The Outlook for Renewables and BP Alternative Energy
Speaker: Dominic Emery
Speech date: 11 March 2011
Venue: Imperial College Business School
Speech date: 11 March 2011
Venue: Imperial College Business School
Thank you for inviting me to participate in this series of events on behalf of BP Alternative Energy. We are delighted to take part, and we welcome the opportunity to share our views on the alternative energy market and explain why we have invested as we have.
Over the next 45 minutes or so, I want to cover two main areas:
We are taking the lessons deep into the fabric of the organization and I think is right to say that there is no part of BP that is unaffected. This experience has had a profound and transformative effect on us. As a result we have three priorities. The first is to put safety and risk management at the heart of everything we do. The second is to earn back the trust of governments, shareholders, staff and society. And with safety and trust as foundations, the third priority is to build value for the long term.
Over the next 45 minutes or so, I want to cover two main areas:
- The first part is about context. I’m going to share with you our analysis of the current global energy picture and our expectations for the future of energy up to 2030 - that includes the state of the clean tech market;
- The second part is about our Alternative Energy strategy – where are we investing and why? And here I will cover our biofuels businesses; our commitment to low carbon power (principally from wind and solar); and our venturing arm – a fund originally set up in 2006 that invests in a range of innovative, high-potential clean energy technologies.
We are taking the lessons deep into the fabric of the organization and I think is right to say that there is no part of BP that is unaffected. This experience has had a profound and transformative effect on us. As a result we have three priorities. The first is to put safety and risk management at the heart of everything we do. The second is to earn back the trust of governments, shareholders, staff and society. And with safety and trust as foundations, the third priority is to build value for the long term.
As a consequence of the accident and the clear-up exercise, we have made fundamental organizational changes, including setting up a new safety and operational risk function which has around 500 professionals deployed in BP’s businesses to guide, advise and if necessary intervene.
In addition, we have restructured our upstream segment and introduced a new performance management system which will link reward explicitly to safety, risk management, compliance, teamwork and other key factors. We’re also reviewing the way we manage our contractors.
In terms of value creation going forward, the accent is very strongly on the long term. One interesting effect of what has happened is that our shareholders are giving us the time and space to focus on getting these fundamentals right. Rather than concentrating primarily on this year’s production and earnings, they’re giving us the space to work on the important factors that drive delivery over several years – safety, capability, relationships, technology. We believe that we can get these right while we have the opportunity then the results will follow.
In addition, we have restructured our upstream segment and introduced a new performance management system which will link reward explicitly to safety, risk management, compliance, teamwork and other key factors. We’re also reviewing the way we manage our contractors.
In terms of value creation going forward, the accent is very strongly on the long term. One interesting effect of what has happened is that our shareholders are giving us the time and space to focus on getting these fundamentals right. Rather than concentrating primarily on this year’s production and earnings, they’re giving us the space to work on the important factors that drive delivery over several years – safety, capability, relationships, technology. We believe that we can get these right while we have the opportunity then the results will follow.
This is a rare opportunity and it comes at theright time – a time when we are making investments that play to our core strengths and are intended to bear fruit over the long term.
These investments include a portfolio of long term upstream exploration and production projects. They include major new investments and partnerships in the emerging economies – particularly the so-called BRICS. And of course they include our long term investments in renewable and low-carbon energy.
And our cumulative investment of over £5 billion in this area to date, demonstrates that we are convinced renewable energy sources will form a critical income stream for our business in the long-term.
Before I get into the data, I want to briefly mention a few background factors that we always have in mind. These are like ground rules for our strategic thinking. You probably also take account of these but I think it just helps to articulate them.
First, diversity and technology. Clearly if there is to be a more sustainable future then the energy mix has to change. We agree with the IEA and other authorities that the future mix will still be a broad one, with a major role for fossil fuels alongside greater efficiency and greater use of low carbon energy. Technology has a key role to play – both in developing new energy solutions and improving efficiency in conventional operations.
Efficiency is potentially the route towards the greatest emissions reductions. It’s estimated that only 10% of primary energy supply actually ends up as motion, heat and light. So energy efficiency is still potentially the biggest ‘win’ of all.
