Dialogue. Vol. 16 No. 2. August USAEE Mission Statement. United States Association for Energy Economics: An Affiliate of the IAEE.

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1 Dialogue United States Association for Energy Economics: An Affiliate of the IAEE 8 Alex Farrell The Scale and the Investment Potential of the U.S. Energy Efficiency Resource 13 USAEE Mission Statement The United States Association for Energy Economics is a non-profit organization of business, government, academic and other professionals that advances the understanding and application of economics across all facets of energy development and use, including theory, business, public policy and environmental considerations. To this end, the United States Association for Energy Economics: Provides a forum that includes practitioners, teachers and students of energy economics and related disciplines for the exchange of ideas, advancements and professional experiences. Promotes the development and education of energy professionals. Fosters an improved understanding of energy economics and energy related issues by all interested parties. Energy Efficiency Initiatives Begin to Bite Energy Efficiency and Socially Rational Behaviors: The Role for Social Sciences in Bridging the Energy-Efficiency Gap and Accelerating Efficiency Gains Recycling Energy Waste Vol. 16 No. 2 August 2008 Dialogue 1

2 Recycling Energy Waste By Richard Munson* Soaring prices and climate change are spurring policymakers and economists to discuss energy, but they tend to ignore a key fact that the amount of wasted energy is substantial. Even efficiency advocates focus on installing fluorescent light bulbs, buying efficient appliances, and other important supply-side actions, but they overlook the supply side and the enormous potential to increase the efficiency of generating heat and power. Energy waste represents both a problem and an opportunity. It suggests that tackling climate change can enhance economic vitality and greenhouse-gas emissions can be reduced profitably. How pervasive is energy waste? Policymakers and economists do not seem to see it, but ask virtually any school kid to draw a picture of a power plant and you will see something like Homer Simpson s, where the picture is dominated by massive columns of waste heat that are simply vented into the air. The cartoon picture, unfortunately, matches reality, since the average electric generating facility wastes two-thirds of the energy within its burned fuel. Homer Simpson s Power Plant Such waste is the elephant in the room during climate change debates. The average U.S. power plant burns three units of fuel to generate just one unit of power. Despite phenomenal technological advances and a six-fold increase in electricity consumption, generation efficiency has remained stagnant at just 33 percent for the past 50 years, not improving by a single percentage point since Dwight Eisenhower was in the White House. Imagine any other industry burdened with such a dismal record. Such inefficiency is wasteful, it is costly, and it is needlessly forcing climate change. There s certainly no law of physics that requires efficiency to be frozen at 33 percent. Indeed, Thomas Edison s first power plants because he sought to profit by the sale of both power and heat achieved 50-percent efficiency. Denmark over the last couple of decades increased from 33 to 60 percent, and Germany, Japan, and our other international competitors do a far better job of capturing heat from power generation. In fact, the U.S. electric system, because it focuses only on power and throws away the heat associated with electricity generation, was more efficient a century ago than it is today. Just returning to efficiencies that we achieved in the 1920s would save the U.S. some $70 billion annually. Decline of Electric-Sector Efficiency US Electric Industry Fuel-Conversion Efficiency 70% 60% 50% 40% 30% 20% 10% 0% Recovered Energy U.S. Average Electric Only Electric Generation Plant in Craig, CO. Two-thirds of the fuel s energy is vented to the atmosphere. * Richard Munson is Senior Vice President, Recycled Energy Development, 740 Quail Ridge Drive, Westmont, IL 60559, 630/ , dmunson@recycled-energy.com See footnotes at end of text. Source: Adapted from U.S. Department of Energy, Energy Information Administration, 2008) The Efficiency of Edison s Local Generators Thomas Edison believed in competition. Said the inventor, No competition means no invention. 1 He also favored maximizing profits by capturing and selling the power plant s heat as well as its electricity. Rather than waste the thermal energy produced by burning coal, the innovator piped steam to warm the offices of investors and journalists, ensuring he obtained money and media. Samuel Insull, Edison s personal secretary and later chairman of Chicago Edison Company, found competition to be economically wrong, 2 so he created utility monopolies that sold only electricity from centralized power plants that transmitted electrons long distances. Larger and larger generators became the norm as engineers developed boilers that could withstand enormous and increasing amounts of heat and pressure. While ignoring Edison s vision of localized generators that captured the heat associated with power production, Insull and other util- Dialogue 20

