RECYCLING ENERGY, Growing Income While Mitigating Climate Change October 18, 2005

Thomas R. Casten & Robert U. Ayres reward efficiency, create a bias for increased electricity use, and limit the influence of market INCOME AND CLIMATE CHANGE forces. These rules block energy system innova- A growing global climate debate pits economic tion. Real deregulation would induce the heat growth against a sustainable environment. Over system to recycle much of the presently wasted the past 230 years, engineers have developed energy saving billions of $20 bills and reducing ever better ways of converting fossil fuel into carbon dioxide emissions. As a further ‘double useful work. Burning fossil fuel has dramatically dividend’, lower energy costs would have a pos- increased our standard of living, but also con- itive impact on economic growth, relative to tributed to global warming. Growing atmospher- business-as-usual. ic carbon dioxide concentrations reflect infrared RECYCLING ENERGY radiation back to earth, biasing natural climate cycles towards warming and probably toward in- The manufacturing and electric power indus- creased storm intensity. Current- tries, by and large, use a portion ly proposed approaches to re- of the energy in fuel and discard duce carbon dioxide emissions – The unused poten- the rest as waste energy. Many electric generation with renew- tial for recycling en- cost effective approaches are able energy and CO2 sequestra- available to recycle these waste tion – will raise the cost of ener- ergy may be society’s streams, generating incremental gy services, given today’s tech- best secret. electricity and thermal energy nology and most foreseeable im- without increasing pollution or provements. burning added fossil fuel. The unused potential for recycling energy may be society’s best kept Both sides of the debate largely ignore efficien- secret. cy. They assume that the heat and power system is economically optimal. Received wisdom says There are two ways to extract useful work from that economic actors will deploy efficiency im- waste energy; both require local electric power provements that are cost effective – wringing generation, near users. Both forms of energy re- waste out of every industry to reduce costs. cycling are largely ignored by power industry Hence there can be no $20 bills lying on the regulators, utilities, and most independent power ground, because some entrepreneur will have al- producers, who focus on central generation that ready picked them up. This view of economics cannot recycle energy. limits the climate change debate to when, 1) Recycling Industrial Energy Waste whether, and how much society should pay to reduce carbon dioxide emissions. Various industrial waste energy streams can be recycled into useful heat and power. These The standard assumptions are wrong. A century streams include hot exhaust, low grade fuels, of monopoly protection of electric power gener- and high pressure steam and gas. High tempera- ation and distribution has blocked market forces ture exhaust can produce steam to drive turbine and left the energy system far from economical- generators and produce electricity. Hot exhaust ly optimal. Power industry governance is choked is available from coke ovens, glass furnaces, with obsolete rules that are barriers to efficiency. petrochemical processes, and steel reheat fur- Over time, governments have woven tapestries naces. In other cases, presently flared flue gas of laws and regulations that do not from blast furnaces, refineries or chemical pro- cesses can be burned in boilers to produce steam. All pressurized gases, including steam, have the potential to generate electricity via

Page 1 backpressure turbines. Industrial and commer- A large energy recycling plant located on Lake cial boiler plants produce high pressure steam Michigan opposite Chicago is shown below. for distribution and then typically reduce pres- Over 250 individual ovens bake metallurgical sure at points of use by means of valves. Nearly coal to produce blast furnace coke – expanded every college and university campus, as well as lumps of nearly pure carbon. The plant converts most industrial complexes, could produce some the energy in the coke oven exhaust to 90,000 fuel-free electricity from steam pressure drop. kilowatts and 500,000 pounds of low pressure Similarly, gas transmission companies expend steam for Mittal’s Inland Ispat steel complex. energy to compress natural gas, but then reduce In 2004, this plant generated more clean pow- that pressure with valves to feed local distribu- er than we estimate was produced by all of tion systems. Recycling the discarded energy at the solar collectors throughout the world.2 US natural gas pressure reduction stations could The capital cost was $165 million, compared supply 6500 megawatts, roughly 1% of US elec- with over $5 billion invested in the world’s solar tric power generation. This and examples that photovoltaic fleet. Each dollar of investment in follow using US data are largely applicable to this energy recycling plant produced 33 times other countries. more clean energy than a dollar invested in solar collectors. A dollar invested in this recycled en- Industrial energy recycling is well proven, with ergy plant produced 3.6 times more clean power roughly 9,900 megawatts in operation in the US, than a dollar invested in wind generation and the equivalent of ten large nuclear plants. But wires. These comparisons are not intended to this is only 10% of the 95,000 megawatts of po- disparage renewable energy, but to show the rel- tential identified by a recent study for the US ative value of recycled energy. Over time, as re- Environmental Protection Agency.1 Recycling newable technology improves there will be a ro- waste energy could have produced 19% of US bust economic competition for clean energy sup- electricity in 2003, displacing a quarter of the ply. fossil fuel that was burned to generate electrici- ty. In 2003, 22.9% of US electricity was pro- Mittal Steel enjoys significant economic bene- duced with renewable and nuclear energy, and fits. Producing the same steam with natural gas recycling industrial energy would have raised and purchasing electricity from the grid would the non-fossil total to 42%. have cost over $110 million per year at October 2005 prices. This project illustrates how energy Industrial energy recycling projects range in ca- recycling satisfies both sides of the global pacity from 40 to 160,000 kilowatts. Capital warming debate, simultaneously reducing ener- costs range from $300 per kilowatt for large gy costs and carbon dioxide emissions. Power backpressure turbines to over $1,800 per kilo- industry governance creates many hurdles and watt for small steam-turbine plants, compared to disincentives for local generation that will be roughly $1,200 per kilowatt for a large new discussed below. coal-fired plant.