Consumption patterns are critical to this. If we can reduce consumer demand we can make energy go further. We believe governments must lead the way by incentivizing consumers to become ‘energy aware’. There is a major time factor.
These investments include a portfolio of long term upstream exploration and production projects. They include major new investments and partnerships in the emerging economies – particularly the so-called BRICS. And of course they include our long term investments in renewable and low-carbon energy.
And our cumulative investment of over £5 billion in this area to date, demonstrates that we are convinced renewable energy sources will form a critical income stream for our business in the long-term.
Before I get into the data, I want to briefly mention a few background factors that we always have in mind. These are like ground rules for our strategic thinking. You probably also take account of these but I think it just helps to articulate them.
First, diversity and technology. Clearly if there is to be a more sustainable future then the energy mix has to change. We agree with the IEA and other authorities that the future mix will still be a broad one, with a major role for fossil fuels alongside greater efficiency and greater use of low carbon energy. Technology has a key role to play – both in developing new energy solutions and improving efficiency in conventional operations.
Efficiency is potentially the route towards the greatest emissions reductions. It’s estimated that only 10% of primary energy supply actually ends up as motion, heat and light. So energy efficiency is still potentially the biggest ‘win’ of all.
Consumption patterns are critical to this. If we can reduce consumer demand we can make energy go further. We believe governments must lead the way by incentivizing consumers to become ‘energy aware’. There is a major time factor.
The energy industry is characterized by a large installed asset base and infrastructure with asset lives measured in decades. Most of this is currently based on fossil fuel production, with commercially produced renewable energy other than hydropower making up only 1% of total energy consumption, so transformation to a sustainable energy future will take many decades.
Finally, and fundamentally for the investment community, Government support for emerging low-carbon technologies has a decisive role to play. This is the way that low carbon options become commercial ones.
So having acknowledged that background, let us take a look at some projected trends in population, energy and GDP. These charts and numbers come from BP’s Energy Outlook 2030. This is a document that we use for internal planning and which we update every year. However, this year we decided to publish our conclusions for the first time as a contribution to the debate on the future of energy. <>br>
These summary charts show how over the last 20 years global population has increased by 1.6 billion people and is projected to rise by a further 1.4 billion over the next two decades. Global income has risen by 87% over the same period and is expected to rise 100% by 2030. And of course primary energy demand is also expected to rise – by up to 40%.
At this point I want to make it clear that this projection is taken from what we call our ‘base case’ scenario. This constitutes an assessment of the world energy path most likely to unfold from today’s vantage point – ‘to the best of our knowledge’. It is based on patterns of demand and supply as well as judgments on policy, technology and economic development that themselves are based on extensive consultation. It does involve a significant rise in greenhouse gas emissions, but it is a projection rather than a proposition. It is what we dispassionately think is most likely to happen, not what we want to happen.
Finally, and fundamentally for the investment community, Government support for emerging low-carbon technologies has a decisive role to play. This is the way that low carbon options become commercial ones.
So having acknowledged that background, let us take a look at some projected trends in population, energy and GDP. These charts and numbers come from BP’s Energy Outlook 2030. This is a document that we use for internal planning and which we update every year. However, this year we decided to publish our conclusions for the first time as a contribution to the debate on the future of energy. <>br>
These summary charts show how over the last 20 years global population has increased by 1.6 billion people and is projected to rise by a further 1.4 billion over the next two decades. Global income has risen by 87% over the same period and is expected to rise 100% by 2030. And of course primary energy demand is also expected to rise – by up to 40%.
At this point I want to make it clear that this projection is taken from what we call our ‘base case’ scenario. This constitutes an assessment of the world energy path most likely to unfold from today’s vantage point – ‘to the best of our knowledge’. It is based on patterns of demand and supply as well as judgments on policy, technology and economic development that themselves are based on extensive consultation. It does involve a significant rise in greenhouse gas emissions, but it is a projection rather than a proposition. It is what we dispassionately think is most likely to happen, not what we want to happen.
The bars here show the contrast between OECD countries and the rest. It’s noticeable that while non-OECD countries have outnumbered the OECD in population, they have only just overtaken OECD economies in total energy consumption. And they are expected to overtake the traditional industrialized economies in GDP terms during the decade ahead.
