GreenHunter BioPower

Biopower Basics

Biopower, or biomass power, is the use of biomass to generate electricity. Biomass is any organic matter which is available on a renewable or recurring basis, including trees, plants and associated residues; plant fiber; animal wastes; industrial waste; and the paper component of municipal solid waste.

Biomass is considered to be a replenishable resource because it can be replaced fairly quickly without permanently depleting the Earth’s natural resources. By comparison, fossil fuels such as natural gas and coal require millions of years of natural processes to be produced. Therefore, mining coal and natural gas depletes the Earth’s resources for thousands of generations. Alternatively, biomass can easily be grown or collected, utilized and replaced.

Energy crops involve a “closed-loop process” in that they are grown specifically for their ability to generate energy. Crops such as switch grass, cottonwood and sugar cane are attractive for fuel. Additionally, these crops are short rotation crops; they regrow after each harvest, allowing multiple harvests without having to replant. Manure from cattle feedlots and dairies can also be put to practical use as a renewable energy source and a biomass plant feedstock.

Moreover, using biomass to create energy has positive environmental implications. Carbon dioxide is a naturally-occurring gas. Plants collect and store carbon dioxide to aid in the photosynthesis process. As plants or other matter decompose, or natural fires occur, CO2 is released. In the past 150 years, the period since the industrial revolution, carbon dioxide levels in the atmosphere have risen from around 150 ppm to 330 ppm, and are expected to double before 2050.

Mesquite Lake Resource Recovery Plant Acquisition

Mesquite Lake Resource Recovery Plant (“Mesquite Lake”), is an 18.5MW waste-to-energy facility located in El Centro, California. This Imperial County facility was originally built in 1989 at a cost of approximately $68 million to process cow manure into power and operated until December 1994, when its Power Purchase Agreement (“PPA”) was repurchased by Southern California Edison. Several modifications were implemented during its operating life to improve plant performance leading to a 95% on-line capacity factor during its last year of operation. Currently, Mesquite Lake is not generating electricity and is in a dormant state.

The facility was acquired by Chateau Energy, Inc. (“Chateau”) in June 2002. After acquiring Mesquite Lake, Chateau explored many options for the dormant facility. Within a twenty mile radius of the plant, there are approximately 400 thousand head of feedlot cattle which produce approximately 4 thousand tons a day of manure. In addition, California has an abundance of wood waste to be disposed of on an annual basis. Wood waste haulers typically dispose of wood waste in landfills or taken to other sources such as a biomass plant. With the increased pressure from the State and EPA on waste generators, the local cattle feedlot industry is now prepared to be an economic supplier of fuel for the plant.

Chateau conducted a series of engineering studies to evaluate the condition of the plant equipment and further studies of the fuel source in an effort to improve manure as a fuel for the process. All of the third party reports appear positive and also provide economical solutions to re-powering the facility using pre-treated cattle manure. We acquired Mesquite Lake from Chateau on May 14, 2007. This project is in the development stage of engineering, budget establishment and procurement of contractors to complete refurbishment. We currently estimate the commencement of operations in late 2009 or early 2010. There are no patents or other intellectual property rights associated with this facility. The business of producing electricity from biomass is not a seasonal business. We are currently working with leading power marketer to enter into a long-term power purchase agreement. In the unlikely event that we cannot enter into a power purchase agreement with a utility, the plant would be able to operate by accessing the merchant market.

Mesquite Lake has a number of key project attributes:

•    Mesquite Lake has executed an interconnect agreement with Imperial Irrigation District.
•    Project proximity to manure sourced from cattle yards in the Imperial Valley is ideal.
•    Project qualifies for the Federal Production Tax Credit.
•    Facility should be able to use multiple biomass fuel sources at a large variance of heat rates.
•    Project will provide base load renewable power as opposed to intermittent power provided by other forms of renewable power projects.

Mesquite Lake infrastructure:

•     The current day replacement costs for an 18.5 MW biomass facility is approximately $2.1 million per MW ($38.85 million). GreenHunter Energy has acquired and is in the process of refurbishing the facility at a cost of $1.1 million per MW ($20.18 million).
•     The electrical infrastructure of the plant is in excellent operational shape.
•     The power generation and distribution infrastructure of the plant is in very good condition with a limited amount of overhaul needed.
•     The original construction cost of plant in 1989 was $68 million.

GreenHunter Energy Strategy for the Mesquite Lake Plant

Our primary business objective is to re-power the facility using existing biomass processing technology into a profitable electricity power plant. We intend to accomplish this by executing the following business strategies:

•     Find an optimal biomass fuel mix that will maximize profitability of the plant.
•     Execute long term supply contracts with local biomass producers.
•     Begin to produce our own biomass, investigate the possibility of planting a certain type of tree that will ultimately make the facility a closed-loop biomass facility.
•     Evaluate the feasibility of building an energy “campus” that includes solar power, wind, a biodiesel refinery and possibly an ethanol plant around the existing site location.

Competitive Strengths

We believe that we are well-positioned to achieve our primary business objectives and to execute our business strategies due to the following competitive strengths:

•     We acquired this asset for $2.8 million. The estimated cost to restart this facility is $15 million, and a total cost (purchase price and a refurbishment) of $17.8 million, which is less than 30% of the original cost dating back to 1989.
•     We have a majority of all the necessary infrastructure in place to begin producing electricity in late 2009 or early 2010.
•     We have a transmission interconnect in place.
•     We estimate our fuel source cost to be 10-25% below industry standard.
•     This power plant is the only one of its kind in the US capable of utilizing 100% cow manure to generate electricity.

The Mesquite Lake biomass plant will require an estimated $15 million to refurbish and begin generating electricity. This project is currently finalizing engineering designs and final regulatory approval. We are currently evaluating utilizing a portion of our credit facility to finance the construction and start up of the Mesquite Lake Resource Recovery Facility.