Energy Recycling at Mittal Steel, East Chicago, Indiana

Page 2 The World Survey of Decentralized Energy for 2) Combined Heat & Power Plants 2005 by the World Alliance for Decentralized Energy3 found that 7.5% of worldwide electric The second way to recycle energy is to use generation was from CHP plants, but noted a waste heat from electric generation to provide great disparity among countries, as shown in thermal energy for heating, cooling, and indus- Chart 1. The US and Canada generated respec- trial processes. In 2003, the US power industry tively 7.2% and 9.9% of their power with CHP consumed 33 quadrillion British Thermal Units plants, while some countries generated between (quads) of raw energy in thermal power plants 30% and 52% of their power with more efficient (excluding renewable energy) to deliver 11 CHP plants. Three US states reported no com- quads of electricity – 33% efficiency. Com- bined heat and power plants, while California bined heat and power plants (CHP) sited near and Hawaii produced over 20% of their power thermal users can achieve 90% overall efficien- with CHP plants. Differences in CHP use be- cy and easily recycle half of the waste energy to tween countries shown below as well as differ- achieve double the conventional power system ences among US states reflect local power in- efficiency. The US energy recycling potential is dustry governance. The actual recycling of thus roughly 11 quads, or 13% of total US fossil available heat from CHP plants is not captured energy consumption. This potential savings is in in macro data, which only report total electric addition to the industrial energy recycling poten-

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Chart 1: CHP Production Percentage of Total Power by Country

Roughly 92% of the world’s electricity is pro- OF SCALE? duced at remote generation plants, which dis- Skeptics acknowledge efficiency advantages of card, on average, two thirds of the input energy. local generation that recycles waste energy, but To recycle by-product waste heat, a power plant assume that economies of scale make central must be located near thermal energy users be- generation more cost effective. Indeed, the re- cause steam and hot water cannot be transmitted ported average cost per kilowatt of all new US long distances without prohibitive losses. CHP central generation built in 2004, including base, plants, sited near thermal users, utilize all of the intermediate, and peak load plants, was $890, technologies and fuels used by central genera- which was 25% less than the estimated average tion plants, but produce significantly more use- cost of new decentralized plants. But this $890 ful energy from each unit of fuel. CHP plant ca- ignores the capital costs of required additional pacities range up to 700,000 kilowatts. transmission, distribution and redundancy. Transmission is in short supply, and it is diffi-

Page 3 cult to gain approvals to site new transmission precise moment of system peak load, requiring lines. Numerous power interruptions since 2000 the utility to build or dedicate sufficient grid ca- have flagged problems with existing transmis- pacity to supply 100% of the user’s peak load. sion systems in the US and Europe. Many de- Such analyses is of little relevance as any single veloping countries experience daily blackouts as local plant is likely to be lost in the noise. Poli- transmission capacity is rationed among users. cy considerations should focus on the costs of Satisfying load growth with new central genera- interconnecting multiple local plants inside each tion plants requires average added investment in distribution system. The simultaneous failure of transmission and distribution of $1,380 per kilo- multiple independent distributed generators is watt of capacity.4 highly unlikely. The cost to connect local generation to the grid Table 1 compares the total capital costs of new seldom exceeds 10% of the cost for transmission central and local generation. The third data col- and distribution (T&D) from new central gener- umn shows that total capital costs to remotely ation. Locally generated power flows directly to generate and deliver one new kilowatt of peak the user, freeing grid capacity. It should be noted load are 170% of the capital costs of locally gen- that utility requests for standby rates typically erating the same power. Economies of large cen- claim much higher costs to connect a single lo- tral plants are overwhelmed by the added T&D cal generator to the grid. These calculations as- costs. sume that a single local generator will fail at the

