1. Tom Briggs, VP Policy & Communications, BP Alternative Energy
Sustainable Support for Renewable Energy: an alternative energy perspective
TCB Role at BP AE:
Advise BP and AE on investment decisions in alternative energy technologies, projects and services
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
The energy industry faces a difficult balancing act – how to meet growing customer demands for convenient and accessible energy – in the developed and developing world - while simultaneously addressing concerns about climate change and the security of their energy supply.
Primary energy = coal, oil, gas, nuclear, hydro, biomass and other renewables
Fastest growing sector of the global energy market.
Investment now exceeds $100bn p.a.
With such growth brings opportunity for AE, however this market has also attracted many new dynamic competitors all vying to participate in this growth opportunity. 25
2004
2005
2006
2007
Grossed-up estimate based on disclosed deals. New investment only.
Source: New Energy Finance 2 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
Our thinking on policy starts from the point that we ultimately 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 secondly, because when subsidies dry up, so do the companies that depend on them.
We look forward to 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 costs of renewable technologies will become lower than the carbon price.
Until that happens, transitional support is needed – but the key word is ‘transitional’.

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; 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
Ethanol 1978 – 1996
Solar Thermal 1985 – 1991
Solar PV 1975 – 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 Power 1981 – 2001
Cumulative capacity installed MW
Source: UC Berkeley Energy Resource Group; Navigant consulting

6. 2008 Alternative Energy investment
BP Alternative Energy
In 2008, BP AE will invest $1.5 billion in renewable energy technologies and projects.
In BP Alternative Energy, ~$800 million has been invested in wind energy projects to date. Two-thirds of the 2008 wind investment spend is in the US
By end of 2008, we expect to have 1000MW wind capacity installed
2008 Alternative Energy investment
spend by region
We have one of the largest development portfolios in the US, with around 15,000 megawatts of potential generating capacity. By the end of 2008 we expect our global wind capacity to have grown to 1,000 megawatts.
2008 investment spend ($m)

7. BP Alternative Energy: where we operate
Solar PV facility / market
Wind power
Hydrogen power
Biofuels facility / market
Gas fired power
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
ERCOT predicts that as much as 10,000 MW could be operating by spring This would surpass the legislative Renewable Portfolio Standard (RPS) mandate, which requires 2,000 MW of new renewable capacity by In August 2005, Texas’ Governor Rick Perry signed a bill increasing the amount of renewable generation required in the state. The law requires that 5,880 MW of new renewable generation be built in the state by 2015, which will meet about 5% of the state’s projected electricity demand. The legislation also sets a cumulative target of installing 10,000 MW of renewable generation capacity by In an effort to diversify the state’s renewable generation portfolio, the measure also includes a requirement that the state must meet 500 MW of the 2025 target with non-wind renewable generation. Texas is expected to avoid 3.3 m tonnes of CO2 emissions annually with its Renewable Portfolio Standard (RPS).
As for other forms of renewable energy, Texas has also added generation from biomass to its fuel mix (20 MW of new biomass and 67 MW of new landfill gas capacity having been installed since 1999)
Relatively few siting issues due to low population density in West Texas

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
Within ERCOT, no multi-state licensing and permitting that can often delay project development: Wind in particular has flourished in ERCOT because a wind developer doesn’t need to win a request for proposal (RFP) for a handful of MWs to get sufficient return on investment. The wind developer can register as a power developer company at the PUC, get quick approval for interconnection on the transmission grid relative to other markets within the US, can build without a purchase power agreement and arrange a multi-year offtake agreement for the power and renewable energy credits with a wholesale or retail marketer.
Within ERCOT, all transmission costs are spread among all customers within the region. This policy has made Texas an attractive place to develop new generation as developers do not face uncertain costs in addition to the capex of a new project. All transmission costs are paid for by all the load and not just the local load
The PUC’s commitment to building the necessary transmission infrastructure where it’s most needed (CREZ). The most significant barrier to wind energy development in the Texas Panhandle and parts of West Texas was the lack of adequate transmission. Texas has adopted proactive transmission planning as part of legislative strategy. Competitive Renewable Energy Zones (CREZ) is a mechanism to get transmission out to prime wind energy areas before wind projects have even been developed. As manager of the state’s largest power grid, ERCOT was designated to collect wind data and nominate a number of CREZs based on transmission cost calculations for each CREZ. Following the report by ERCOT, in July 2007, the PUC designated 8 areas as CREZs, which were then combined into five zones. The PUC’s interim final order outlines four scenarios for building transmission from 10,000 MW to 22,086 MW, depending on cost and the number of wind farms that are built.
The estimated cost of building new transmission lines to transport wind generated from West and Northwest Texas to urban areas will cost about $1.5m/mile. ERCOT has identified $3 billion of transmission improvement needed over the next 5 years
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.
Congestion occurs when insufficient transmission capacity exists to allow the lowest cost provider of electricity to deliver power to customers.
When the transmission grid becomes congested, ERCOT maintains the reliability of the grid by instructing power plants to change their output levels in order to route power around the congestion.
Under current market rules, ERCOT manages congestion in two ways. For the main congested transmission lines, the market is segmented into ‘zones’. Market participants who schedule between these zones bear the costs of relieving any congestion that emerges. ERCOT operates markets where generators bid to increase or decrease their output based on the needs of the system.
Within these zones, ERCOT employs command and control mechanisms to order generators to increase or decrease their output, with the cost of relieving this local congestion being shared among all market participants.
A shortcoming of this system is that price signals do not exist for generators to respond to and operate in ways that prevent congestion from occurring (because the costs of local congestion are spread among all market participants, irrespective of whether their actions contribute to congestion). Likewise, there are insufficient signals to inform ERCOT as to the most effective way to relieve congestion.
As a result, ERCOT is transitioning to a nodal marketplace by ensuring the lowest cost of dispatch of generation units, while cost-effectively managing congestion.
New transmission infrastructure is being added: ERCOT conducts an ongoing transmission planning process to identify the grid’s needed upgrades. ERCOT annually reports their findings to the PUC, which ultimately approves the new tranmission lines and their routes. Since 2005, over 2,500 circuit miles of new transmission has been addded to the ERCOT power region’s transmission grid, far outpacing investment in any other part of the US.

