Sustainable Support for Renewable Energy: an alternative energy perspective

1. Sustainable Support for Renewable Energy: an alternative energy perspective Tom Briggs, VP Policy & Communications, BP Alternative Energy

2. Alternative energy: the market today Global new investment in clean energy $148.4bn 150 125 100 $86.5bn 75 $bn $54.6bn 50 $28.6bn 25 0 2004 2005 2006 2007 Grossed-up estimate based on disclosed deals. New investment only. Source: New Energy Finance 2

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 • Capital cost; 2004 USD/W “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 Machida President, Sharp Corp • Ethanol1978 – 1996 • Solar Thermal1985 – 1991 • Solar PV1975 – 2003 • 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 • PV inverter • 1995 – 2002 • Wind Power1981 – 2001 • Cumulative capacity installed • MW Source: UC Berkeley Energy Resource Group; Navigant consulting

6. BP Alternative Energy • In 2008, BP AE will invest $1.5 billion in renewable energy technologies and projects. • In BP Alternative Energy, ~$800 million has been invested in wind energy projects to date. Two-thirds of the 2008 wind investment spend is in the US • By end of 2008, we expect to have 1000MW wind capacity installed 2008 Alternative Energy investment spend by region 2008 investment spend ($m)

7. Solar PV facility / market Wind power Hydrogen power Biofuels facility / market Gas fired power BP Alternative Energy: where we operate Investing $1.5bn in 2008

8. Overview of Texas electricity market Texas electricity generation mix • 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 Texas renewable generation mix Source: EIA August 2008

9. The growth of wind power in Texas • 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. Growth of renewable energy capacity in Texas Capacity (MW) • 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: PANHANDLE ABILENE AREA MCCAMEY AREA COASTAL

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 Retail electricity providers Transmission & distribution utility Generation companies End user REP REP REP • Market prices subject to ERCOT-ISO and PUC rules • Regulated by the PUC • Open access • Unregulated rates

16. Average all-in price for electricity in ERCOT 2003-2007 Ancillary services Uplift Energy Natural gas price $/MWh Natural gas price ($/MMbtu) 2003 2004 2005 2006 2007 Texas wholesale electricity pricing history Source:2007 State of the market report for the ERCOT wholesale electricity markets

17. The retail electricity market in Texas Some of the REPs serving Houston • 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

18. Transition incentives are needed for new technology • Carbon price “funnel” • CO2 price • $/t • Where cost of abatement technology is greater than the carbon price, there is a need for transition incentives to drive investment Longer term CO2 price driven by economics of supply and demand, and fiscal regime • Carbon price • Solar • Wind • Year * Solar costs reflect combination of rooftop PV and CSP costs, weighted average across regions. Wind cost is onshore weighted average across regions

19. Incentives can accelerate maturity TRANSITIONAL INCENTIVES Capital - Production - (CO2 tonnes) CARBON PRICING based based ( MWh ) + trading Cap - and - trade programs, e.g. capital e.g. feed - in - e.g. RO, RPS carbon taxes grants, inv tax tariffs, prod tax credits credits R&D H2 power with CCS Solar nano Solar PV Demo. Offshore wind Deployment Onshore wind Gas power Commercialisation Tech Cost Time

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 Nodal market Zonal market Northeast North West South Houston Commercially Significant Constraint (CSC)