Table 1. Capital to Serve an Incremental Kilowatt of Peak Load Genera- Transmis- Total/k KW Costs/k tion sion & distri- W of per W of new bution new kW load genera- load tion Central Genera- $890 $1380 $2,270 1.44 $3,269 tion Local Genera- $1,200 $138 $1,338 1.07 $1,432 tion Savings (Excess) $310 ( $1,242) ($1,068) (0.37 ($1,837) of Central ) versus Local Generation Central Genera- 74% 1000% 170% 135 228% tion Capital as a % percent of Local Generation Cap- ital The fourth data column of Table The world can spend flow and with ambient tem- 1 deals with further significant perature, and are thus much capital cost differences. Line $10.8 trillion to build higher during summer peak losses from remote generation to new generation and loads. Peak hour line loss- users averaged 7.5% in the US in es from remote generation 2003, but peak losses are much T&D, or spend $5.8 plants range from 10% to higher. In general, line losses trillion supplying the 30%, depending on the sys- vary with the square of current expected 2030 load tem and distance the power growth with local generation, saving $5.0 trillion Pageof capital 4 costs. travels to users. Boston Edison’s last rate case, ternational Energy Agency base case for 2030 approved by the Massachusetts regulatory com- project the addition of 4,368 gigawatts of new mission, claimed marginal losses from generator electric load (4.37 billion kilowatts). Using cur- to consumer of 22%. Using this filing as gener- rent capital cost estimates for the likely mix of ally true, one kilowatt of new load capacity will generation plants, the WADE study found that require 1.22 kilowatts of new central generation the world can spend $10.8 trillion to build new and distribution capacity. By contrast, net line central generation and T&D, or spend $5.8 tril- losses from local generation seldom exceed 2%. lion supplying expected 2030 load growth with If a local plant generates power in excess of site local generation, saving $5.0 trillion of capital. needs, that power will flow backwards, towards The operating savings of local generation is also central generation plants, reducing line losses. significant. Supplying the world load growth To achieve system reliability, there must also be with central generation requires more fossil en- some redundant generation and grid capacity. ergy, equivalent to 122 billion barrels of oil or An electric system composed solely of large half of stated Saudi reserves. The WADE study, central plants must have backup capacity for using 2003 fuel prices, found central generation failure of the largest plant or for failure of the fuel costs would be $2.8 trillion more than local wires transmitting power from that plant to load generation over 30 years. At October 2005 fuel centers. A recent Carnegie Mellon study found prices, the fuel savings potential of local genera- that a system of smaller generation units with tion exceeds $5.0 trillion. Carbon dioxide emis- 3% to 5% spare capacity would be as reliable as sions were roughly 49% less in the local genera- the current central generation system with 18% tion case. spare capacity.5 Thus, as the multiple local gen- HUMAN RESOURCES LIMIT RECYCLED erators are built, the overall need for spare gen- ENERGY erating capacity will diminish. A clear issue of local generation is the need for Table 1, counting both above factors, shows that human resources. The people skills and time serving a kilowatt of new peak load requires ei- needed to develop a 10 megawatt recycled ener- ther 1.44 kilowatts of new central generation and gy plant could develop a 500 megawatt central T&D [1.22 for peak loss times 1.18 for redun- plant. Each plant requires a site, engineering de- dant capacity], or 1.07 kilowatts of new local sign, permits, procurement, construction, com- generation [1.02 line losses times 1.05 redundant missioning, and financing. While the construc- capacity]. Considering all factors, more than tion is more elaborate for the large plant, the twice the capital cost is required to serve load small plant must interface with the site’s waste growth with central generation than to serve the energy and/or thermal energy systems. same load with local generation. Serving one year’s US load growth of 14 million kilowatts At a fundamental level, recycling energy in- with central generation will require $21 billion volves a substitution of high skill human re- more capital investment than serving that growth sources for fossil energy. From the perspective with local generation. of creating high quality jobs, moving to local gen- WORLD POWER SYSTEM Moving to local generation eration is positive. From CHOICES will create many jobs and the perspective of a power A recent study by the World require a significant shift industry executive, local Alliance for Decentralized En- generation is threatening ergy (WADE) extended the in students’ career choices and fraught with complex- above analysis to determine & academic training. En- ity. In fact, such a move the costs of supplying world ergy recycling could be the could reduce the value of electric load growth and pro- skill sets that have taken duced the ‘bookend’ cases of next computer revolution decades to master, just as serving all load growth with in its impact on employ- the move to personal com- new central generation or with puters devalued skills of new local generation. The In- ment patterns. corporate IT managers