The challenge is clear – a growing world population and growing income leads to growing energy demand. Meeting that demand raises questions about secure access to energy and its environmental impact.
These charts focus on the base case, showing first how non OECD countries dominate demand growth in the next two decades.
In the scenario we regard as most likely, non-OECD energy consumption is set to grow 2.6% a year compared to OECD growth of 0.3%. Non OECD growth is expected to account for an amazing 93% of global energy growth over the next two decades.
Energy efficiency is playing a role here in the OECD world, helping to keep demand close to flat while non OECD demand soars upwards.
Energy intensity (the amount of energy required per unit of income) is set to improve at an accelerating rate, largely as a result of expected policy interventions to promote energy efficiency.
As the second graphic here shows, energy sources are set to diversify over the next 20 years, with non-fossil fuels (nuclear, hydro and renewables) becoming the biggest source of growth for the first time ever We see oil suffering a long run decline in market share, while gas gains. We expect coal’s gains (made as India and China industrialize) to be reversed by 2030.
The challenge is clear – a growing world population and growing income leads to growing energy demand. Meeting that demand raises questions about secure access to energy and its environmental impact.
These charts focus on the base case, showing first how non OECD countries dominate demand growth in the next two decades.
In the scenario we regard as most likely, non-OECD energy consumption is set to grow 2.6% a year compared to OECD growth of 0.3%. Non OECD growth is expected to account for an amazing 93% of global energy growth over the next two decades.
Energy efficiency is playing a role here in the OECD world, helping to keep demand close to flat while non OECD demand soars upwards.
Energy intensity (the amount of energy required per unit of income) is set to improve at an accelerating rate, largely as a result of expected policy interventions to promote energy efficiency.
As the second graphic here shows, energy sources are set to diversify over the next 20 years, with non-fossil fuels (nuclear, hydro and renewables) becoming the biggest source of growth for the first time ever We see oil suffering a long run decline in market share, while gas gains. We expect coal’s gains (made as India and China industrialize) to be reversed by 2030.
Renewables, including biofuels, are projected to account for 18% of the growth in energy to 2030 – compared to 5% of the growth since 1990 - and the rate at which renewables penetrate the global energy market is similar to the emergence of nuclear power in the 1970s and 1980s.
The projected shift from higher to lower carbon energy is driven in large part by the anticipated trend of increasing policy support.
So even in our base case – what we see as the most likely outcome - we see a change in the fuel mix that projects a strong future for renewables, gas and nuclear.
Wind, solar, biofuels and other renewables all look set to grow their share in primary energy, from less than 2% now to over 6% by 2030. The same is true of nuclear and hydropower.
The use of renewable energy will grow strongly – we believe at around 8.2% per year to 2030 which is almost four times the 2010 level by 2030.
The projected shift from higher to lower carbon energy is driven in large part by the anticipated trend of increasing policy support.
So even in our base case – what we see as the most likely outcome - we see a change in the fuel mix that projects a strong future for renewables, gas and nuclear.
Wind, solar, biofuels and other renewables all look set to grow their share in primary energy, from less than 2% now to over 6% by 2030. The same is true of nuclear and hydropower.
The use of renewable energy will grow strongly – we believe at around 8.2% per year to 2030 which is almost four times the 2010 level by 2030.
But despite this shift in the energy mix, there is still a growing gap between where many people among policy-makers, business people and civil society want to be – in terms of collective policy aspirations – and where we are – in terms of individual decisions guided by self interest within the framework of current policies.
So we have separately set out what we call a ‘policy case’ which assesses the potential impact of more aggressive policies on climate change.
As you can see this would involve bearing down more heavily on greenhouse gas emissions with the result that the world uses a lot less coal and a more renewable and nuclear energy.
So we have separately set out what we call a ‘policy case’ which assesses the potential impact of more aggressive policies on climate change.
As you can see this would involve bearing down more heavily on greenhouse gas emissions with the result that the world uses a lot less coal and a more renewable and nuclear energy.
So what are the prospects for the policy case, or something like it, becoming a reality – bringing with it increased demand for renewables and clean technology?
