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The Economic Opportunity of
Climate Change: Profitably
Recycling Waste Energy
Presentation to Distributed
Generation / Combined Heat and
Power Conference
Sean Casten,
President & CEO
Recycled Energy Development, LLC
September 23, 2008
Richard Ivey School of Business
Toronto, ON
1
RED | the new green www.recycled-energy.com
Climate syllogisms
1. Burning fossil fuel emits CO2
2. Fossil fuel costs money
3. Therefore, avoiding fossil fuel combustion saves
money and CO2 emissions.
This logic is largely absent from our climate
debate, which assumes that CO2 reduction will
be economically painful.
2
RED | the new green www.recycled-energy.com
Understanding the linkage between
the economy and GHG emissions.
Wast
e
Fossil fuel in Economy Useful Stuff out
CO2 Emissions Economic Activity
Indirect linkage
3
RED | the new green www.recycled-energy.com
Two massive opportunities for
profitable CO2 reduction
Wast
e
Fossil fuel in Economy Useful Stuff out
1. Modify processes to reduce fossil fuel use per unit of
production (energy efficiency, including CHP)
2. Recycle waste energy into useful electric and/or thermal
input
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RED | the new green www.recycled-energy.com
Economically / politically optimal
GHG policy understands this linkage
• The ratio of [useful stuff] : [fossil input] isn’t fixed!
• Good GHG policy = good economic policy.
• Lower GHG emissions
• Lower manufacturing costs = more competitive businesses
• Lower fossil fuel purchase = enhanced balance of payments
• Greater overall standard of living
5
RED | the new green www.recycled-energy.com
DG is the primary beneficiary of an
efficiency-focused GHG policy.
• The biggest cost-effective opportunities to lower
GHG emissions are in the power generation sector.
• Utility regulation does not incentivize efficiency
• Well-run businesses do not invest in high-return energy
projects
• The only way to significantly increase generation
efficiency is to site generation at/near the load.
• We have identified opportunities to generate 40% of US
electricity from such local sources, which would profitably
lower US CO2 emissions by 20%.
• We have identified 11,400 MW of opportunity in Ontario; have
not yet done analysis for all of Canada.
• BUT: the goal of good policy is not to deploy DG,
but to profitably reduce CO2.
6
RED | the new green www.recycled-energy.com
Local generation has an innate
operating cost advantage.
US Electric Industry Fuel-Conversion Efficiency
70%
Recovered Energy
60%
U.S. Average Electric Only
50%
40%
30%
20%
10%
0%
1880
1890
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
7
RED | the new green www.recycled-energy.com
Local generation has an innate
capital cost advantage.
US Average Capex ($/kW installed)
Line Loss & Total $ per
Generation T&D Redundancy new kW load
92% of US Central
Grid $1,000 - $3,500 $1,400 1.44 $3,460 - $7,000
Approach
8% of US Local $1,000 -
$140 1.07 $1,140 - $3,360
Grid; only Generation $3,000
4% of this
Local Gen.
(0.32% Capital
Adds $200 to
Saves $1260 Saves 0.37
Saves $100 to
total) by Comparison $3,200 $5,860 per KW
regulated
utilities
8
RED | the new green www.recycled-energy.com
If it’s such a good idea... well-
managed businesses probably
haven’t done it already.
CO2-ABATEMENT PROJECTS THAT
OPPORTUNITIES WITH GET BUILT BY
ABOVE-MARKET RETURNS INDUSTRIALS
Industrial IRR threshold for energy investments ~ 40%
Rate of Return
Industrial IRR threshold for core investments ~ 15%
Industrial
$ threshold =
meaningful fraction
of EBITDA
Annual $ Savings
9
RED | the new green www.recycled-energy.com
And yet, much of our GHG
conversation remains focused on
who should lose.
• Virtually all of the “solutions” presented as a part of
the GHG solution will raise energy costs.