Page 5 who cut their teeth on mainframe computers. Current power industry rules prevent local com- From the regulators’ perspective, moving the in- petition. Distribution utilities are sheltered from dustry to multiple small plants will either vastly market forces by legal prohibitions against pri- increase regulatory complexity, or enable the vate electric wires crossing public streets. The market to perform the regulator’s job. The con- century-old natural monopoly argument says it sumer will see lower cost energy and fewer would waste societal resources to build two sets emissions coupled with change of century old of electric wires. This argument seems logical, patterns. In all events, moving to local genera- but has flawed assumptions. Electric distribution tion will create many new jobs and require a sig- is only a natural monopoly if all power must nificant shift in students’ career choices and aca- flow through the distribution system. Local gen- demic training. Energy recycling could be the eration needs no wires for the on-site user, and next ‘computer revolution’ in its impact on em- excess power could simply flow across the ployment patterns. street. CONVENTIONAL THINKING VERSUS Ironically, the monopoly protection designed to FREE MARKET ECONOMICS prevent duplicate wires causes increased invest- ments in the total grid. Central generation re- Why then, do most countries continue to build quires long transmission wires, transformers, central generation? Modern distributed genera- and capacitance banks that local generation tion is more efficient and less polluting, requires avoids. Distribution utilities are financially moti- half of the capital, and reduces system vulnera- vated to block local generation to retain rev- bility to weather and terrorism. Is lack of human enues by creating daunting barriers including ex- resources the issue that blocks local generation? cessive grid interconnection costs, excessive Is this analysis flawed, or is there a flaw in con- standby rates, and wholesale prices that ignore ventional thinking? the grid benefits that local generation creates. Facts suggest the latter. The power industry is But blocking local generation increases reliance far from economically optimal, because most on remote generation, which requires added players do not face market forces. This is espe- transmission wires. The societal cost of banning cially so for those who distribute power. The local duplicate wires that would be short and in- regulated power industry shuns local generation. expensive is the forced purchase of long trans- Between 1970 and 2003, US regulated utilities mission wires that increase electric costs and built 435,000 megawatts of new generation; line losses. 99% was central plants that cannot recycle waste Allowing everyone to build private wires would energy. US independent power producers built not result in a tangle of new wires. If a local 175,000 megawatts of new power in the same power developer could sell power at retail prices period, with only 34% able to recycle waste en- to neighbors via a private wire, it would be logi- ergy. The independent power companies largely cal for the distribution utility to offer competi- stopped developing local plants in 1992 when tive prices for moving power to neighbors. In the federal law changed to allow non-utility gen- fact, the distribution utility might decide to com- eration that does not recycle energy. The power pete more fully and offer customers local gener- industry avoids the complexity of multiple small ation options. Competition would work its usual plants that interface with user waste streams or magic, reducing consumer prices and wringing user thermal requirements, because it can. Few inefficiencies out of the system. power executives in either regulated or unregu- lated enterprises will ever relish the complexity International experiments with deregulation of building many relatively small energy recy- have mostly focused on opening competition cling plants even though the resulting power among central plants, not realizing the gains costs are much lower and pollution is reduced. possible from local generation. How can gover- Without more competition and/or mandates and nance encourage more optimal behavior, includ- incentives, the power industry will continue to ing local generation that recycles energy? We di- build central generation and discard waste ener- vide the answer into two parts, beginning with a gy. theoretical economic approach, followed by sug- gestions for more gradual step changes.