This diagram needs little explanation – we all recognize the ‘drivers’ for change: increasing population, urbanization, commodity crunches and pressure on natural resources as industrialization progresses, the ever-present threat of climate change, changing social attitudes to carbon, security of energy supply…
Together these forces put pressure on the energy ‘status quo’. The argument for transitioning to a sustainable low-carbon economy is compelling – particularly if new technology can fulfil its potential to produce commercially viable alternatives to higher carbon energy…
That’s the theory – but in practice it all depends on the price that society – led by governments – is willing to pay for the higher costs of renewables.
Unfortunately, these imperatives are often challenged by an economic force majeure in times of recession or recovery. And currently – especially in OECD economies – support for low-carbon investment is faltering.
This diagram needs little explanation – we all recognize the ‘drivers’ for change: increasing population, urbanization, commodity crunches and pressure on natural resources as industrialization progresses, the ever-present threat of climate change, changing social attitudes to carbon, security of energy supply…
Together these forces put pressure on the energy ‘status quo’. The argument for transitioning to a sustainable low-carbon economy is compelling – particularly if new technology can fulfil its potential to produce commercially viable alternatives to higher carbon energy…
That’s the theory – but in practice it all depends on the price that society – led by governments – is willing to pay for the higher costs of renewables.
Unfortunately, these imperatives are often challenged by an economic force majeure in times of recession or recovery. And currently – especially in OECD economies – support for low-carbon investment is faltering.
Essentially there are two ways governments can support the move to a lower carbon economy. They can institute a price for carbon which incentivizes both the saving of energy and switching to lower carbon energy now. And they can provide transitional incentives to help commercialize emerging technologies with the potential to reduce carbon at scale – with the help of the carbon price – in the future. Such incentives can take the form of subsidies, mandates and regulations. They need to be transparent, long-lived and clear – or ‘TLC’ – but in our view they should also be offered only at a level necessary to deliver improvements in technology cost and performance.
Currently progress towards carbon pricing – which has been slow anyway – has faltered in some key parts of the world, especially the US. And governments, particularly OECD ones, are also questioning or already cutting back on their transitional incentive policies as part of austerity packages introduced to cut the debt mountains amassed during the effort to tackle the credit crunch and recession.
The phasing out of transitional incentives for commercialization should be the long-term goal. But reducing them prematurely because of budget constraints risks undermining the benefits they have already delivered and slowing progress to their commercialization in the future.
We are seeing ongoing uncertainty over solar feed in tariffs, notably in Spain and the threat of retroactive action.
Currently progress towards carbon pricing – which has been slow anyway – has faltered in some key parts of the world, especially the US. And governments, particularly OECD ones, are also questioning or already cutting back on their transitional incentive policies as part of austerity packages introduced to cut the debt mountains amassed during the effort to tackle the credit crunch and recession.
The phasing out of transitional incentives for commercialization should be the long-term goal. But reducing them prematurely because of budget constraints risks undermining the benefits they have already delivered and slowing progress to their commercialization in the future.
We are seeing ongoing uncertainty over solar feed in tariffs, notably in Spain and the threat of retroactive action.
In US wind, we are seeing ongoing uncertainty over the renewal of production tax credits and we are urging the government to maintain this transitional incentive for longer - otherwise we will see dramatic reductions in wind farm construction.
Interestingly biofuels remain an attractive investment with policies that have so far mainly remained resilient. They will remain in strong demand to 2020 because governments in many countries have established targets and mandates and we see no weakening of these.
Energy efficiency is also an interesting area because capital invested in using energy better delivers gains in terms of both economics and the environment for perpetuity. Given the economic climate it may be that policy should place more emphasis on efficiency measures so that they really take off – and we’ll mention later that BP itself is making some investments in promising technologies to reduce energy consumption.
But the message coming through is that, while clean energy is likely to receive growing policy support – through carbon pricing and transitional incentives – that support may not be quite as generous or long-lasting as anticipated two or three years ago. This means emerging technologies will have to rely more on innate competitiveness and investability.
Interestingly biofuels remain an attractive investment with policies that have so far mainly remained resilient. They will remain in strong demand to 2020 because governments in many countries have established targets and mandates and we see no weakening of these.
