Pollution Probe August 2, 2006 Profitably Reducing CO 2 by Recycling Energy

1. Pollution Probe August 2, 2006 Profitably Reducing CO2 by Recycling Energy Some ‘Convenient Truths’ Thomas R. Casten Chairman & CEOPrimary Energy, LLC

2. Presentation Summary • Ontario can profitably eliminate coal fired generation with unconventional, innovative governance • Must remove barriers to efficiency and encourage local generation in order to: • stimulate energy recycling, • Avoid new T&D capital • Cut fossil fuel use • Improve manufacturing competitiveness

3. Climate Change MitigationA Governance Dilemma? • The declining cost of energy services has driven income growth throughout history • Exploiting fossil fuel has produced 150 years of per capita income gains, but • Resultant CO2 emissions are changing climate • 2/3’s of fossil fuel use is for heat and power • The Governance Dilemma: How to supply affordable energy services and maintain a healthy biosphere?

4. False Prophets Say We Must Chose Between Economy and Environment Pollution Cost

5. But North American Energy Systems Are Far from Optimal • Regulations ignore new technologies • Regulations block innovation • Energy price signals do not include externality costs • Utilities are seldom rewarded for fossil efficiency or conservation • These many rules are ‘barriers to efficiency’

6. Pollution Waste Heat Transmission Line Losses 3 units (9.0%) Fuel 100 units 67 units Waste Energy = 33 units Electricity Conventional Central Approach1960 Data (& 2003 Data) End User Power Plant

7. Pollution 33 units Thermal Energy = 66 units Useful Work Fuel 100 units 33 units Electricity End User Site Recycling Thermal Energy with Combined Heat and Power 33 units Waste Energy CHP Plant Recycle Waste Heat

8. Comparative Deployment of Combined Heat and Power in 2004

9. Ontario CHP Potential • Current CHP @ 10% 2,600 MW • If German CHP @ 19% 4,900 MW • If Netherlands CHP @ 39% 10,400 MW • If Denmark CHP @ 52% 13,520 MW • Compare with current coal 7,000 MW

10. Affordable Clean Energy PotentialRecycling Industrial Waste Energy • Recycled energy is useful energy derived from: • Exhaust heat from any industrial process or power generation • Industrial tail gas that would otherwise be flared, incinerated or vented, • Pressure drop in any gas

11. Saved Energy Input Energy Recycling Plant Electricity Finished Goods Process Fuel Waste Energy End User Site Fuel-Free Heat and Power Recycling Industrial Energy Electricity Steam Hot Water

12. Primary Energy’s Approach 90 MW Recycled from Coke Production

13. Ontario Energy Recycling Potential(Rough Estimate 2,300 MW) • Steel (Defasco, Stelco, Algoma) est. 400 MW • Blast furnace gas, exhaust heat, pressure drop • Refineries and chemical factories est. 900 MW • Natural gas pumping station exhaust – 560 MW of fuel-free power • Pressure drop at gas delivery points est. 100 MW • Glass & fiberglass factory exhaust heat • Sewage gas, landfill gas, biomass, construction waste, recycled carpet, other.

14. Ontario CHP Potential • Gas fired combined cycle plants next to thermal energy users to recycle heat • Toronto and London district energy systems, hospitals, breweries, refineries, universities, industrial plants using heat • Biomass fueled plants for greenhouses, agricultural processing, paper, paper recycling • Other opportunity fuels including tires, sludge, wood waste, construction waste, petroleum coke

15. Conventional Power Thinking:Local Generation Saves Fuel, But Economies of Scale Make Central Generation Optimal

16. Economies of Scale? Central versus Decentralized Generation

17. What is Optimal New Generation • Reduced cost versus present systems (including all subsidies and externality costs) • Reduced overall capital investment • Reduced criteria pollutant emissions (NOx, SOx, particulates, mercury, CO) • Reduced green house gas (GHG) emissions • Society should demand win/win answers

18. Future Generation Options Renewable Energy Options Central Generation Options No incremental fossil fuel line Avg. Retail Power Price 8.1¢ / kWh Recycled Energy Options Avg. Industrial Power Price 5.5¢ / kWh (33% efficiency) (net fossil savings) (100% efficiency) (50% efficiency)

19. Policy Goal Power Cost and CO2 Policy Choices Cost and Emissions Today Coal gasification, CCGT, Cost up, CO2 up Central generation with coal, no criteria pollutant control Cost down, CO2 up CO2 down CO2/MWh CO2 up CHP, industrial energy recycling (Requires local generation) off grid solar, local hydro Cost down, CO2 down Wind, Geothermal, CO2 sequestering, on grid solar Cost up, CO2 down Cost down Cost / MWh Cost up

20. Ontario Recycled Energy Potential • Avoid 730 trillion Btu’s of fossil fuel per year • Add 9,000 megawatts of clean generation • Largely eliminate need for added T&D • Reduce annual energy costs by $3 billion • Reduce CO2 and other emissions by 20% • Preserve manufacturing jobs, stimulate construction jobs • Reduce electric system vulnerability • Force bordering U.S. states to follow or lose jobs to Ontario

21. How Can Ontario Governance Spur Profitable CO2 Reduction? • Modernize old rules that are now barriers to modern technology • Raise energy taxes to cover the externality costs of burning fossil fuel, cut other taxes, send accurate price signals • Reward local generation for avoiding T&D capital and line losses • Encourage all clean energy, including recycled energy

22. Specific Suggestions • Provide standard offer for CHP, no time limits • Provide Provincial loan guarantees for industrial energy recycling plants • Shift energy subsidies into cost of energy services and lower tax rates to remain revenue neutral • Tax externality costs of fossil fuel and then lower other taxes to stay revenue neutral but send clear signal • Ask all to identify specific barriers to efficiency and suggest new rules that serve the social purpose but do not block efficiency.

23. Convenient Truth:Energy Recycling Can Profitably Reduce CO2 • Ontario can profitably replace coal with 9,000 megawatts of recycled energy – all affordable and clean • Requires innovative governance • The biggest challenge is to change conventional thinking! • Denmark made this change in two decades, and we can do better

24. Denmark Changed in Two Decades Source: Danish Energy Center

25. Conclusions: • Global warming a very serious problem • Mitigating climate change will require all clean energy solutions. to reduce atmospheric CO2 buildup • Recycling energy will reduce the cost of energy services and lower CO2 • This will buy time for development of lower cost renewable energy • Our collective future depends on how fast governments remove barriers to efficiency and encourage clean energy

26. Thank you for listening