Phase II of Renewable Energy in America

National Policy Conference

November 28-29

Cannon Caucus Room, Washington, DC

American Council On Renewable Energy (ACORE)

Pat Wood:  Hello, I'm Pat Wood.  I'm the session cochair here.  Last year we had the honor of having Vivian Cox from British Petroleum, BP, excuse me, Beyond Petroleum.  Coming from the oil patch myself, I know that the long-term investment that's been done by the large oil and gas companies, the independent oil and gas companies in the world has been a pretty close cabal, but several years ago, one of the big sisters broke away and decided that they would move Beyond Petroleum into the new energy; and that is, of course, BP.  We proudly have today the very next, I think as of next Monday--is that right, Katrina?--as of next Monday the group vice president for BP Alternative Energy, which is basically the COO of the division, Katrina Landis.  Katrina has been with BP a while, most recently as head of supply and trading, now works out of London, but I know you aren't native.  We're proud to have her here and also proud to recognize her company as the diamond sponsor for our WIREC conference in March.  So, please give a warm welcome to Katrina Landis.  <Applause>

Katrina Landis:  Good afternoon, and thank you for the invitation to join your discussion today.  Unfortunately, I don't have an amusing story or a joke to share with you right now, although I will tell you that with a name like Katrina, I've heard every hurricane joke known to man.  So I'd like to start by congratulating ACORE for its work with the U.S. Government to bring the WIREC conference to Washington next year.  We're delighted to support that event as we believe it will provide an interesting opportunity for everybody who's interested in developing clean energy.  This is a new market for me.  As you heard, I'm just into my role.  I'm starting on Monday, but I've been working in this area for the last couple of months.  My early impressions are that this is a tremendous opportunity, a significant challenge, and a large responsibility.  And I'd like to offer you an insight today into how our business is addressing this large responsibility.  How do we decide where to invest?  What have we done so far?  And how are we encouraged by policy makers?  I'd like to say at the start that we realize the urgency of the situation, as Dennis was alluding to earlier.  We've read the IPCC's latest reports with its calls for early investment in low-emission technologies.  We're deeply conscious of rising concerns over energy security.  And that's why we're investing significantly today.  In November of last year, Vivian Cox, the Chief Executive of BP Alternative Energy, spoke to you about our plans.  Since then, we've been building 500 megawatts of wind capacity.  We've announced a major expansion of our solar manufacturing capacity.  We've formed a series of new biofuels ventures.  We've created a bioscience research center, and we're creating a joint venture to develop hydrogen power plants.  So we're serious about developing low-carbon energy as a competitive business.  I'll start with how we've chosen the technologies to focus on.  We recognize that the twin drivers for renewable and alternative energy are energy security and climate change.  This chart from the world resource institute shows how various technologies address these two issues in the U.S. context.  The size of the bubble indicates the volume of energy provided or avoided.  The further up the chart, the greater the reduction in greenhouse gases.  The further to the right, the better for energy security.  The top right quadrant is where technologies are positive for both issues, and as you can see, it's a very busy place.  Now, I realize that those of you in the back may not be able to read the small text in the blue box, so the three key take-aways are that around 50 percent of the supply which abates greenhouse gas emissions also supports greater energy security; 45 percent of the CO2 abatement options are broadly neutral; and only 5 percent represent a trade-off with security, for example, more import of biofuels made from sugar cane.  The greatest benefits come from energy efficiency in buildings and vehicles.  After that, in the power sector, key options are wind, solar PD, nuclear and carbon capture and storage, or CCS.  In transport, advanced biofuels are key.  Corn ethanol scores highly on security but is lower on greenhouse gas reduction.  Cellulosic ethanol, however, is a high score on both axes.  So, what's that meant for BP?  It's meant that we've chosen to scale up our wind and solar businesses.  And given our expertise on the subsurface, we intend to be a leader in carbon capture and sequestration.  We also have investments in natural gas power because gas will be an integral part of the lower carbon landscape of the future.  So one of our primary areas of focus is power.  And we've chosen this for two reasons:  This is where most emissions are generated, around 40 percent of the energy emissions come from power; and secondly, around 65 percent of the capacity needed in 2030 is not yet built, and plans for this new capacity are being decided now.  