Energy efficiency is also an interesting area because capital invested in using energy better delivers gains in terms of both economics and the environment for perpetuity. Given the economic climate it may be that policy should place more emphasis on efficiency measures so that they really take off – and we’ll mention later that BP itself is making some investments in promising technologies to reduce energy consumption.
But the message coming through is that, while clean energy is likely to receive growing policy support – through carbon pricing and transitional incentives – that support may not be quite as generous or long-lasting as anticipated two or three years ago. This means emerging technologies will have to rely more on innate competitiveness and investability.
The good news is that more and more renewable technologies are now driving down their levelized – or non subsidized – costs. Today, geothermal, biomass and wind projects can compete with and surpass their fossil-based rivals in increasingly significant energy markets. For example, Brazilian sugar-based ethanol has been competitive with gasoline on an unsubsidized basis for some time. Photovoltaics have reached parity with retail electricity prices in areas such as Italy and Hawaii and parts of other US states.
That may be made easier if fossil fuel prices continue to rise and make low carbon alternatives more attractive – though even this relationship is not straightforward, as the cost of raw materials generally rises too.
That may be made easier if fossil fuel prices continue to rise and make low carbon alternatives more attractive – though even this relationship is not straightforward, as the cost of raw materials generally rises too.
The overall picture of clean energy investment belies the potential downside factors I have been discussing because their impact has yet to come though.
On the face of it 2010 was great year of recovery for clean tech as global clean energy investment surged by 30% to a new record of US$ 243bn.
I think future investment will be more hard won. Now the real boom-times seem to be passing, the clean-tech sector is facing some real headwinds, with the high capital investment and long development times involved making it relatively high-risk.
I noticed in reading the latest World Economic Forum report that Venture capital and private equity investment had a strong year in 2010. Taken together they accounted for $8.8 billion of investment – up 28% on 2009 but some way off the peak of $11.8 billion reached in 2008.
In many ways it’s closest in nature to the bio-tech sector. It’s also important to understand that the clean-tech revolution is global and that the dynamics driving the markets in China and India are very different to those in the US.
In the last quarter of 2010, seven Chinese energy companies went public through IPOs, raising $3.1 billion between them. In Europe there was one major IPO at Enel Green Power, raising $3.5 billion, but the other four that took place raised just $320 million between them, and in the US there wasn’t a single clean energy IPO.
On the face of it 2010 was great year of recovery for clean tech as global clean energy investment surged by 30% to a new record of US$ 243bn.
I think future investment will be more hard won. Now the real boom-times seem to be passing, the clean-tech sector is facing some real headwinds, with the high capital investment and long development times involved making it relatively high-risk.
I noticed in reading the latest World Economic Forum report that Venture capital and private equity investment had a strong year in 2010. Taken together they accounted for $8.8 billion of investment – up 28% on 2009 but some way off the peak of $11.8 billion reached in 2008.
In many ways it’s closest in nature to the bio-tech sector. It’s also important to understand that the clean-tech revolution is global and that the dynamics driving the markets in China and India are very different to those in the US.
In the last quarter of 2010, seven Chinese energy companies went public through IPOs, raising $3.1 billion between them. In Europe there was one major IPO at Enel Green Power, raising $3.5 billion, but the other four that took place raised just $320 million between them, and in the US there wasn’t a single clean energy IPO.
It’s also very important to stress that we are talking about a very different investment ‘scenario’ compared with IT or internet start-ups. This is a tough, capital-intensive sector, in which players face major challenges to deliver returns within a set timeframe. For example cellulosic biofuels involves integrating two giant sectors – agriculture and energy – and developing new technologies that are then commercialized through building major engineering projects and creating extensive new agricultural operations.
We believe there was exaggerated optimism about the timetable for cellulosic biofuels in the US. We think this may have been in influenced by investors and start-ups who all under-estimated the task of creating what is effectively a new industry with large-scale physical assets, as opposed to the digital assets of the internet sector.
There is certainly a real place for start-ups in this world, but there is also a role for big companies with large balance sheets and long time horizons. In BP we’ve seen the two come together as we have worked with Verenium and then acquired their cellulosic assets. We hope to retain the entrepreneurialism of the original enterprise while surrounding it with the resources and support of a large company.
