Thomas CastenDR: If every industrial facility in the world has been throwing money on the ground, why has it taken so long for somebody to come along and pick it up? What’s the catch?

TC: EPA did a study and it appears that we can generate 20 percent of our electricity with industrial energy that’s now being thrown away. So we can’t do everything. There is not silver bullet.

DR: That’s not small potatoes.

TC: No. It would require an investment of somewhere north of $100 billion, but it has been identified fairly well.

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To calibrate you, that is about 64,000 megawatts of capacity that could be built. There is about 10,000 MW of that capacity existing. This is not a brand new idea that nobody’s ever tried. 10,000 MW is the equivalent of ten large nuclear plants. There’s quite a lot out there. It’s in the steel business, pulp and paper … but there’s 54,000 MW not done.

Why hasn’t it been done? There are three answers.

First, there are barriers to putting in local generation that have been imposed by the monopoly utilities and their regulators. In order to rapidly electrify a state or country, governments enter into a Faustian bargain. They give utilities a monopoly in perpetuity. In return, they get to regulate rates.


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DR: Those regulators aren’t exactly scrupulously independent.

TC: That’s absolutely true, but the difficult part is more structural than bad regulators. The structural issue is that it rewards capital and not efficiency. The utilities, whether municipal or federal, have a bias in favor of throughput, and they put all kind of rules to block local generation. People have worked on them; those barriers are falling. That’s why this subject is more and more in the news. But there are barriers out there.

The second issue is that these projects are more expensive to build than the great big projects in the middle of nowhere. They create benefits — they avoid the building of that $1400 of transmission; they avoid the pollution of burning more fuel; they avoid a whole bunch of problems — but they are not allowed to capture most of those benefits.

Let’s say the wholesale market is 4 cents an hour. You get 4 cents an hour for a kilowatt hour of power 100 miles east of Seattle; the wholesale market for Jim’s power downtown is also 4 cents. Jim’s power didn’t require transmission lines, but he didn’t get any credit. His power has line losses of 2 percent. The other line has losses of 9 percent. Just doing that math, you would think he ought to get paid a bit more. He doesn’t.

The third is a market blocker. Every polity in the world, with two exceptions, has a law that absolutely forbids private wires to cross public streets. Let’s get back to Jim Young’s plan in downtown Seattle. Lets say his electric plant is 10 megawatts, much more than he needs. It is illegal for him to move that power to the bank across the street. The utility will pay him 4 cents for it wholesale. The power will automatically go across the street — the utility company buys it for 4 and sells it for 12 (again, I’m making up numbers here), even though they didn’t have any line losses.

So there’s three reasons it doesn’t happen. You’ve got barriers to it, you can’t capture the benefits, and you’re not allowed to sell the power for what it’s worth to somebody next to you.

That leaves us with trying to understand, well, why wouldn’t the industrial plant have done it where they can use all the power within their own plants? Typically, the amount of power they’d make is less than they are consuming in their own operations. Primary Energy is making 64 megawatts at the coke plant, but the mill is using 400 megawatts. So why don’t more industrial plants do it?

A couple reasons. First of all, it is capital intensive, and well-managed companies don’t put their capital in non-core areas. The sort of naive notion is that they look at all their opportunities and invest in the top one first, then the next one. Not true — they look at all their core opportunities.

DR: Because of habit, or is this good management?

TC: It is good management. They don’t have the intellectual resources to do recycled power. The worst mistake you can make in business is to say, gee, I’m making good profits, so I’m smarter than everyone else, so I can go do this, that, and a third thing. You stumble and fail in all of them. It’s not a simple slam dunk to do this. There are a lot of skills involved. They’re masterable, but you have to be focused.

A typical industrial corporation that’s well-managed doesn’t do their own payroll. They don’t do their own phone service. They don’t do their own security. They don’t do their own janitorial. They hire somebody that’s good at all that stuff.

DR: Seems like there’s a market there.

TC: I’ve been in that market for 30 years. My colleagues have deployed over $2 billion. When people ask me, "who are your competitors?", I say, "I wish I could tell you." I would not have lasted thirty years except for the passion I have. If you’re going to be in this business, you have to overcome the barriers: you don’t get paid what it’s worth, you can’t run your power across the street, the utility can delay you and delay you and delay you with the interconnect.

But the more important thing is, there is an unusual risk of building this $165 million facility for the coke guy. You depend on him to produce the waste. If he stops making coke, you stop making power. Everybody knows that people fail, they go in and out of business. The banks lending the money get extremely nervous about that, because they know they’ve got no control over it.

DR: They’re not just risking the failure of your business, they’re risking the failure of the business you’re attached to. It’s parasitic.

TC: If there’s one single silver bullet that would put us in compliance with Kyoto: have the government provide a limited guarantee of the capital costs of industrial waste energy recycling facilities. Limited in the sense that it doesn’t trigger if the host ceases to provide the waste energy flow over some defined period of time.

DR: Why is that the silver bullet rather than changing some of these perverse regulations about interconnecting and power transmission?

TC: I love your question. The reason it’s a silver bullet is, it is by far the best for the carbon. I’m making electricity with no fuel. In fact, I may be offsetting some boiler fuel. But there’s two other reasons. All of the [regulatory] barriers I described are at the state level. It’s your state commission that decides on standby fees, on interconnect policies, etc. Even if we had a president with a brain and a sympathetic Congress, they would get into enormous states’ rights issues.

Frankly, the right thing to do is to declare electricity interstate commerce — which it is — and overrule all of these state regs, but that’s very hard to do politically.

Bottom line, why I’m so excited is that I live in this business and have identified — and proven, with some $2 billion worth of capital — that there are a bunch of ways to lower carbon and lower costs. Not lower carbon in a way that doesn’t cost too much, which is about as far as I’ve ever been able to get Al Gore to go. No: make money lowering the carbon.

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