But transport also matters, and because of the significance of advanced biofuels, we're making several investments in this area as well as blending ethanol and biodiesel for today's market.  A key factor in bringing these technologies to bear is the rate at which costs fall as a result of R&D breakthroughs, economies of scale and learning by doing.  The lesson of history is that while R&D is essential, scaling up is key to reducing cost.  For example, when solar capacity doubles, its costs fall by about a quarter.  Our thinking on policy starts from the point that ultimately we want to be part of a low-carbon sector that is sustainable economically as well as environmentally.  In other words, we don't want to be in a sector that is eternally dependent on subsidies.  This is firstly because in time, a carbon market will be the main spur for innovation.  And secondary, when subsidies dry up, so do the companies that depend on them.  We look forward to a world in which there is an economy-wide carbon price, with the market driving innovation and cost reductions.  The likelihood is that this carbon price will increase as it becomes tougher to reduce carbon emissions.  At some point, the cost of the renewable technologies will become lower than the carbon price.  Until that happens, transitional support is needed, but the key word here is transitional.  The incentives are needed while technologies make progress down the cost curve.  Typically, the R&D phase is encouraged by capital incentives.  Demonstration plants are supported by capital and some production incentives.  The deployment phase is supported by production incentives, and finally, commercial production is supported by a price on carbon.  The options are many and varied.  So it may be useful to look at the ones which have been significant for us in the growth of our business.  An early example was the feed-in tariff and the one hundred thousand roofs program to encourage solar power in Germany.  This has made Germany the largest PV market in the world and helped to drive our own investments.  The tariffs are designed to be transitional.  They decrease by 5 percent a year.  But by lowering the cost, an acceptable return is created and customer demand soars.  Since 2002, Germany's share of the world PV market has grown from 20 percent to nearly 50 percent, from 83 megawatts to around 3,700 megawatts, and BP has achieved a market share of over 5 percent in Germany over that time.  In the U.S., solar investments are encouraged by Federal Investment Tax Credit and, of course, by a variety of state-level programs, including renewable portfolio standards with solar carvats [ph?].  California has become the largest solar market in the U.S. through its ambitious programs and support targeted to consumers.  This framework has encouraged us to offer a BP Solar Home Solution package to consumers at Home Depot stores and elsewhere.  We now have a market share of 15 percent for residential solar systems in the state, and the new 3-billion-dollar California Solar Initiative is accelerating this trend.  It's also encouraging deployment of large systems for commercial sites.  We are working with companies like Wal-Mart, for example, to install 4.3 megawatts of solar power.  In terms of research, the Solar America initiative is new and welcome.  As part of that initiative, we've drawn up a program designed to halve our module costs by 2015.  Other countries have also provided attractive opportunities for investment, including Spain, China and Australia.  The global solar market, while relatively small, is growing at more than 30 percent a year.  And to meet this growing demand, we're rapidly expanding our manufacturing capacity.  This includes a 97-million-dollar expansion of our plant at Frederick, Maryland, already the largest fully-integrated solar facility in North America.  We're also expanding production in our plants in Madrid and Bangalore, and we're on track to meet our commitment to grow to 700 megawatts over the next few years.  Turning to wind, when we launched Alternative Energy in November of 2005, we had just 30 megawatts of wind capacity, two farms in the Netherlands and one small project in the UK.  Two years later, we have one of the largest development portfolios in the U.S. with around 15,000 megawatts of potential generating capacity.  By the end of this year, we will have over 500 megawatts of capacity either built or under construction, able to generate enough clean electricity for around 150,000 American homes.  By the end of next year, we expect our capacity to have grown to over 1,000 megawatts.  At Cedar Creek, Colorado, we're building one of America's largest wind farms at 300 megawatts with our partners Babcock and Brown.  We've been encouraged to do this amount of investment in the wind sector by state-level RPSs and, of course, by the production tax credit.  Naturally, we all know that there are still practical barriers to growth, not least the pace at which new transmission lines are installed.  