Sustainable Support for Renewable Energy: an alternative energy perspective

Tom Briggs, VP Policy & Communications, BP Alternative Energy

22

Alternative energy: the market today

Grossed-up estimate based on disclosed deals. New investment only. Source: New Energy Finance

Global new investment in clean energy

20070

25

50

75

100

125

$28.6bn

2004

$54.6bn

2005

$86.5bn

2006

$148.4bn

$b

n

150

3

Principles for transitional incentives

• Goal: “accelerate the deployment of low-carbon power technologies”

• Policy understood to be ‘transitional’ – eventually phased down and replaced with a carbon-based measure

• Policy based around a market mechanism, e.g. tradable certificate system – to seek out lowest-cost solutions and to allow business to optimise across a wider playing field

• Policy provides encouragement tailored to each technology without ‘picking winners’ for favored treatment

4

Priorities to stimulate investment

• Enduring carbon pricing policies eg continuance of CDM, cap and trade in US and EU

• Stability and predictability in transitional incentives - long-term policies – avoiding stop-go syndrome

• Further tailoring of incentives to technologies

• Regulatory support for Grid expansion and development, including

streamlined planning permission.

• Reduce barriers to global trade and investment

5

Historical cost development and learning rates

1

10

100

1 10 100 1,000 10,000 100,000

• Capital cost; 2004 USD/W

• Cumulative capacity installed

• MW

• Solar PV1975 – 2003

• Solar Thermal1985 – 1991

• Wind Power1981 – 2001

− Historical learning rates per doubled cumulative capacity of

− 23% for Solar PV*

− 13% for Wind Power

− 15% for Ethanol

− 6% for PV inverters

− 3% for Solar Thermal

Source:UC Berkeley Energy Resource Group; Navigant consulting

• Ethanol1978 – 1996

• PV inverter

• 1995 – 2002

“By the year 2010 we'll be able to halve generation costs. By 2020 we expect a further reduction – half of 2010 – and by 2030 we expect half the 2020 level.”

Katsuhiko MachidaPresident, Sharp Corp

6

BP Alternative Energy

• In 2008, BP AE will invest $1.5 billion in renewable energy technologies and projects.

• In BP Alternative Energy, ~$800 million has been invested in wind energy projects to date. Two-thirds of the 2008 wind investment spend is in the US

• By end of 2008, we expect to have 1000MW wind capacity installed

0

100

200

300

400

500

600

Wind Thermal Solar Biofuels Venturing Hydrogen DistributedEnergy

S AmericaUSAsia & Middle EastEurope

200

8 in

vestm

en

t sp

en

d (

$m

)

2008 Alternative Energy investment spend by region

7

BP Alternative Energy: where we operate

Investing $1.5bn in 2008

Solar PV facility / market

Wind power

Hydrogen power

Biofuels facility / market

Gas fired power

8

• Texas produces and consumes more electricity than any other state:

− 9.8% share of US total net electricity generation

− 11th in the world in terms of consumption

• Approximately 50% of electricity produced by gas-fired power plants

• Texas is the largest wind energy producer in the US

• 78.5% of Texas’ renewable generation is from wind

Overview of Texas electricity market

50.5%

47.2%

38.0%

0.6% 4.5%7.3%

Petroleum-firedNatural gas-firedCoal-firedNuclearHydroelectricOther renewable

Source: EIA August 2008

Texas electricity generation mix

7.8%10.6%

78.5%

0.5%2.6%

Hydro conventional

Wind

Wood/wood waste

Landfill gas

Biomass

Texas renewable generation mix

9

The growth of wind power in Texas

0100020003000400050006000700080009000

10000

2001 2002 2003 2004 2005 2006 2007 2008 2009est.

Growth of renewable energy capacity in Texas

Capaci

ty (

MW

)

• As a result of incentives and competitive market forces, Texas has seen an explosion in investment in generation facilities, particularly wind.

• As of 1Q 2008, Texas has installed over 5,300 MW of wind capacity – more than any other state.

• ERCOT predicts that as much as 10,000 MW could be operating by spring 2009.