• Carbon sequestration adds capital cost and depresses the
operating efficiency of power plants; will raise rates of coal
fired power by ~$50 – 70/MWh.
• No government has ever succeeded in building nuclear without
massive public subsidies; the capital costs cannot be justified
by a competitive market.
• Conventional renewables have high capex/kW and low load-
factors
• All of these may well have a role to play in a carbon
constrained future – but they aren’t the first choice
of a world rationally allocating scarce dollars to GHG
reduction.
10
RED | the new green www.recycled-energy.com
Ontario is no less guilty of favoring
the status quo over true reform.
• The provincial Clean Energy Standard Offer Program
set out to replace coal plants, but fails to encourage
least cost clean energy solutions.
• Ignores the transmission and distribution costs associated with
central power.
• Models the cost of nuclear power at a 4% cost of capital, mis-
representing financial markets, and/or mandating an additional
tax-payer subsidy of nuclear power.
• Significantly understates the efficiency and load-factor of
locally sited CHP (54% and 58% respectively).
• Compares the cost of power generation rather than the cost of
delivered energy, thereby ignoring the transmission, reliability
and reserve margin savings innate to local generation.
• Provides long-term contracts to non-regulated investments
only for power plants <10 MW.
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RED | the new green www.recycled-energy.com
Profitable GHG reduction in Gary, IN.
• 95 MW of power recovered from the exhaust of 268 coke ovens.
• Saves host ~$40 million/year with no marginal fuel combustion or
CO2 release.
• Generates more clean power in 1 year than all the world’s grid-
connected solar panels (with less CO2/MWh!)
Courtesy Primary Energy
12
RED | the new green www.recycled-energy.com
Profitable GHG reduction in Alloy,
WV.
• RED will recycle hot gas to generate 45 MW of power from waste
heat on 120 MW furnace
• Competitive with West Virginia (coal) power prices.
13
RED | the new green www.recycled-energy.com
Getting GHG policy right is a two-
pronged approach.
• Monetize externalities
• Replacing our subsidy for dirty energy with a financial
incentive to be clean will shift capital allocation in beneficial
directions.
• This is also true for many non-environmental attributes
(locational pricing, etc.)
• Remove barriers to market access
• Monetization alone is not sufficient, given the high discount
rate placed on energy projects by non-energy experts.
• Electric regulation has been built on monopolies; these rules
limit third party’s access to customers, distribution and capital.
• Removing these barriers has no fiscal cost, and significant
gain. But they are politically hard.
14
RED | the new green www.recycled-energy.com
How big are our efficiency reserves?
(= how long before we must tap
unprofitable GHG reductions?)
1. What are the thermodynamic constraints?
• If we are at/near the limits of fossil fuel conversion from an
energetic or mass-balance perspective, the opportunity is
small. A: We’re not even close.
2. How dependent is the economy on extractive
industries?
• The only sector of the economy that does not grow with fossil
fuel conservation is fossil fuel extraction. If an economy is
dominated by extractive industries, efficiency will slow
economic growth. A: This is not true of any first world
economy.
3. How quickly can the private sector respond?
• Addressing the threat of global warming requires urgent
action. Can the private sector alone respond quickly enough?
A: Faster than you think.
15
RED | the new green www.recycled-energy.com
Why we’re nowhere near
thermodynamic constraints.
• Regulated electric sector (approx. 1/3rd total CO2
emissions) is not rewarded for fuel conservation.
• Monopoly franchises have kept profit-maximizing
capital out of the energy space.
• Thermal energy consumers (approx. 1/3rd total CO2
emissions) place an extremely high return threshold
on energy efficiency investments.
• Many opportunities to lower GHG with >20% returns
• Long-lived existing capital stock was built in a much
lower energy cost environment.
• Assets optimized for 1990 fuel costs are suboptimal at 2008
fuel costs.
16
RED | the new green www.recycled-energy.com
Canada’s economy shows a net gain
from conservation.