Page 6 GUIDANCE FROM ECONOMIC THEORY mill’s electricity and steam. Local utilities, often government owned, either refuse to purchase ex- Economists offer clear guidance on how to stim- cess power or offer only a small fraction of retail ulate innovation and push any industry towards power prices, so most of the world’s sugar mills optimal production: expose that industry to mar- simply incinerate excess bagasse. A modern ket forces. Market forces work best when the bagasse-fired power plant can produce three following conditions are present: times the electricity needed by the mill and sup- 1. Free business entry and exit (i.e. no barri- ply power to the surrounding rural area. When ers and no positive returns to scale), local utilities are forced to offer fair prices, the 2. Prices send clear and accurate cost sig- mills build new plants to efficiently recycle all nals, of the energy in the bagasse. A recent regulato- ry change in India has induced over 750 3. No subsidies that distort decisions, megawatts of new recycled energy capacity in 4. Users are charged externality costs, and 87 sugar mills, and is expected to call forth 5,000 megawatts of recycled energy, roughly 5. Predatory practices are prohibited. 5% of India’s present generation capacity.6 No country, state, or province power industry 2. Energy Price Signals Are Misleading governance embodies all of these essential con- ditions. Consider typical power industry gover- Functioning markets depend on accurate and nance: timely price signals. Electricity is typically sold at average prices, even though marginal costs 1. Entry Is Blocked are up to ten times higher during peak hours Economic efficiency requires free business than during off peak hours. Real-time pricing would cause consumers to shift on-peak power entry and exit. This does not exist in the use, reducing system costs and the cost of elec- power industry. Partial deregulation has al- tricity. lowed new entrants to the central power generation side, which has caused dramatic im- Example: California’s electric system peak is provements, but has largely retained local distri- 50,000 megawatts, which strains the grid, caus- bution monopolies and left incentives for local ing frequent brownouts. California consumers, utilities to block local power generation devel- seeing only average prices, use 1000 megawatts opers. of power during peak hours to wash their clothes.7 Accurate price signals would allow As a result, distributed generation cannot cap- consumers to reduce their electric bills by wash- ture much of the value it creates. A local genera- ing clothes during off peak hours, and might in- tion plant displacing the site’s purchased power duce appliance manufacturers to add smart con- avoids retail prices, which include costs of trans- trols to washers and dryers, automatically shift- mission, and thus captures some grid displace- ing loads. ment value, but most standby rates then take more than 100% of the value back. Even where 3. Energy Subsi- California consumers, regulations now allow a user to seek competitive dies Are the bids on standby generation, the power can only Rule seeing only average flow through the local distribution monopoly’s Subsidies distort price prices, use 1000 wires, at their rates. Excess power can only be signals, but politicians sold to the grid at wholesale prices. All excess respond to citizens’ de- megawatts of power power automatically flows to nearest neighbors sire for cheaper energy during peak hours to who then pay the distribution utility roughly $20 by subsidizing various per megawatt-hour for moving the power across parts of the energy sys- wash their clothes. the street. tem. These subsidies, which are paid out of tax Example: Sugarcane factories all over the world revenues, lower electric prices and thus signal typically burn the cane residue, called bagasse, consumers to overuse energy and to under invest in inefficient power plants that generate only the in conservation and efficiency.

