Too Interwoven to Fail?

Seattle Steam CEO Stan Gent sees the future of district-wide energy to be closely intertwined with sustainability.

Against the backdrop of luxury hotels, condos and high-rise
office buildings, the billowing plumes of smoke from Seattle Steam Co.s
hulking industrial plant on Western Avenue seem out of place. But given its
purposeto make steam and hot water for 200 downtown and First Hill
buildingsand the fact that heat is lost the farther it travels from where its
generated, the nearly 100-year-old facility couldnt be in a better location.

From its plants in Pioneer Square on Post Avenue and the
main facility on Western, Seattle Steam delivers hot water and steam through an
18-mile network of high- and low-pressure pipes to customers such as the
Seattle Public Librarys main branch, the Four Seasons hotel, and the Olive 8
condominiums, as well as Swedish, Virginia Mason and Harborview medical
centers. This service eliminates the need for on-site air conditioning systems
and furnaces that must be maintained and take up valuable square footage.

Nor could timing be better to be in the steam business. Even
with the relatively cheap price of natural gas and petroleum relative to
periods in the recent past, building owners are looking to maximize their
energy dollars. With the possibility of state or federal taxes on carbon also
in the offing, energy consumers are bracing for even more belt tightening.

For Seattle Steam, a substantial part of that process began
in April 2008 when construction of a new biomass generator began to replace an
old natural gas-fired boiler. The $30 million unit, which runs primarily on
urban waste wood but can burn natural gas, oil and diesel as well, came online
last fall. Recognizing the inevitability of carbon pricing in the future, the
company is also trying to raise $75 million for a natural gas-powered combined heat and power (CHP)
generator. The plan is to get an $18.75 million grant from the federal stimulus
program, and the company is in talks with an unnamed corporate partner to raise
the rest.

Its really trying to lower the cost of energy while
lowering the carbon, explains CEO Stan Gent of his companys $100 million
investments, which he says are smart business and environmental strategies.

Compared with natural gas, the primary fuel Seattle Steam
has used since it stopped burning coal in the 1950s, wood is cheaper and has a
smaller carbon footprint. The company estimates that converting to wood will
slash its carbon output by 50 percent, or about 45,000 metric tons per year.
According to Gent, living trees remove carbon from the air, so burning waste
wood simply releases its stored carbon, which is different from burning fossil
fuels that add new carbon to the atmosphere.

Not everyone is in agreement about the carbon neutrality of
burning biomass, although there are fewer doubts with respect to burning
reclaimed wood compared with wood from a living tree.

Also environmentally problematic is the fact that water used
for steam heat is then dumped into the city sewers, which puts additional strain
on the system and will boost costs as water prices rise.

Both cost and carbon savings are realized because Seattle
Steam is physically close to its wood. The farther the fuel travels, the higher
its price, and the companys fuel staging center is located within a half-mile
of its three suppliers. A Seattle Steam spokesman says the company has worked
the cost of shipping fuel to its boilers into its overall carbon output, and
has even declined offers from foresters to sell the company wood on the basis
of the distance it would have to travel.

In 2009, Seattle Steam paid Puget Sound Energy $9 million
for natural gas. In January, the mildest on record for Seattle, the PSE bill
was $1.3 million, although part of that savings came from lower natural gas prices.
Gent says the company plans to spend $5 million on wood this year, which he
estimates could add tens of millions of dollars in value to the local economy.

Thats if Seattle Steam gets all the kinks worked out. So
far, it hasnt been easy. When construction on the biomass boiler commenced,
Gent explains, the price of natural gas was three times that of urban reclaimed
wood. The slowdown in the construction industry, which has suppressed gas
prices and made wood more scarce, combined with the areas warm winter has
prevented the company from getting a return on its investment.

Were not getting the benefits that wed hoped for
financially, says Gent, adding Seattle Steam has been paying interest on the
loan secured through the International Brotherhood of Electrical Workers Local
77, of which its hourly workers are members, Washington Capital Management Inc.
and other groups. We think itll work well in the long run but right now with
the economy in a downward spiral still, its not working just yet.

Robert Thornton, president of International District Energy
Association (IDEA), a Westborough, Mass.-based trade group of which Seattle
Steam is a member, agrees. Despite the recession, district-based energy systems
are growing rapidly, he says, adding that one of district energys advantages
is fuel flexibility.

District energy is recognized as a near-term solution for
rapid energy efficiency, Thornton says.

The revenue picture is hazy as many district energy systems,
including Seattle Steam, are privately held, although Thornton describes the
systems as generally profitable. IDEA data from 2005 provide revenue
estimates for three systems: Trigen-Philadelphia Energy Corp., a subsidiary of
French Veolia Energy ($60 million); Indianapolis Citizens Thermal Energy
($40.3 million); and Enwave Energy Corp. in Toronto ($40 million).

Thornton says annual revenues of IDEAs members range from
$10 million to upward of $600 million. Regarding Seattle Steam, Gent simply
offers that as with other utilities, everything the company spends on fuel is
revenue.

Weve been here 115 years, Gent says. Its more of a
social responsibility than a make-a-lot-of-money business. We operate on very
low budgets to keep our costs down. Some years we might make money; some years
we might not.

Indeed, Seattle Steam is among the regions oldest
businesses, tracing its origins to one of the citys early settlers. In fact,
it was the search for a site for the young citys first steam-powered sawmill
that brought Henry Yesler to Seattle in 1852. Yesler, who is credited as
Seattles first millionaire and who also served as mayor, invited his relative
James D. Lowman to serve as trustee for Yeslers property, including his
sawmill. And in 1893, when Seattle Steam and Heat Co. was established in
Pioneer Square, Lowman served as its president.

In the early days, the plant generated electricity and used
coal as its fuel source. In the 1920s, it stopped making electricity. In the
1950s, the company dumped coal in favor of natural gas. Since 1974, the company
has been owned by several trusts in a limited partnership.

Where the wood plant is projected to reduce Seattle Steams
carbon emissions by half, federal climate change legislation calls for an 80
percent reduction in current carbon levels by 2050. Seattle Steam hopes that a
new CHP system, which can generate 50 megawatts of electricity, or about the
load of Seattles central business district, as well as heat for steam, can get
it the rest of the way. Efficiency at a typical electric utility is around 50
percent, but for CHPs, its closer to 80 percent, Gent says.

Before the Department of Energy gives final approval,
Seattle Steam must secure a buyer for the electricity it generates, which most
likely would be Puget Sound Energy. Roger Thompson, a spokesman for the
utility, says the companies have had some discussions, but as of late February
no agreement had been reached.

In general, we are very supportive of renewable energy. We
need to make sure any power supply agreement is cost effective, Thompson says.

Seattle Steam has until June 15, 2010, to get PSE on board.
If the arrangements given a green light, it must be in service by January
2013.

No matter how much money Seattle Steam generates, or fails
to, Gent says his company is too interwoven with the community to fail.

Two hundred buildings and billions of
dollars are tied up in Seattle Steams existence, he says. Its not a
business that can go away easily.