Creating Value from Steam Pressure

1. SUSTAINABILITY, CHP AND ENERGY EFFICIENCY: SEARCHING FOR THE WIN-WIN Presented to Boston Area Solar Energy Association Cambridge, MA June 12, 2003 Sean Casten Chief Executive Officer 161 Industrial Blvd. Turners Falls, MA 01376 www.turbosteam.com Creating Value from Steam Pressure

2. Why is it so hard to do something that is so obviously good? • Over 1 billion tons/year of U.S. greenhouse gas reduction can be achieved if we focus only on short-term financial returns. • Any debate that is based on tradeoffs between environmental and economic impacts misunderstands the problem. • It will take strong leadership to overcome the existing regulatory barriers that prevent this economic/environmental win-win. • Differences of opinion within the environmental community have contributed to some of these barriers.

3. The current situation, as predicted by simple economics: • If supply is flat and demand is rising: • Prices should rise • Shortages should occur • Volatility should increase • Doesn’t this supply situation describe the U.S. electric sector? • No new oil fields being discovered • No new hydro coming on line • New nuclear/coal difficult to permit • Natural gas distribution infrastructure can’t meet rising demand, and most new fields are non-U.S. • Electric delivery infrastructure has not kept pace with demand for the last 2 decades (see next)

4. While electricity demand growth shows no sign of slowing… 20 Year Electric Demand Projection (DOE/EIA)

5. …the distribution infrastructure to deliver that electricity is increasingly inadequate. U.S. Transmission Infrastructure: 20 year History Note – we are likely to hit a supply constraint at the end of the wire long before we ever see a fuel and/or generation limit upstream.

6. From these supply constraints, demand is starting to behave in ways that are predicted by economic theory. • Volatility in natural gas markets goes up each year: U.S. Wellhead Natural Gas Prices

7. From these supply constraints, demand is starting to behave in ways that are predicted by economic theory. • Electric shortages are increasing both in frequency and intensity • Chicago (1995): 800 deaths directly attributable to power outages • California (2000): Multibillion dollar budget overrun / utility bailout directly attributable to power outages • New York (2002): Transformer fires in Manhattan directly attributable to too much power demanded through too few wires • Coming soon to a wire near you…?

8. From these supply constraints, demand is starting to behave in ways that are predicted by economic theory. • But (average) electricity price is (so far) flat / falling… why? 1996 $ Year

9. Fuel switching has helped to maintain falling electric rates (although current trends are probably unsustainable)…

10. In addition, well intentioned (but also unsustainable) regulation has thus far insulated markets from much price volatility. • California 2000: Rising natural gas prices (among other causes) were never seen in their entirety by electric consumers due to price caps that ultimately bankrupted the state’s utilities. • Connecticut 2003: Grid congestion in SW CT is driving up the cost of getting power into this load pocket – but the PUC has so far leaned towards spreading rate increases across the state so as to blunt the economic impact in Fairfield county. • In many jurisdictions, it is easier to alter a rate structure so as to maintain profitability rather than pass economic costs directly to electricity consumers (standby tariffs currently/recently under debate in NY, CT, MA, CA).

11. So if fuel supply is fixed and electricity demand is rising, how do you avoid disaster? By increasing conversion efficiency. The Costs of Failure (U.S. only) • ~$100 billion too much money spent on energy each year • Over 1 billion too many tons of CO2 emitted from low-efficiency power generation each year.

12. So what’s stopping us from “going back to the future”? Three (uncomfortable) barriers: • Bad Utility Regulation: Cost-plus utility pricing, monopoly regulations and bans on private wires all work to create financial disincentives to efficiency that would not be present in an unregulated industry. • Bad Environmental Regulation: Input-based standards, end-of-pipe enforced pollution control and accelerated depreciation for non-revenue generating pollution control approaches all serve to discourage efficiency as a pollution control strategy. • Living up to Low Expectations: We expect economic growth to be inconsistent with economic enhancement - and we get what we expect.

13. What is the cost of inaction? Three looming crises: • Natural gas crisis. Rising gas price volatility + rising electric dependence on gas = ??? Expect electric price volatility, electric outages, or both (see CA, 2000). • T&D crisis. Line losses in a fixed diameter wire increase with the square of the current… which is what we see: 1975: 5%; 1998: 8.5%; 2002: 9.5%. Linearly increasing demand + exponentially increasing losses = ??? • Crisis decision making does not focus on the long-term. LIPA is installing 120 MW of diesel recips on Long Island in preparation for the summer. NYC post 9/11 installed nothing but diesel generators. We can make sensible economic/environmental choices now – but if we wait for a crisis to come, the decision will be made based on economics alone.

14. The good news? There’s an easy solution. • We avert disaster by getting as much clean, energy efficient DG at the end of the wire as we can as quickly as possible. • Cheapest, cleanest way to serve future load growth (see next) • We have to make the most of current opportunities and resources • We have to tear down the barriers common to all DG quickly • Need to install 13,000,000 kW per year just to keep up with rising electric demand • Clean DG community needs unification. • Utilities present a consistent front to regulators who rely on lobbyists for education • DG community remains caught up in theoretical arguments and loses sight of the big picture. Is CHP clean enough? Is Solar cheap enough? Does anything other than a fuel cell jeopardize the future “hydrogen economy”? (We need them all to achieve 1)

15. Minimizing capital cost for future load growth = maximizing DG penetration.

16. Minimizing retail electric cost = maximizing DG penetration.

17. Minimizing fossil fuel use = maximizing DG penetration.

18. BAD IDEAS A final thought exercise: place policies in the matrix – why don’t more policies encourage the win/win? SHORT-TERM ENV’TL. INTERESTS SUSTAINABILITY Positive 0 Net Impact on Environment SHORT-TERM BUSINESS INTERESTS Negative Positive Negative 0 Project Return-on-Capital

19. Heat-first CHP (Turbosteam Projects) Nuclear Power-first CHP Wind Photovoltaics On this metric, CHP presents an unparalleled solution to environmental and economic limits to growth – shouldn’t this be the starting point for all environmental action? 0.5 All Sequestration Technologies 0 GHG Reduction (ton/$ invested) End-Of-Pipe SOx/NOx Control (0.5) 0 300% (300%) Project Return-on-Capital Note: All returns calculated on a 15-year, pre-tax basis with a 4X cash multiple in the final year. Capital and operating costs for each technology were estimated as the current state-of-the-art with power revenues calculated on a wholesale or retail basis as appropriate. Turbosteam projects represent actual, known capexes, opexes and annual revenues.

20. So how do we get there? • Over 1 billion tons/year of U.S. greenhouse gas reduction can be achieved if we focus only on short-term financial returns. • CHASE EFFICIENCY • Any debate that is based on tradeoffs between environmental and economic impacts misunderstands the problem. • TEAR DOWN REGULATORY BARRIERS TO ENERGY EFFICIENCY • It will take strong leadership to overcome the existing regulatory barriers that prevent this economic/environmental win-win. • BROAD ACCOUNTABILITY FOR CURRENT PREDICAMENT; ENVIRONMENTALISTS AND BUSINESS COMMUNITY HAVE ERECTED BARRIERS TO EFFICIENCY • Differences of opinion within the environmental community have historically made it difficult for this leadership to emerge. • VALUE JUDGMENTS BETWEEN TECHNOLOGICAL APPROACHES ARE SELF-DEFEATING. SET ENVIRONMENTAL RULES TO ACHIEVE GOALS, BUT DON’T TRY TO PICK THE ROUTE.