COMBINED HEAT AND POWER, RECYCLED ENERGY AND THE GOLDILOCKS

OPPORTUNITY

Presentation to the Energy Efficiency Finance ForumApril 12, 2007

Sean CastenPresident & CEO

Recycled Energy Development, LLCMarch 14, 2007

How to deploy more CHP is not a productive question independent of consequences. But CHP is the answer to deep societal questions.

• The wisdom of David Lee Roth, as applied to 2007 energy policy.

• More meaningful questions:– Can we lower GHG emissions without driving

up the cost of energy?– Can we serve new load growth without

facing NIMBY fights and driving up cost?– Can competition work in the electric sector?

0%0%

10%10%

20%20%

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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

Back to the future? Cost-effective GHG control is neither an oxymoron nor dependent on R&D.

Challenge & OpportunityChallenge & Opportunity(U.S. only)(U.S. only)

• ~$100 billion potential energy savings/revenue from if we return to 1920s model (~37% rate reduction)• Would reduce GHG

emissions by 1 billion tons/yr• No other GHG

reduction approach comes close in terms of economics or market potential.

BUT – current business models are not structured to capitalize on this opportunity.

0 MW 200 MW+5 MW 15 MW

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POTENTIAL RANGE OF CUSTOMER-SITED GENERATION ASSETS

INCREASING PROJECT COMPLEXITYINCREASING PROJECT COMPLEXITY INCREASING HURDLE RATESINCREASING HURDLE RATES

EQUIPMENT MANUFACTURERS

IPPS & ENERGYMERCHANTS

Estimated $350BN Estimated $350BN Capex OpportunityCapex Opportunity

(US only)(US only)

Estimated $350BN Estimated $350BN Capex OpportunityCapex Opportunity

(US only)(US only)

“Extraordinary claims require extraordinary proof” – Carl Sagan

• Potential for such massive potential conflicts with conventional wisdom – how is this possible in a market economy?– Biggest industry in country is not subject to

competitive pressure. Markets give you what you reward – and cost-plus rewards cost.

– “Stick to your core” drive industrials away from >2 year paybacks on energy, and outsourcers have not filled gap.

Why haven’t outsourcers emerged to date?

• Regulatory obstacles– Utilities have neither the incentive, thermal

expertise nor entrepreneurial culture to pursue.

– Rate structures, interconnect rules and bans on third party electric sales all erect barriers to entry.

– Subsidies and demographic trends caused real, delivered energy prices to fall every year until 2000*; lowered incentive for EE.

• These barriers are falling.

* With the exception of brief disruption in late 1970s after OPEC price shocks

Electricity price history – end of an era?

Average Inflation-Adjusted US Electricity Price (2006 $)

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7.0

8.0

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12.0

1970 1980 1990 2000

c/k

Wh

Why haven’t outsourcers emerged to date?

• Financial & Business obstacles– Bulk of space is ~$2 – 20 MM projects– Too big for “spiderweb” contracting

inherent to OEM model– Too small for high transaction costs

inherent to merchant/PF model– Too much $ for industrials or 3rd parties to

self-finance (esp. without losing control)– But $350 billion is a lot of porridge…

• Significant returns will accrue to the enterprise that can overcome these obstacles

Understanding the industrial perspective

• Rule of thumb: non-core investments must deliver < 2 year paybacks to gain capital approval (and only then if $ is available)

• BUT: purchasing processes reluctant to enter long-term agreements that have a higher WACC than industrial.

• Creates the gap and opportunity (see next)

Understanding the industrial perspective

Annual $ Savings

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Industrial IRR for non-core

Industrial IRR for core = 3rd party IRR for customer non-core

Industrial$ threshold

Thresholdwith 3rd party PF

High Return Opportunities thatdon’t get built with current models

Conventional finance doesn’t work for CHP/RE projects.

• Asset-backed debt not well structured for large, custom-engineered facilities

• Cash-flow secured project finance too transaction-intensive for <$50MM projects

• Time-to-cash is too long for private equity without liquidation of business, in spite of rapid capital paybacks (once built)– ~1 year project development time– ~1 – 2 year project construction time– ~3 – 5 years to pay off (required) debt

• Family history – PE-level returns incompatible with new construction?

“Energy Investment Trust” - The ideal financial structure?

• CHP/RE project development has more in common with REITs than conventional PE– Value creation is in acquisition and earnings

enhancement during first few years– Projects generate high-return annuities– Once developed, assets have value based on

long-term earnings.– Projects can be sold independent of parent

enterprise at attractive multiples• Structure so that projects can be funded

with 100% equity, then leveraged post-acquisition to minimize transaction costs and deal-fatigue.