• The growth surge has been driven by:

− high natural gas prices

− excellent wind resources

− relatively few planning permission issues

− viable retail and wholesale markets in which to sell energy

− favourable transmission policies

− Federal tax credits and Texas Renewable Portfolio Standards

10

Transmission plays a key role in promoting the growth of renewable energy

• Within ERCOT, there is no multi-state licensing and permitting that can often delay project development

• No limit to interconnection and a standard interconnection agreement – “plug and play”

• Within ERCOT, all transmission costs are spread among customers within the region

• The PUC is building transmission to the windiest areas in Texas - Competitive Renewable Energy Zones (CREZ)

• The “Wild West of Open Access”

From the perspective of network upgrade needs, there are generally 4 sets of potential CREZs:

COASTAL

PANHANDLE

MCCAMEYAREA

ABILENEAREA

11

Transmission CREZs in Texas

• TX PUC approved Competitive Renewable Energy Zones that will be able to accommodate 18,456 MW of renewable energy by 2017

• PUC selected the lowest cost scenario, estimating total transmission cost at $4.93 bn. Does not include .8 billion in estimated generator connection costs.

• PUC estimated savings of $38 per MWH relative to other scenarios.

• Study found that 23% wind penetration could be managed reliably by ERCOT.

• The impact of the decision is significant: Wind developers have confidence that grid capacity and operations will not be a barrier to development.

12

Conclusion

• TX PUC decision on Grid development provides a useful example of how regulators can support renewable energy.

• However, one reason this approach may work in Texas is due to the relative ease of building transmission lines.

• Approach may not be possible in other jurisdictions.

13

Additional Slides

14

Texas electricity market structure

• Texas spans four regional power grids

• 85% of usage occurring in the Electric Reliability Council Of Texas (ERCOT) grid

• ERCOT lies solely within the state so the production and sale of electricity is not subject to regulation by the FERC

• Market and utility restructuring began in 2001, with implementation of Texas Senate Bill 7

• Transmission, generation and competitive retailers were unbundled into separate market segments

15

Electricity market structure in ERCOT

Generation companies

Transmission & distribution

utility

Retailelectricityproviders

End user

REP

REP

REP

• Market prices subject to ERCOT-ISO and PUC rules

• Regulated by the PUC • Open access

• Unregulated rates

16

Texas wholesale electricity pricing history

2003

2004

2005

2006

2007

$/

MW

h

Average all-in price for electricity in ERCOT

2003-2007

Natu

ral g

as p

rice (

$/M

Mb

tu)

Ancillary servicesUpliftEnergyNatural gas price

Source:2007 State of the market report for the ERCOT wholesale electricity markets

17

The retail electricity market in Texas

• Most Texas residents have a choice in their Retail Electricity Provider (REP)

• There are a proliferation of consumer offerings for all types of customer (industrial, commercial and residential)

• Prior to restructuring, only a fraction of such offerings existed

Some of the REPs serving Houston

18

0

10

20

30

40

50

60

70

80

2008 2012 2016 2020 2024 2028

Transition incentives are needed for new technology

Longer term CO2 price driven by economics of supply and demand, and fiscal regime

*Solar costs reflect combination of rooftop PV and CSP costs, weighted average across regions. Wind cost is onshore weighted average across regions

• Solar

• CO2 price

• $/t

• Year

• Wind

• Carbon price

• Where cost of abatement technology is greater than the carbon price, there is a need for transition incentives to drive investment

• Carbon price “funnel”

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Incentives can accelerate maturity

R&D

Demo.

Commercialisation

Capital-based

Production-based (MWh)

TRANSITIONAL INCENTIVES

CARBON PRICING (CO2 tonnes)

Time

+ tradinge.g. capital grants, inv tax credits

e.g. feed-in-tariffs, prod tax credits

e.g. RO, RPS

Cap-and-trade programs, carbon taxes

H2 power with CCS

Solar PV

Onshore wind

Gas power

Tech Cost

Offshore wind

Deployment

Solar nano

20

Transmission constraints in Texas

• Large distances between wind resources and load centres

• The grid is increasingly congested.

− The PUC is reviewing the move to a nodal marketplace from a zonal one

− New transmission infrastructure is being added

West

South

North

Houston

Northeast

CommerciallySignificantConstraint (CSC)

Zonal market Nodal market