3 ity executives increasingly demanded that equipment manufacturers build bigger and bigger units cited far away from the consumers who needed the thermal energy (and who were required to burn additional fuels to power boilers that supplied the heat). Yet the electricity industry changed dramatically in 1967, even if virtually no one noticed, because that year represented the peak in power plant efficiency. No longer would new generating equipment be more efficient than the machinery it replaced. The properties of construction materials had reached their practical limits. Rather than lowering the average cost of electricity, larger stations henceforth would increase it. Economies of scale did not apply any longer for the utility industry. Today s power system in the United States, based on centralized generators that throw away their heat, has become a rickety antique. The average generating plant was built in 1964 using 1950s technology, and more than one fifth of U.S. power plants are more than 50 years old. As noted above, utilities have not improved their delivered efficiency in some 50 years, largely because they continue to vent the heat associated with power generation. Today s high-voltage transmission lines were designed before planners ever imagined that enormous amounts of electricity would be sold across state lines, and, consequently, the wires often are overloaded and subject to blackouts. Much utility equipment, moreover, predates the computer revolution. The basic switches that control the transmission system, for instance, are mechanical, in that they must be opened to break the electrical circuit, and they are excruciatingly slow and unable to manage the flow of electricity. Compared with the speed of light, observes Kurt Yeager of the Galvin Electricity Initiative, those mechanical switches have an equivalent delay factor of about ten days. If I were running a railroad, for example, and I said it took me ten days to open or close a switch, I wouldn t move many trains. 3 The consequences of the system s inefficiencies are little noticed, yet staggering. Two thirds of the fuel burned to generate electricity is wasted, causing Americans to pay for and burn unnecessary fuel. Unreliable supplies ranging from milli-second fluctuates that destroy electronic equipment to the summer-2003 blackout that left 50 million people without power are shocking the nation s high-tech industry and annually cost billions of dollars. Generators also are the nation s largest polluters, spewing tons of mercury, sulfur dioxide, and other contaminants into America s air and waters. Today s dominant utility approach centralized power plants for electricity and separate units for thermal energy to heat or cool buildings might have made sense with state-ofthe-art generation and distribution technologies of the 1950s, but smaller and dispersed electricity systems now provide economic and environmental advantages. Localized power, for instance, avoids or reduces distribution bottlenecks and curtails the need for massive investments in high-voltage and unpopular transmission lines. Some 10 percent of electricity is sacrificed during the typical long-distance transmission process as a result of heat and resistance. During peak hours, the number rises to 20 percent, meaning that congestion-related losses require the construction of extra generators and lines. Such costs would shrink if electricity producers were close to power consumers. Harsh weather, terrorist attacks, and simple accidents have highlighted the vulnerability of the centralized power system with its large power plants and far-flung transmission wires. Smaller, dispersed units, in contrast, provide more security and resilience. To state the obvious, a destroyed micro-generator has smaller impacts than damage to a large reactor or highvoltage line. Distributed generators also can provide the highly reliable and high-quality power demanded increasingly by the array of businesses that cannot afford energy disruptions. On-site units can avoid most power outages and surges that result from problems with the grid, as evidenced by Kodak s on-site generator continuing to operate during the massive blackout in summer Another key benefit of decentralization is financial. Smaller modules present fewer economic risks because they take less time to devise and construct, obtain greater efficiencies, enjoy portability, and face reduced vulnerability to fuel shortages and price volatility. Small generators, which can be built in increments that match a changing electricity demand, allow for more reliable planning. Large units, in contrast, take numerous years to complete, during which time forecasts can alter dramatically, perhaps eliminating or reducing the need for the investment. Big plants also invariably overshoot because they add huge supplies that remain idle until the expected demand catches up. Even fervent advocates of distributed generation do not envision the total abandonment of today s centralized generator or long-distance transmission lines. Their goal is a more equal hybrid of central power and distributed energy. Compared with the present system s virtually total reliance on large plants and long lines, a mixed approach would provide substantial economic, environmental, and security benefits. Climate Change Why should supply-side efficiency be a more prominent part of our climate and energy debates? In part because electricity costs are rising and we cannot afford waste. Another Percent of Total US CO2 Emissions Electric Generation s Increasing Contribution to Domestic CO 2 Emissions 50% 40% 30% 20% 10% 0% Source: U.S. Department of Energy, Energy Information Administration, CO 2 History from 1949, Year Dialogue

