Transcript Document

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
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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.
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Understanding the linkage between
the economy and GHG emissions.
Wast
e
Fossil fuel in
Economy
CO2 Emissions
Useful Stuff out
Economic Activity
Indirect linkage
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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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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
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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.
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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%
1990
1980
1970
1960
1950
1940
1930
1920
1910
1900
1890
1880
0%
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Local generation has an innate
capital cost advantage.
US Average Capex ($/kW installed)
92% of US
Grid
8% of US
Grid; only
4% of this
(0.32%
total) by
regulated
utilities
Generation
T&D
Line Loss &
Redundancy
Total $ per
new kW load
Central
Approach
$1,000 - $3,500
$1,400
1.44
$3,460 - $7,000
Local
Generation
$1,000 $3,000
$140
1.07
$1,140 - $3,360
Local Gen.
Capital
Comparison
Adds $200 to
$3,200
Saves $1260
Saves 0.37
Saves $100 to
$5,860 per KW
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If it’s such a good idea... wellmanaged businesses probably
haven’t done it already.
Rate of Return
CO2-ABATEMENT
OPPORTUNITIES WITH
ABOVE-MARKET RETURNS
PROJECTS THAT
GET BUILT BY
INDUSTRIALS
Industrial IRR threshold for energy investments ~ 40%
Industrial IRR threshold for core investments ~ 15%
Industrial
$ threshold =
meaningful fraction
of EBITDA
Annual $ Savings
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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 loadfactors
• 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.
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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, misrepresenting 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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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 gridconnected solar panels (with less CO2/MWh!)
Courtesy Primary Energy
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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.
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Getting GHG policy right is a twopronged 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.
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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.
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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.
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Canada’s economy shows a net gain
from conservation.
Canadian Employment, by Sector
25%
10 jobs are at risk
as energy prices
rise for every 1 job
that benefits.
Manufacturing +
Transportation
Extractive Industries
% of All Jobs
20%
15%
10%
5%
0%
2003
2004
2005
2006
2007
Canadian GDP by Sector
25%
Manufacturing +
Transportation
Extractive Industries
20%
% Contribution to GDP
$4 of GDP are at
risk as energy
prices rise for
every $1 that
benefits.
15%
10%
5%
0%
2003
2004
2005
2006
2007
Source: www.statcan.ca
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RED | the new green
Mongolia
0
Iraq
Japan
France
Sweden
Italy
South Korea
Finland
United Kingdom
Brazil
Spain
Belarus
Top 10 CO2 Sources
(67% of total emissions)
Mexico
New Zealand
USA
Germany
Norway
Canada
China
Iran
Nigeria
Saudi Arabia
Uzbekistan
Rep. Congo
India
Indonesia
Viet Nam
Czech Rep.
Suriname
Angola
Poland
25
Bulgaria
30
Ukraine
Columbia
Russian Federation
Turkmenistan
South Africa
Austrailia
Serbia & Montenegro
North Korea
Kazakhstan
kg/$ of GDP (USD)
…as do all other first-world
economies.
Fossil Fuel Extraction Rates (2005)
G8
20
15
10
5
Source: http://www.materialflows.net/mfa/
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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
$/MTCO2e
$20
$0
a
1 9 1
6 8
3 8 1
1 6 9 -4 a
4 5 2
2 2 -2 -9 2 3 3
7 3 4 2
b
-1
U CI- CI- -1 CI- CI- ES- LU F-3 F-3 CI- CI- A- CI- S-1 LU LU U-1 U-1 A- A-1 ES- A- F- CI- ES- - 1 F- ES- AU
R R
R E
R
TL R R ES R R
T
T T TL TL
L
T
-$20
-$40
Reduce Land
Conversion
-$60
-$80
Carbon Intensit
Targets
-$100
AZ CCAG Policy Option
Electricity Pricing
Clean Cars
RED | the new green
DG & CHP
Appliance Efficiency
Standards
Building
Codes
DSM
RPS
Increase
Reforestation
Truck Speed Limit
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…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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The private sector can respond
rapidly once barriers are removed.
US Installed Generation Capacity, by Fuel Type
Installed GW
450
400
Natural Gas
Nuclear
350
Coal
300
250
Final FERC rehearing
of 888 to clarify initial
rule in 1998
200
150
100
50
FERC Order 888 mandates
non-discriminatory
transmission access
1992 Energy Policy Act opens
competitive markets
0
1975
1985
1995
2005
Source: US DOE, Energy Information Administration (www.doe.eia.gov)
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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.
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