Page 7 Example: State and municipally owned power Power industry laws and regulations throughout systems, unlike other manufacturing enterprises, the world thus ignore the lessons of economics. pay no income tax and are allowed to issue tax Without these minimum conditions, the invisible exempt and even taxpayer-backed debt with in- hand of the market does not work, so the power terest rates well below those paid by competitive industry continues to waste energy and capital. industries. Tax credits for wind, solar, geother- POLICY OPTIONS TO ENCOURAGE mal, and biomass power generation subsidize RECYCLED ENERGY power from these technologies. Governments then tax other activities to make up for lost rev- Examining the economic requirements for func- enues. These subsidies hide the true cost of tioning markets helps explain why there are electricity, encouraging waste. many $20 bills lying on the ground, even in ju- risdictions that have liberalized power industry 4. External Costs Are Not Included in En- governance. Nonetheless, many features of gov- ergy Prices ernance that block a competitive heat and power Markets only respond to prices, ignoring exter- market will continue. Politicians risk personal nalities that are not included in prices. Fossil unemployment when they propose to tax energy fuel taxes seldom cover the externality costs of or to remove energy subsidies. Citizens enjoy- burning fossil fuel, thus understating energy ing subsidized power will band together to op- costs. pose the political parties and politicians threat- ening their subsidy. Removing barriers to entry Example: Societies pay health costs related to and mandated clean energy are less politically burning fossil fuel with Medicare taxes, health charged and could be enacted. Small policy insurance premiums, and individual medical changes will not correct all governance prob- bills. Other government programs fund acid rain lems, but will deliver appreciable benefits to the remediation and climate change mitigation. public and create a case for unleashing market These actions hide the true cost of energy. Tax- forces to improve the worlds’ largest and most ing fossil fuel to recover the estimated externali- important industry. The public has not experi- ty costs would increase the cost of electricity enced the benefits that full power industry com- and stimulate investments in efficiency. Euro- petition would deliver, and has experienced pean countries tax energy and consumers re- problems stemming from poorly designed partial spond by investing in efficiency deregulation, such as occurred in California. 5. Predatory Monopoly Practices Are The following policy changes will move the Protected by Law. global power industry towards economic opti- Because incumbent firms can afford predatory mality: practices that lose money but discourage compe- Policy Change: Include recycled energy in Re- tition, governments have adopted anti-trust newable Portfolio rules. But utilities are allowed to engage in Standards (RPS), predatory practices that are banned by anti-trust crediting power Laws mandating more legislation. from industrial recycled energy will help Example: Many regulatory commissions allow waste energy and entrepreneurs develop re- utilities to offer discounted rates for ‘all electric’ crediting thermal buildings that use electricity for heating, cooling energy from local cycling technology for and lighting. This discourages non-electric heat- generation plants. export, and will encour- ing and cooling systems that are more fossil-ef- Five US states have ficient. By contrast, when Kodak offered lower already included re- age existing local indus- prices for copiers to consumers who also pur- cycled energy in tries to recycle energy, chased Kodak maintenance, the Supreme Court their energy portfo- held that such product bundling violated an- lio standards. Be- thus improving their ti-trust statutes. There are many other examples. cause renewable en- competitiveness. ergy resources are not evenly distributed, national RPS standards

Page 8 that are limited to renewable energy are politi- Policy Change: Require grid operators to inter- cally difficult to enact, since they could cause connect with backup generators, in return for the wealth transfers to states with good wind or so- right to obtain power from those generators dur- lar resources and penalize local industry with ing extreme system peaks and emergencies. The higher electric prices. By contrast, every state US standby generation fleet has a capacity equal has many opportunities to recycle energy. to 12% of system peak, but very little of that generation is interconnected with the grid. When Renewable Portfolio Standards mandate a rising the grid is approaching melt down, as happened percentage of electricity to be produced with re- in the northeast in August of 2003, several times newable energy. These mandates create a sepa- in California, and recently in France and Italy, rate market for clean energy, typically restricting interconnected standby generation could help competition to power from solar collectors, avoid brownouts and blackouts and save lives. wind, biomass, run-of-river hydroelectricity, and wave power. Given current technology, power Policy Change: Require regulatory commis- produced with renewable energy usually costs sions to pay local generators for the values their more than fossil fuel based power, and is seldom plants provide to the grid, including saved capi- built without subsidies or mandates. tal costs, saved line losses, reduced pollution, and grid voltage support. Commissions rightful- RPS programs have two political goals. The first ly expect local generators to pay for service pro- goal is to increase production of clean energy, vided by the grid, but seldom invert the analysis. regardless of market signals. But ‘renewable en- A recent study conducted at the University of ergy’ is not the only way to produce clean ener- Massachusetts found that each kilowatt of new gy and all clean energy production should be al- distributed generation installed in Boston would lowed to compete to satisfy the clean energy produce a net societal benefit of $351 per year, goal. Recycled energy, properly defined, uses but is instead required to pay $114 per year for no added fossil fuel and produces no added pol- standby services. This represents a $465 penalty lution – it is pristine. per year per kilowatt versus the net benefit to so- Opponents to including recycled energy in the ciety created.8 mandates point to a second political goal, name- Policy Change: Make carbon savings from re- ly to create new technology clusters that manu- cycled energy eligible for ‘green tags’ and car- facture tomorrow’s technology. Denmark’s bon trading credits. Many electric consumers mandates for increased wind power created a lo- voluntarily pay a premium for clean electricity cal market and enabled Danish firms to develop but the choices are limited to renewable energy. and sell world class wind technology. Energy Including recycled energy will increase clean recycling is also an important future technology energy production and reduce its cost. cluster, with double benefits. Laws mandating more recycled energy will help entrepreneurs WANTED: LEADERSHIP develop recycling technology for export, and Although these will encourage existing local industries to recy- The world would be better suggested policy cle energy, thus improving their competitive- changes will cre- off to deploy local genera- ness. ate significant tion with doubled efficien- Policy Change: Allow local generators to build benefits, enact- private wires to a limited number of retail cus- ment will require cy, save $5.0 trillion, and tomers, sufficient to transmit excess capacity. considerable po- then use some of the sav- Alternatively, require commissions to set vari- litical leadership. able grid charges based on the distance the pow- The busi- ings to extend energy ser- er will move and the relative tightness of the ex- ness-as-usual ap- vices to all people. isting network. The ‘postage stamp’ rates em- proach will, as al- ployed in most jurisdictions charge all genera- ways, command tors the average cost of moving power across the great allegiance from incumbent firms who ben- state, obscuring the locational value of genera- efit from present rules. Some in the renewable tion. energy industry will fight to keep all clean ener-