4 answer is that electricity generation has become the dominant source of CO 2 emissions, rising from about 12 percent in 1950 to 42 percent today. Factor in thermal energy essentially the heat used at industrial factories, office buildings, and homes and the generation of heat and power accounts for 69 percent of all fossil fuel CO 2 emissions in the United States. Compare that 69 percent to the 19 percent attributed to automobiles, which have been the focus of contentious congressional debates about efficiency standards. Missing from those discussions is the elephant in the room the inefficiency of power and heat generation. Wasted energy can be captured and recycled. At a steel smelter in northwestern Indiana, just across Lake Michigan U.S. Carbon Dioxide Emissions, 2005 Other Transport 12% Cars 19% Thermal 27% Electricity 42% save 916,000 metric tons of CO 2, about the same as removing 166,000 cars from the roads. Of particular importance to the company and the overall economy, the steel mill now enjoys power at 25 percent of average U.S. retail electricity prices, and it is saving almost $100 million annually from reduced energy costs. There are many more examples of profitably reducing greenhouse gas emissions. In Alloy, West Virginia, a silicon manufacturer uses five, 80-year-old furnaces to melt quartz rock in order to produce silicon for computer chips, solar cells, and 1,500 other products. My firm, Recycled Energy Development (RED), is investing $55 million to recycle the furnace heat into 45 megawatts of clean energy. RED will reduce CO 2 emissions by 290,000 metric tons annually, equal to removing nearly 60,000 cars from the road. RED will sell the power back to the factory at a fixed price for the next 25 years, making it the world s lowest cost producer of silicon. The silicon manufacturer will use the savings and extra power to open a sixth furnace and add 30 industrial jobs. Thus, when anyone suggests that tackling climate change will hurt the economy, consider that by recycling waste heat, Alloy, West Virginia, is creating jobs and bringing silicon production back to the United States from China. Source: U.S. Department of Energy, Energy Information Administration, CO2 History from 1949, 2006 from the Chicago skyline, 368 massive ovens bake coal to remove impurities and obtain coke for the adjacent steel smelter. For years, the plant simply vented the oven s heat into the atmosphere. Yet by finally seeing waste as a resource, plant managers now recycle the heat from the coke ovens, as well as from the blast furnace s flares, to generate 220 megawatts of clean electricity (as well as 400 megawatts of clean thermal energy) clean because the energy plant does not burn any additional fuel or emit any additional pollutants. Just to provide some perspective, this single facility supplies more clean power than all the world s grid-connected solar cells and it provides more clean electricity than all the wind turbines in Illinois and Indiana combined. The smelter s plant managers also annually 220 Megawatts from Steel Smelter s Waste Energy 44 Megawatts from Silicon Production Efficiency opportunities, of course, are not limited to industrial factories. A trigeneration plant in Oklahoma City produces 1.2 megawatts of electricity and then captures the resulting heat to provide both steam and chilled water to 26 buildings throughout the downtown. On a national scale, studies for the Department of Energy and the Environmental Protection Agency estimate that such efforts to capture and recycle waste energy would generate 200,000 megawatts of electricity the equivalent of 400 coalfired power plants. 4 Policy Options The opportunity to capture substantial quantities of waste energy, of course, raises the obvious question: why does inefficiency prevail? Dialogue 22

5 Trigeneration in Oklahoma City It is certainly not a lack of technology the equipment to capture and recycle waste energy is available and proven. The key problem is that our energy laws and regulations are outmoded, designed for an era before climate change and rising energy costs were issues. Reforming those rules and regulations will not be easy because policy losers scream louder than winners cheer. Nowhere is the task more difficult than in the climate change debate, where conventional wisdom holds that reducing greenhouse gas emissions will hurt the economy. Yet the steel-smelter and silicon-manufacturing examples demonstrate that we can profitably lower emissions and burn less fuel if we increase the efficiency of converting fossil fuel into useful energy services. The economic and environmental health of our country depends on how fast government modernizes energy regulations to give clean energy a chance. Below are two outside-the-box policy proposals that would reduce carbon dioxide emissions as well as spur economic growth. First, a Clean Energy Standard Offer Program (CESOP) which is being developed by the Tennessee Valley Authority and the Ontario Power Authority would provide clean energy at a discount and unleash private-sector investment in our electric grid, while still protecting utility shareholders. The CESOP is structured to accelerate the deployment of any generation technology that significantly reduces greenhouse gas emissions and saves 15 percent relative to the cost of delivered electricity from the best central generation plant. A CESOP s first step is for regulators to determine the true long-term marginal cost of delivered electricity from the best new, electric-only power plant that meets current environmental standards. Retail suppliers of electricity then would offer long-term contracts to anyone who could supply clean power at just 85 percent of the delivered cost from the best electric-only power plant. Qualifying clean energy plants must achieve at least 60-percent annual fossil efficiency or be non-carbon-emitting power plants such as renewables or nuclear. Distribution utilities would keep their retail customers, fund interconnection facilities to qualified clean-energy plants and earn allowed returns on required capital investments. Qualified CESOP plants would not be considered a major modification to industrial processes under the Clean Air Act, thus removing the threat of losing an operating permit. CESOP would induce