Canadian Employment, by Sector
25%
Manufacturing +
Transportation 10 jobs are at risk
as energy prices
Extractive Industries
20%
rise for every 1 job
% of All Jobs
15%
that benefits.
10%
5%
0%
2003 2004 2005 2006 2007
Canadian GDP by Sector
25%
Manufacturing +
Transportation
Extractive Industries
$4 of GDP are at
20%
% Contribution to GDP
risk as energy 15%
prices rise for
every $1 that
10%
benefits. 5%
0%
2003 2004 2005 2006 2007
Source: www.statcan.ca
17
RED | the new green www.recycled-energy.com
RED | the new green
kg/$ of GDP (USD)
10
15
20
25
30
0
5
Mongolia
Kazakhstan
North Korea
Serbia & Montenegro
Austrailia
South Africa
Turkmenistan
Russian Federation
Columbia
Ukraine
Bulgaria
economies.
Iraq
Poland
Angola
Suriname
Source: http://www.materialflows.net/mfa/
Czech Rep.
Viet Nam
Indonesia
India
Rep. Congo
Uzbekistan
Saudi Arabia
Nigeria
Iran
Top 10 CO2 Sources
China
(67% of total emissions)
Canada
Fossil Fuel Extraction Rates (2005)
Norway
Germany
USA
…as do all other first-world
New Zealand
Mexico
Belarus
G8
Spain
Brazil
United Kingdom
Finland
South Korea
Italy
Sweden
18
France
www.recycled-energy.com
Japan
Many jurisdictions are coming to
realize the potential for negative
cost (=profitable) GHG policy...
AZ CCAG Options Ranked by $/MTCO2e 2007-2020
$80
$60
$/MTCO2e
$40
$20
$/MTCO2e
$0
-9
-1
TL -3
-6
RC 3
ES 8
RC 1
6
RC 4
5
ES 2
7
TL 12
3
RC 1
-4
TL 2
TL -9
1a
RC b
RC 1
TL 2
14
3a
2
3
9
8
RC 1
2
-
-
I-
I-
I-
I-
I-
I-
I-
I-
-1
-1
-1
3
F-
F-
A-
A-
A-
A-
U
U
U
U
ES
ES
ES
ES
-
F-
F-
A-
RC
-
U
U
TL
TL
U
-$20
-$40
Reduce Land
-$60 Conversion
-$80
Carbon Intensit
-$100 Targets
AZ CCAG Policy Option
Building Increase
Electricity Pricing Codes Reforestation
RPS
DG & CHP
Truck Speed Limit
Clean Cars Appliance Efficiency DSM
Standards 19
RED | the new green www.recycled-energy.com
…to create $billions of GDP growth
and jobs.
Source: www.azclimatechange.us
Estimates of the net impacts of stabilizing atmospheric
CO2 between now and 2020 suggest an NPV of over $1
trillion globally, even before consideration of
environmental externalities.
Source: Ken Colburn
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RED | the new green www.recycled-energy.com
The private sector can respond
rapidly once barriers are removed.
US Installed Generation Capacity, by Fuel Type
450
Natural Gas
400
Nuclear
350 Coal
Installed GW
300
250
200 Final FERC rehearing
of 888 to clarify initial
150 rule in 1998
100
FERC Order 888 mandates
50 1992 Energy Policy Act opens non-discriminatory
competitive markets transmission access
0
1975 1985 1995 2005
Source: US DOE, Energy Information Administration (www.doe.eia.gov)
21
RED | the new green www.recycled-energy.com
Conclusions
• The opportunity for profitable GHG reduction is
massive.
• The obstacles to profitable GHG reduction are
primarily regulatory – not technological.
• Local power generation would be a significant
beneficiary of a policy that rewarded profitable CO2
reduction – but it is the path, not the goal.
• Given the right signals, the private sector has an
ability to act much faster than is appreciated.
• There is no reason not to act.
22
RED | the new green www.recycled-energy.com