Page 9 gy mandates limited to their products. Many in- the power industry to market forces. Failing dustries and market purists will continue to op- such full deregulation, performance can be im- pose any mandates without offering alternate proved by eliminating regulatory biases against plans to remove economic distortions. But local generation and by encouraging energy re- growing energy related problems require dra- cycling. Once the public sees the benefits, sup- matic change, political leadership, and fresh port will grow for more comprehensive changes. ideas. It should be emphasized that there is no need to The long term trends that lowered the cost of en- eliminate existing central generation capacity. A ergy services have stalled, threatening to severe- great deal of new local generation is needed to ly disrupt economic progress. Average delivered just meet the world’s expected electric load electric generation efficiency has not improved growth and retirement of the aging fleet of cen- significantly since 1960. Fuel prices are three to tral plants. Nor is there any reason to weep for five times 1999 levels. Transmission systems are the established utilities. Nothing should prevent strained, such that extreme weather regularly these organizations from participating in the in- disrupts electricity supply. Vehicle and appli- evitable (and profitable) new market for decen- ance efficiency gains have slowed. tralized power plants that recycle energy. CONCLUSIONS It is time to challenge the widely held assump- tions among economists and policy makers that The stakes for energy efficiency may be much central generation and monopoly protected elec- higher than generally realized. President Bush’s tric distribution are optimal. Like Voltaire’s assertion in 2001 that the US economy could not Candide, these folks assume (contrary to evi- afford Kyoto may not have considered the vul- dence) that this is “the best of all possible nerability of the electric grid and other costs of worlds.” Global economic and environmental hurricanes intensified by global warming – of a health depends upon the speed at which govern- 2,500 year storm (Ivan in 2004) followed by an ments stimulate economic efficiency in the even more intense Katrina in 2005. Govern- world’s largest industry: electric power produc- ments seeking to mitigate climate change with- tion and distribution. out rewarding efficiency are increasing local en- ergy prices and could well damage their own A final comment is called for at this point. economies. Spending $10.8 trillion to supply Though the full story is too complicated to tell global electric load growth over the next 30 here, there can be little doubt that productivity years with central generation will greatly worsen increases and economic growth in the past have

CO2 emissions and will, according to the Inter- been driven very largely by the use of fossil fu- national Energy Agency, still leave over 1.4 bil- els to drive machines – notably steam engines lion people in energy poverty.9 The world and internal combustion engines. These, in turn, would be better off to deploy local generation have performed useful work (much of it electric) with doubled efficiency, save $5.0 trillion, and and substituted for human and animal labor. For then use some of the savings to extend energy over two centuries these ‘engines of growth’ services to all people. have contributed to, and been driven by, declin- ing fossil fuel prices. But industrial societies There is no reason to settle for current energy in- now face the prospect of rising prices for petro- efficiencies. Energy recycling is economically leum and natural gas, with an increasingly ur- advantageous using existing technology. Be- gent need to use less fossil fuels for environmen- cause energy recycling requires massive human tal reasons. The consequence, in the absence of resources to develop, it will proceed slowly un- a major structural change, could be reduced eco- less mandated, by either governments or by mar- nomic growth, if not extended recession and de- ket forces. We believe the best way to improve clining national income. Recycling energy is the energy system efficiency is for governments to single most promising strategy for avoiding this heed the lessons of economics, fully exposing threat.10