the profitable reduction of greenhouse-gas emissions. It would stimulate private-sector investment in cleaner, cheaper heat and power. It also would provide benefits to all stakeholders, including distribution utilities, manufacturers, and all retail customers. Moreover, CESOP would improve U.S. manufacturing competitiveness and preserve or even add industrial jobs. A second proposal offers an alternative approach to the Climate Security Act debated recently in the U.S. Senate. The beauty of the so-called Lieberman-Warner bill is that it sets clear limits on future greenhouse-gas emissions, but then it offered a convoluted series of subsidies totaling $6.7 trillion to support politically-favored technologies or to essentially buy support from the unwilling. Output-based allowances offer a more elegant, practical, and market-oriented approach that could win bipartisan approval, cause rapid private-sector investment in clean energy, and slash both carbon emissions and heat and power costs to the economy. This approach includes three simple steps. First, each producer of electricity and thermal energy would receive initial allowances equal to the average CO 2 emissions per delivered megawatt-hour of power and heat. Second, every plant that generates heat and/or power would be required annually to obtain allowances equal to its CO 2 emissions. Dirty plants would have to purchase extra allowances from clean plants at market prices. Since allowance purchases would equal allowance sales, the economy would feel no increase in the average cost of producing heat and power, government would not be put in the position of picking technology winners, but clean plants would be encouraged while dirty plants discouraged. Third, reduce these allowances every year to insure total emission reductions. Output-based allowances leverage America s innovative and creative spirit. While carbon taxes or allocation auctions let government pick winners and distribute proceeds to selected technologies, output-based allowances encourage all actions that lower greenhouse gas emissions per unit of useful output and penalize above-average pollution per unit of output, thereby unleashing innovation and creativity. 23 Dialogue

6 Output-based allowances are fiscally neutral since dirty generators pay cleaner generators. This market-based exchange encourages heat and power producers to lower greenhouse-gas and other emissions without increasing overall energy costs or draining public coffers. While most approaches to greenhousegas mitigation impose a cost on polluters but provide no incentive to clean energy sources, output-based allowances offer immediate fiscal benefits to everyone who lowers greenhouse-gas emissions. Conclusion If we are to tackle rising energy costs and greenhouse-gas emissions, if we are to give clean energy a chance, the U.S. must: First, recognize that a substantial amount of wasted energy is available for capture and recycling. Second, focus on the elephant in the room tackle supplyside inefficiency by increasing the productivity of heat and power generation. Third, consider climate legislation as an opportunity to spur innovation, create jobs, and enhance economic activity. Footnotes 1 Robert Conot, A Streak of Luck (New York: Seaview Books, 1979) 2 Forrest McDonald, Insull (Chicago: University of Chicago Press, 1962). 3 Personal communication with the author. 4 Owen Bailey and Ernst Worrell, Clean Energy Technologies: A Preliminary Inventory of the Potential for Electricity Generation, Ernest Orlando Lawrence Berkeley National Laboratory, April Bruce Hedman, Energy and Environmental Analysis, Inc., The Role of CHP in the Nation s Energy System, presentation to the U.S. Clean Heat and Power Association, October 3, Do You Want to Start Your Own USAEE Chapter? The requirements for starting a USAEE Chapter are straightforward a viable group forms to create a Chapter and have organized to the point of adopting a set of bylaws as well as have elected a group of officers. A sample set of bylaws may be found by visiting or calling USAEE Headquarters at USAEE dues are $85.00 per person, per year for a subscription to The USAEE Dialogue, The Energy Journal and IAEE Newsletter. Student membership is $ USAEE bills members directly for their membership in the Association. Chapter membership must be open to all individuals whose interest is in the field of energy economics. If you have any further questions regarding the establishment of a USAEE Chapter, please do not hesitate to contact USAEE Headquarters, phone: ; usaee@usaee.org A complete Chapter start-up kit can be mailed to you. Developing & Delivering Affordable Energy in the 21st Century 27th USAEE/IAEE North American Conference Proceedings, Houston, TX, September 16-19,2007 Single Volume $130 - members; $180 - non-members This CD-ROM includes articles on the following topics:. Crude Oil and Petroleum Product Price Dynamics. Economics of the LNG Industry. Energy Efficiency and the Economy. Large-Scale, Low Carbon Energy Technologies. Unconventional Fossil Fuel Resources: Challenges and Opportunities. Political Economy of Energy. Energy Policy and Price Effects on Economic Growth. Impact of International Environmental Agreements on Reducing Carbon Emissions. Global Perspectives on Electric Power Transmission Infrastructure. Distributed Energy Resources & Renewables. Price Impact on Upstream Petroleum Industry Investments Payment must be made in U.S. dollars with checks drawn on U.S. banks. Complete the form below and mail together with your check to: Order Department IAEE Chagrin Blvd., Suite 350 Cleveland, OH 44122, USA Name Address City, State Mail Code and Country Please send me $130 each (member rate) $180 each (nonmember rate). Total Enclosed $ Check must be in U.S. Dialogue 24