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
The names of the other grids are:
SPP: Southwest Power Pool
SERC: Southeastern Electricity Reliability Council
WSCC: Western Systems Coordinating Council
ERCOT manages the flow of electric power to approximately 20 million homes
While FERC does have jurisdiction over reliability standards and enforcement, the existence of a single economic regulator (the PUC) places Texas in a unique position.
the FERC has jurisdiction, including enforcement authority, over the wholesale electric market and transmission in all areas of the US, except in ERCOT
The PUC has jurisdiction, including enforcement authority, over both wholesale and retail electric markets in ERCOT, and rate regulation in out-of-ERCOT areas within Texas

15. Electricity market structure in ERCOT
Transmission
& distribution
utility
Retail
electricity
providers
Generation
companies
End user
REP
REP
REP
In ERCOT, the power generation and retail electricity sectors are unregulated with prices determined by forces of competition
New transmission investment is moved forward quickly primarily because of known cost recovery by the utilities and a strong policy stance by regulators and the Texas Legislature.
Generation companies that are not affiliated with transmission and distribution utilities are permitted to construct and operate new generation facilities and have access to transmission lines in the state to permit them to deliver their power to wholesale customers.
The transmission and distribution sector remains fully regulated by the PUC, with rates set on a cost-of-service basis and open access guaranteed to all buyers and sellers of electricity. Some of the largest TDUs are Oncor, Centerpoint and AEP.
ERCOT has had aggressive construction of new transmission lines because the Texas Legislature and the PUC have taken the strong policy stance that transmission lines in ERCOT are a public good.
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
$/MWh
Average all-in price for electricity in ERCOT
Natural gas price ($/MMbtu)
Ancillary services
Uplift
Energy
Natural gas price
Natural gas price fluctuations are the dominant factor driving electricity prices in the ERCOT wholesale market
As can be seen from the graph, natural gas prices increased in 2005 by an average of more than 41% from 2004 levels while the all-in-price for electricity increased by 63%.
In 2006, the natural gas price dropped by an average of 20% from 2005 levels and the all-in-price for electricity decreased by 23%.
In 2007, the natural gas price increased by an average of 4% from 2006 levels and the all-in price for electricity increased by 0.5%.
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. 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
Carbon price
Longer term CO2 price driven by economics of supply and demand, and fiscal regime
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 -
CARBON PRICING
(CO2 tonnes)
based
based (
MWh ) +
trading
Cap -
and -
trade
e.g. capital
programs,
e.g. feed - in -
e.g. RO, RPS
grants, inv tax
carbon taxes
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
Zonal market
Nodal market
Northeast
North
Congestion occurs when insufficient transmission capacity exists to allow the lowest cost provider of electricity to deliver power to customers.
When the transmission grid becomes congested, ERCOT maintains the reliability of the grid by instructing power plants to change their output levels in order to route power around the congestion.
Under current market rules, ERCOT manages congestion in two ways. For the main congested transmission lines, the market is segmented into ‘zones’. Market participants who schedule between these zones bear the costs of relieving any congestion that emerges. ERCOT operates markets where generators bid to increase or decrease their output based on the needs of the system.
Within these zones, ERCOT employs command and control mechanisms to order generators to increase or decrease their output, with the cost of relieving this local congestion being shared among all market participants.
A shortcoming of this system is that price signals do not exist for generators to respond to and operate in ways that prevent congestion from occurring (because the costs of local congestion are spread among all market participants, irrespective of whether their actions contribute to congestion). Likewise, there are insufficient signals to inform ERCOT as to the most effective way to relieve congestion.
As a result, ERCOT is transitioning to a nodal marketplace by ensuring the lowest cost of dispatch of generation units, while cost-effectively managing congestion.
New transmission infrastructure is being added: ERCOT conducts an ongoing transmission planning process to identify the grid’s needed upgrades. ERCOT annually reports their findings to the PUC, which ultimately approves the new tranmission lines and their routes. Since 2005, over 2,500 circuit miles of new transmission has been addded to the ERCOT power region’s transmission grid, far outpacing investment in any other part of the US.
West
South
Houston
Commercially
Significant
Constraint (CSC)