Creating Value from Steam Pressure

FIVE ACES AND A WINKING DEALERCauses of the U.S. failure to modernize its electric system

Presented to the World Energy Engineering CongressAtlanta, GA

November 12, 2003

Sean CastenChief Executive Officer

161 Industrial Blvd.Turners Falls, MA 01376

www.turbosteam.com

Three hard – and provocative – questions:

• We could easily reduce CO2 emissions by 1 billion tons/year AND reduce electricity bills by $100 billion tons a year by deploying proven technology. Why don’t we?

• For two decades, investments in the U.S. grid have failed to keep pace with growth in power demand. Why doesn’t supply rise to meet demand?

• The average U.S. power plant was twice as efficient during WWI than it is today. Why don’t we make the most of existing technology?

The answer lies in a fundamental ideological flaw in the way we regulate the electricity sector.

“The best lack all conviction, while the worst are filled with passionate intensity” – Yeats, describing 21st century electric policy.

Social BenefitSocial Damage

FiscalBenefits

(Revenues)

FiscalDamage(Costs)

The best: “If it’s such a

good idea, someone would

have done it already”

The worst: “I am more moral

than you”

The worst: “I am more moral

than you”

Note: “Social” damages and benefits are used broadly here to include any impacts that are not monetizable in the near term, and may include environmental impacts, national security considerations, electric grid reliability, etc.

What should good energy policy do, at a minimum?

Social BenefitSocial Damage

FiscalBenefits

(Revenues)

FiscalDamage(Costs)

First: encourage, stimulate and reward anything that provides a win/win

Second: discourage and penalize anything that provides a lose/lose

Third: deal impartially with the hard questions that are left – but when in doubt, go back to step 1!

What do we actually do?

Social BenefitSocial Damage

FiscalBenefits

(Revenues)

FiscalDamage(Costs)

Third: we ignore the win/win, assuming that it’s already done.

Second: we actually reward people for the lose/lose

First: we devote most of our effort to resolving the battle between Carter’s sweater and Bush’s oil lobby

…and our backwards logic creates barriers.

ENERGY EFFICIENCY

Social BenefitSocial Damage

FiscalBenefits

(Revenues)

FiscalDamage(Costs)

Policies that reward these actions drive

scarce capital dollars away from the best

investments

With very few exceptions, there are no counterbalancing policies to encourage

the win/win

0%0%

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18801880 18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 19901990

U.S. Average Electric Only

Power Industry

Efficiency

Recovered Heat

Sadly, but not surprisingly, barriers to the win/win create enormous penalties.

The Costs of FailureThe Costs of Failure(U.S. only)(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.

• BUT: fixing this requires that we first fix the paradigm

Barriers generally fall into two categories:

• Generally focus on the “fight” between economics and environmentalism

• In many cases, unwittingly reward us for the lose/lose

• Good business practices force tradeoffs

• In many cases, unwittingly prevent us from realizing the win/win

Regulatory BarriersRegulatory Barriers Business Practice BarriersBusiness Practice Barriers

Regulatory Barriers (partial list)

• Environment over Economy: BACT emissions controls

• Environment over Economy: Input-based emission standards preferentially reward non-revenue generating emissions control

• Economy over Environment: Grandfather provisions of CAA

• Economy over Environment: Drilling in ANWR

• Cost-plus pricing rewards utilities for inefficiency

• Input-based emission standards penalize efficiency

• Ban on private wires forces CHP generators to be undersized.

• Monopoly rights allow utilities to take anti-competitive actions to block their customers from installing high-efficiency CHP

Failures of OmissionFailures of Omission(Lose/Win vs. Win/Lose)(Lose/Win vs. Win/Lose)

Universal FailuresUniversal Failures(Lose/Lose)(Lose/Lose)

Business Practice Barriers almost all derive from a common cause: limited capital budgets.

Total Capital Available

Total Opportunity for In-Plant Win/Win Capital Investments

Capital Mandated to Lose/Win Projects

Capital for Core Capital Projects

Capital not allocated due to failure to achieve IRR criteria

Key point: Good business practice adopts only a fraction of the total win/win, absent regulatory encouragement.

As we begin to think about how laws could support the win/win, consider the case of CHP.

All SequestrationTechnologies

Project Return-on-Capital

0

GH

G R

ed

uc

tio

n (

ton

/$ i

nv

es

ted

)

0

0.5

(0.5)(300%) 300%

Photovoltaics

NuclearWind

Power-first CHP

Heat-first CHP(Turbosteam Projects)

End-Of-Pipe SOx/NOx Control

Recommendation 1: Examine every future energy and/or environmental policy to make sure that it preferentially rewards the win/win.

• In some cases, this has already started:– EPA trends towards output-based emission standards and offset credits– National Energy Policy’s proposed tax-depreciation (and other) incentives

for CHP.– Recent EPA ruling regarding flare gas MACT in carbon black plants– Maine’s 35-A §3210: 30% renewable requirement, CHP counts (see next)– DSM is a win-win, in some cases

• In most cases, we still argue over who should lose:– Recent debates over NSPS overhaul, ANWR, “Costs” of Kyoto compliance

• Emerging CO2 policies are an ideal test ground for this new formulation:

– Require CO2 abatement only on those projects than engender positive rates of return?

The impact of good legislation.

0%

5%

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20%

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30%

35%

40%

HI

OK

LA TX

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VA

AK

CO NV

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OH RI

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KY SD

Compare

US Average

CH

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f T

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-Sta

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(G

WH

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• Actions that would encourage energy efficiency, leading to negative costs and environmental improvement:– Amend the tax code to classify CHP as a pollution control device,

so as to level the economic playing field with lose/win alternatives.

– Give facilities credits for emissions offsets accumulated through energy efficiency investments – and apply them to any energy that is displaced, be it fuel or electricity.

– Extend the logic of DSM programs to high efficiency power generators – since the result is the same.

Recommendation 2: Recognize that good business practices limit the potential adoption of energy efficiency, and recast policies to recognize these limitations

• Many features of the central paradigm were appropriate in the 1920s, but now drive us to lose/lose:– Cost-plus rate setting.– Bans on “private wires”– Monopoly protection of anti-competitive utilities

• Some features of the our regulatory structure were passed more recently, but did not question the CP’s core tenets:– PURPA encouraged end-of-wire installations – but set the value of

the electricity based on wholesale markets!– Many interconnection policies over-design for bi-directional flow…

what if I don’t want to export?

• The only exception to Win/Win: Within the CP, a win/win for economy and the environment is a lose for the utility! – If we don’t have the courage to question the CP, we won’t

realize the benefits of efficiency.

Recommendation 3: Knock down the “central paradigm”.

Finally – recent events have shown the liability inherent in our devotion to the central paradigm. It’s time to move forward.