We've also now built our first wind project in Asia.  This is a 40-megawatt project in northern Maharashtra, India, constructed by our partner, SUSLA [ph?].  This has been encouraged by the Kyoto Treaty's Clean Development Mechanism or CDM.  We're hoping that we will soon get the final approval for the project's emissions reductions to be certified under the CDM.  In some markets such as the EEU, support for onshore wind is declining somewhat compared to support for offshore projects.  Offshore wind has great potential but substantial capital cost.  At the moment, there's a lot of attention on Germany and its feed-in tariffs for wind.  We're hoping that the tariffs for offshore projects built after 2010 will be set at a level which gives operators confidence to invest.  Biofuels have been supported in North America and Europe by quota systems that require a certain portion of the fuel pool to be composed of biocomponents.  BP has become one of the largest blenders of biofuels in the world with around 10 percent of global supply in 2006.  However, as we know, today's biofuels, while beneficial, can only go so far because of their potential impact on the food industry as well as the pressure they put on water and land.  So our aim is to supply today's demand while working hard to develop more advanced biofuels.  This is why we're building a butanol demonstration plant with DuPont, and it's why we're investing 500 million dollars over 10 years in an energy biosciences institute which will investigate advanced biofuels and other applications of biotechnology to energy.  Looking very briefly at hydrogen and CCS, this year we've formed a joint venture called Hydrogen Energy with Rio Tinto to evaluate such projects.  One of the plans being examined is for a plant in California.  Here the policies are less mature, and of course, the technology is yet to be demonstrated at scale in combination with the power plant.  So it's a case of business leading the way with plans and working with policy makers to design the right framework.  So the global picture or BP is developing fast, and the biggest strategic decision we've made was to bring all of these low-carbon businesses together at BP Alternative Energy, creating a critical mass of capability and resource.  This business plans to invest at least 8 billion dollars over a decade in low-carbon energy.  So based on this experience so far, what distinguishes the really effective transitional incentive policies?  First, as I said earlier, they are transitional in nature.  Secondly, where possible, they're market based.  They encourage competition to drive down cost, increase efficiency, and stimulate innovation, and they're tailored to the maturity of each technology, providing appropriate support for each.  And incidentally, since incentives are designed to reduce cost, perhaps it would be logical to structure policy in a way that specifically rewards success in doing so.  So let me close by looking at some of the priorities that we believe would accelerate investment in the near future.  We are supporters of market mechanisms, and we would like to see these developed.  In Europe, the task is to make the emissions trading scheme really effective.  We would like to see a cap and trade system implemented here in the U.S. as well.  Ultimately, the vision must be to establish a global carbon market.  For such progress to take place, market systems need to be enduring.  It's hard to make a business case on a CDM project, for example, if you cannot estimate a rate of return beyond 2012 when Kyoto expires.  In terms of transitional incentives, the major priority is predictability.  Stop-go policies stunt investment and tend to drive cost up rather than down.  In the U.S., for example, the PTCs have expired and been renewed three times producing corresponding surges and falls in investments.  We also support further tailoring incentives to specific technologies, providing support that addresses the particular issues of each technology.  In the U.S., we support a Federal RPS because it would provide greater energy security, more sustainability, and extra employment.  It is also a good mechanism for rewarding efficiency in particular technology areas as it offers tradable certificates.  Finally, the obvious point, scale matters.  The effective policies have been the ambitious ones: Japan's support for solar, Germany's feed-in tariffs, Texas's wind deployment, California's solar programs.  A concluding thought, this is all about time scales.  It's about reconciling investment life cycles of 50 or more years with political time scales of four or five years.  I think the key factor is the degree to which concern about the future translates into demand for change today.  The more people that share the sense of urgency, the more the demand for change.  That's why we're sharing the facts about climate change and low-carbon power with our customers through mechanisms like our educational programs.  We believe change is on its way.  We're building our low-carbon business rapidly, and we look forward to working with you as the journey continues.  Thank you.  <Applause>