COMBINED HEAT AND POWER, RECYCLED ENERGY AND THE GOLDILOCKS OPPORTUNITY

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COMBINED HEAT AND POWER, RECYCLED ENERGY AND THE
GOLDILOCKS OPPORTUNITY Presentation to the
Energy Efficiency Finance Forum April 12,
2007 Sean Casten President CEO Recycled Energy
Development, LLC March 14, 2007
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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?

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Back to the future? Cost-effective GHG control
is neither an oxymoron nor dependent on RD.
Challenge Opportunity (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.

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BUT current business models are not structured
to capitalize on this opportunity.
INCREASING PROJECT COMPLEXITY
INCREASING HURDLE RATES
Estimated 350BN Capex Opportunity (US only)
Number of Direct Selling Companies
200 MW
5 MW
15 MW
0 MW
POTENTIAL RANGE OF CUSTOMER-SITED GENERATION
ASSETS
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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
  gt2 year paybacks on energy, and outsourcers have
  not filled gap.

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Why havent 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
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Electricity price history end of an era?
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Why havent 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

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Understanding the industrial perspective

• Rule of thumb non-core investments must deliver
  lt 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)

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Understanding the industrial perspective
Rate of Return
Annual Savings
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Conventional finance doesnt 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 lt50MM 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?

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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.