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Bailey, Owen and Worrell, Ernst, Clean Energy Technologies, A Preliminary Inventory of the Potential for Electricity Generation, Lawrence Berkeley National Laboratory, July 2004. 2 At the end of 2004, 650 megawatts of solar collectors were installed worldwide, which, at an annual estimated 8% load factor, would have produced 650 *8760 hours *.08 = 455,520 MWh. The 90 MW coke oven exhaust recycling plant produced 503,000 MWh in 2004, equal to an 8% load factor of all solar collectors. 3 World Alliance for Decentralized Energy, 2005, www.local power.org 4Little, Arthur D., Preliminary Assessment of Battery Energy Storage and Fuel Dell Systems in Building Publications, Final Report to National Energy Technology Laboratory, US DOE, Aug 2, 2002, p43. 5 Zerriffi, Hisham., “Electric power systems under stress: an evaluation of centralized vs distributed systems architec- tures”, PhD, Carnegie-Mellon University, 2004. 6 Natu, S.U., Bagasse based cogeneration, India marching ahead (p 417), International Sugar Journal, Turnbridge Wells, UK. 7 Comments from William Reed, Senior Vice President, Regulatory Affairs and Strategic Planning, San Diego Gas & Electric at the West Coast Energy Management Conference on June 28, 2005. 8 Kosanovic, Dragolijub and Ambs, Lawrence, The Influence of Distributed Energy Resources on the Hourly Clearing Price of Electricity in a Restructured Market, 2005 ACEEE Summer Study on Energy Efficiency in Industry, West Point, NY, July 2005. 9 World energy Outlook, International Energy Agency, 2002, p 3. 10 See extensive work of Robert U. Ayres including: Ayres, Robert U., Ayres, Leslie W., and Warr, Benjamin, Exergy, power and work in the US economy, 1900-1998, Energy 28 (3), 219-273, 2003. Ayres, Robert U. and Warr, Benjamin., Accounting for growth: The role of physical work, Structural Change & Eco- nomic Dynamics 16 (2), 181-209, 2005. Warr, Benjamin and Ayres, Robert U., The MEET-REXS model, Structural Change & Economic Dynamics, 2006.

Thomas R. Casten has spent 30 years developing decentralized energy recycling projects as founding Presi- dent and CEO of Trigen Energy Corporation, a New York Stock Exchange corporation and its predecessors from 1977 through 2000, and currently as founding Chair & CEO of Primary Energy Ventures LLC, an Oak Brook, Illinois based firm with a Toronto Stock Exchange traded subsidiary, Primary Energy Recycling Corp. Mr. Casten has served as President of the International District Energy Association and has been named a “CHP Champion” by the US Combined Heat and Power Association. He currently serves on the board of Fuel Cell Energy (NASDQ: FCEL) and is the Chairman of the World Alliance for Decentralized Energy (WADE). Tom’s book, “Turning Off The Heat,” published by Prometheus Press in 1998, explains how the world can save money and pollution. His articles have been published in a variety of energy jour- nals and he has presented energy recycling at the International Association of Energy Economics, the Aspen Energy Policy Forum, the Bordeaux Energy Colloquium and the World Technology Network. He has testi- fied on several occasions before US Senate and House Energy committees and advised Indian, Chinese, and Brazilian government officials on power industry governance.

Prof. Robert U. Ayres was trained as a theoretical physicist (BS Chicago, 1954, MS U Maryland 1956, PhD London, 1958). In subsequent years he worked at the Hudson Institute, Resources for the Future, Inc., Inter- national Research and Technology Inc. and (from 1979) Carnegie-Mellon University where he was Professor of Engineering and Public Policy. He also worked at the International Institute for Applied Systems Analysis (IIASA) in Laxenburg, Austria (1986-2000). In 1992 he was appointed Sandoz Professor of Environment and Management at INSEAD (a business school) in Fontainebleau, France. Since retiring from INSEAD in 2000 as Emeritus Professor he has lectured widely in Europe and Japan. He is currently Institute Scholar, at IIASA. He has written more than 200 peer-reviewed journal articles or book chapters, written or co-authored 16 books (including one in press), and edited or co-edited 12 books on topics ranging from theoretical physics and thermodynamics to technological change, energy, ecological economics and industrial metabo- lism. He received the Kenneth Boulding Prize of the International Society for Ecological Economics (ISEE) (2002) and the first award for outstanding research of the International Society for Industrial Ecology (ISIE).