired Electricity Slow capital stock rotation in the buildings sector is a major hurdle. Electricity usage is spread fairly evenly across the three end-use consumer sectors. The industrial sector has instituted many conservation measures already in part through the efforts of the DOE “Industries of the Future” programs in EE/RE, therefore the best area for gain by focusing on the vast commercial building and residential sectors. The residential sector changes over time as the housing sector rotates gradually. Large apartment buildings in urban core areas could provide a focused target for CHP efficiency upgrades as a specific application area. Source: EIA, AEO 2003

15. U.S. Power Generation - 2005 EIA Baseline EIA: Based on AEO 2006

16. U.S. Power Generation - 2010 EIA Baseline EIA: Based on AEO 2006

17. U.S. Power Generation - 2015 EIA Baseline EIA: Based on AEO 2006

18. U.S. Power Generation – 2020, “Back to Baseload” Not much real shift is forecast by 2020. Fossil (coal and gas) still dominate power supply. EIA Baseline EIA: Based on AEO 2006

19. Baseline: U.S. Power Generation - 2005 Challenge: A MW of Wind or Solar does NOT equal a MW of coal… Lower capacity factors diminish contribution by renewable sources (wind, bio, solar).

20. Real Cost of Power Sources Affected by Capacity Factor Fuel costs, weather affect downtime of some sources, which impacts investment. Example: An installed KW of wind is not the same as in installed KW of baseload coal and nuclear, which run many more hours regardless of weather. So, the cost per KWe must be adjusted for average capacity factor: red bar is “Effective Capacity”, adjusted for downtime. Data Source: NETL, EPRI

21. Some GHG / Energy Policy Approaches A variety of tools are available… and needed. Capital incentives may be superior to cap and trade by triggering innovative solutions and economic growth. A cap with lower growth curbs agency budget resources.

22. Lack of Consensus on Power Options Capacity by NERC Electricity Region (GWe) Sharp regional differences remain in electricity sourcing and use, so regional policies are important in shaping options for North America. Garnering a national consensus is extremely difficult, especially on energy sources. GWe Fuel source NERC region ftp://www.nerc.com/pub/sys/all_updl/ docs/pubs/LTRA2005.pdf

23. Public sector “gaming” Turmoil in EU Carbon Market (May 2006) Europe hopes to avert a false economy in carbon By Fiona Harvey, June 28 2006 19:38 | Financial Times of London “What came close to putting the scheme on life support was data released between late April and mid-May which showed that last year – the first the scheme had been in operation – businesses covered by it had been given more permits than they needed because member states had overestimated demand.” http://www.ft.com/cms/s/b03dbc7a-06cf-11db-81d7-0000779e2340.html

24. Robert Socolow (Princeton): Stabilization Wedges All wedges will be needed to make progress on curbing carbon emissions. Billions of Tons of Carbon Emitted per Year 14 14 GtC/y Currently projected path Seven “wedges” O Historical emissions 7 GtC/y 7 Flatpath • Aggressive end-use efficiencies • More biofuels, biomass • RE: more wind, solar, geo • Expand safe nuclear worldwide • Sequester carbon (coal use) • Better vehicles (PI hybrids) • Manage natural sinks 1.9  0 1955 2005 2055 2105

25. Climate & Clean Energy Business Opportunities Different opportunities emerge at varying paces with varying impact.

26. Wrap-up: Capital Incentives >> Cap & Trade • The fundamental issue is accelerating the turnover of capital stock from carbon intensive assets to low-carbon, efficient ones: • Power generation (and sequestration) • Fuel refineries, vehicles, and transport infrastructure • End-use efficiency in buildings (design, use, equipment) • Industrial manufacturing and energy production • Capital incentives do not impair economic growth, which is needed to fund innovation and regional infrastructure, and change demand • Capital incentives create demand for engineering / tech services. • North American capital markets are the largest, most efficient • Cap & trade creates bureaucratic inefficiencies and incentives for “gaming” and fraud in both public and private sectors • Economy-wide reporting and monitoring costs are extensive • Uneven impact creates large scale winners and losers • Natural sources of carbon are immense and not “capped” • Incentives engage big developing economies (China, India, etc.)

27. N. America & EU share goals, but different paths… “Bordeaux Energy Enterprise Framework” (2006) High Growth “GREENHOUSE” “ENERGY ENTERPRISE” Rising Asia New World Fossil Future Carbon Mgmt (Energy Security) N.Am / Austr. E.U./ Japan “CLUB OF ROME” “GRAPES OF WRATH” Low Growth

28. The way forward for N.America will be an Asia – Pacific Partnership “Bordeaux Energy Enterprise Framework” (2006) High Growth “GREENHOUSE” “ENERGY ENTERPRISE” • High demographic growth • More vulnerability to disruptions • More Oil & Gas E&P • Gas turbines for power • Diesel engines for power • GTL + CTL for fossil fuels • LNG bonanza • Coal-fired power • Mass transit for urban growth • High demand + carbon intensity reduction • Less vulnerability to disruptions • Massive EE & DSM • Accelerated nuclear plant construction • Renewable power (wind, solar, bio); Biofuels • Clean coal with CCS • Plug-in hybrid vehicles + mass transit • Community scale EE and Co-gen • Reforestation / sequestration • Technology • Joint Venture • Investment • incentives • Joint R&D • Bi-lateral agreements • Market mechanisms • Guidelines / Regulations • Multi-lateral agreements • Public-private partnerships Rising Asia New World Fossil Future Carbon Mgmt (Energy Security) N.Am / Austr. E.U./ Japan “CLUB OF ROME” “GRAPES OF WRATH” • Low relative demographic growth • Vulnerability to disruption • More Oil & Gas E&P (tax incentives) • Gas turbines for power / LNG growth • Higher mileage ICE (cars) • Extended coal plant life • Some mass transit growth • EE in new homes • Hybrid vehicles • Low demographic growth • Lower carbon intensity • Heavy mandates / regulations • Huge imports of natural gas (to replace coal) • CO2 limits / allocations / trading • Marked rise in biopower • Feed-in tariffs for renewable power • Urban electric mass transit • Co-generation for EE / DG Low Growth

29. Finish

30. Backup / Extras

31. U.S. Power Capacity: 2005 - 2020 (AEO 2006) Baseline: Fossil fuels still projected to provide most electricity. EIA: Based on AEO 2006

32. U.S. Power Consumed: 2005 - 2020 (AEO 2006) Baseline: Fossil fuels still projected to provide most electricity. EIA: Based on AEO 2006

33. Change in Capacity Forecasts by EIA(AEO2001 v. 2006) AEO2001 was issued in Dec. 2000, prior to 9/11, the recession of 2001, and the stock collapse of merchant power. Hence, the forecast for gas turbine capacity was substantially higher than current forecasts. In addition, the forecast for coal capacity was still higher than the updated forecast in AEO2006.

34. EIA: AEO 2007 Early Release EIA has reduced projections of natural gas use and raised forecasts of coal use. AEO 2007: “World oil prices since 2000 have been substantially higher than those of the 1990s, as have the prices of natural gas and coal (although coal prices began to rise somewhat later than oil and natural gas prices). The sustained increase in world oil prices caused EIA to reevaluate earlier oil price expectations in producing AEO2006. The long-term path of world oil prices in the AEO2007 reference case is similar to that in the AEO2006 reference case, although near-term prices in AEO2007 are somewhat higher than those in AEO2006.

35. Global Natural Gas Costs Differ Sharply Unlike oil, natural gas is still priced regionally rather than globally. This puts U.S. heavy industrial gas users at a distinct disadvantage. Russia $0.95 UK $5.15 Belarus $1.20 Canada $5.55 Japan $4.50 Ukraine $1.70 Belgium $5.25 USA $6.30 Iran $1.25 Turkey $2.65 South Korea $4.50 China $4.50 Kuwait $1.25 North Africa $0.80 Saudi Arabia $0.75 India $3.10 Trinidad $1.60 Taiwan $4.65 Qatar $0.65 Indonesia $2.70 Feb. 2005 Sources: Bloomberg, Economic Times, EIA, Fertecon, Financial Times, Pace, Platts, World Bank Singapore $3.20 Bolivia $1.60 Oman $1.00 Australia $3.75 Argentina $1.50 ($US per million BTUs) American Chemical Council

36. Planned Coal Plants Rising; near 100 GWe by 2030 2006

37. Attributes Affecting Energy Choices High capital costs for coal and nuclear drive electricity rate structure toward a regulated outcome rather than competitive rates with market exposure because investors demand assured returns on capital. Plentiful capacity and natural gas would be more suited to competitive rate structures because most of the electricity cost is fuel instead of capital. A regional RPS is essentially a regulated rate approach by dictating fuel mix.

38. Socolow: Carbon Stabilization Wedges • EFFICIENCY • Buildings, appliances, transport, industrial processing, lighting, electric power plants, upstream extraction. • DECARBONIZED ELECTRICITY • Natural gas for coal • Power from coal or gas with carbon capture and storage • Nuclear power • Power from renewables: wind, photovoltaics, solar concentrators (troughs and dishes), hydropower, geothermal. • DECARBONIZED FUELS • Synthetic fuel from coal, natural gas, and biomass, with carbon capture and storage • Biofuels • Hydrogen • from coal and natural gas, with carbon capture and storage • from nuclear energy • from renewable energy (hydro, wind, PV, etc.) • FUEL DISPLACEMENT BY LOW-CARBON ELECTRICITY • Grid-charged batteries (“plug-in hybrids”) for transport • Heat pumps for furnaces and boilers • NATURAL SINKS • Forestry (reduced deforestation, afforestation, new plantations) • Agricultural soils • METHANE MANAGEMENT • landfill gas, cattle, rice, natural gas

39. AEO Forecasts for Nuclear Capacity: Rising Every Year EIA raised its forecast for nuclear capacity in 2020 every year since 1998.

40. Energy Policy Options

41. DOE Programs with Impact on Carbon Emissions DOE Programs How can Federal Credit help? Accelerated or Improved Results: • DOE – FE • “FutureGen” (275 MWe advanced coal plant) • Carbon Sequestration Initiative Lines of Credit; Credit enhancement DOE – FE - Better proposals from industry, less budget exposure for government DOE - NE - “Nuclear Power 2010” to address licensing of Gen III plants Commissioning Coverage DOE - NE - Federal finance focused on key risks for new orders • DOE – EE/RE • Buildings Program/Weatherize • Distributed Generation (DEER) • Biomass / Biofuels • Industrial Technologies (EE) • Fuel Cells / hydrogen • DOE – EE/RE • Wider variety of financing; broader market adoption • More repayment Leasing options, Revolving Loans • DOE - OETD • Transmission Roadmap • Policy initiatives for investment Power purchase agreements DOE – OETD - Incentives to cover long-term investment, upgrades