Corporates can play a critical role in bringing innovation forward and fulfilling a bridging role between pure plays funded by VC and PE and traditional large company product lines. I’m aware that I’ve spent quite a long while ‘scene-setting’. I think this is important, because our alternative energy strategy clearly needs to be understood in context; set against the trends and challenges I’ve taken you through.
So, ‘where does BP play?’ In simple terms, the answer is that we invest in areas where we have an advantage in driving down costs and developing scalable deployment options – which means areas where we can leverage our core capabilities.
We believe there was exaggerated optimism about the timetable for cellulosic biofuels in the US. We think this may have been in influenced by investors and start-ups who all under-estimated the task of creating what is effectively a new industry with large-scale physical assets, as opposed to the digital assets of the internet sector.
There is certainly a real place for start-ups in this world, but there is also a role for big companies with large balance sheets and long time horizons. In BP we’ve seen the two come together as we have worked with Verenium and then acquired their cellulosic assets. We hope to retain the entrepreneurialism of the original enterprise while surrounding it with the resources and support of a large company.
Corporates can play a critical role in bringing innovation forward and fulfilling a bridging role between pure plays funded by VC and PE and traditional large company product lines. I’m aware that I’ve spent quite a long while ‘scene-setting’. I think this is important, because our alternative energy strategy clearly needs to be understood in context; set against the trends and challenges I’ve taken you through.
So, ‘where does BP play?’ In simple terms, the answer is that we invest in areas where we have an advantage in driving down costs and developing scalable deployment options – which means areas where we can leverage our core capabilities.
So in practice that means we are choosing to prioritize in three main areas.
- In Biofuels, which offer a genuine commercial alternative to hydrocarbon liquid fuels and where we have distinct technology, a growing capability and a ‘natural’ fit. (In many ways - refining, distributing etc – we already know how to do this and do it well)
- In Renewable Power, specifically Wind and Solar, both of which we see as a complementary and alternative investments to gas into power; both of which play to our core strengths as a capital intensive, technology-driven business
- In Venturing and carbon capture and storage – through our ventures arm which is investing in the possibilities of new ‘clean-tech’ businesses. And this includes our continuing interest in carbon capture and storage.
Let me take you through these three in more detail.
We believe biofuels offer an extraordinary opportunity to produce a viable, commercial, large-scale renewable liquid fuel.
Biofuels production (largely ethanol) is expected to exceed 6.5 Mb/d by 2030, up from 1.8 Mb/d in 2010 – contributing 30% of global supply growth in liquid fuel supply over the next 20 years, and all of the net growth in liquid fuel supply outside OPEC.
Widespread policy support, high oil prices and ongoing technological innovations are driving this rapid expansion and make biofuels a good place to be now and in future.
We’re alive to the criticisms that have been leveled at biofuels and we make a clear distinction between good and bad biofuels. The biofuels industry must demonstrate that these fuels can be produced without negatively impacting the environment or the food supply chain and that they can lead to material greenhouse gas reductions.
Our goal is biofuels done well. We aim to develop biofuels that are low cost, low carbon, scalable and sustainable.
By that we mean fuels that are competitive with incumbent liquid fuels, even without regulatory incentives. Fuels that deliver material greenhouse gas reductions. Fuels that can be scaled up in terms of feedstock production, conversion facilities, distribution and infrastructure. And fuels that are sustainable, both environmentally and in their social impacts.
Biofuels production (largely ethanol) is expected to exceed 6.5 Mb/d by 2030, up from 1.8 Mb/d in 2010 – contributing 30% of global supply growth in liquid fuel supply over the next 20 years, and all of the net growth in liquid fuel supply outside OPEC.
Widespread policy support, high oil prices and ongoing technological innovations are driving this rapid expansion and make biofuels a good place to be now and in future.
We’re alive to the criticisms that have been leveled at biofuels and we make a clear distinction between good and bad biofuels. The biofuels industry must demonstrate that these fuels can be produced without negatively impacting the environment or the food supply chain and that they can lead to material greenhouse gas reductions.
Our goal is biofuels done well. We aim to develop biofuels that are low cost, low carbon, scalable and sustainable.
By that we mean fuels that are competitive with incumbent liquid fuels, even without regulatory incentives. Fuels that deliver material greenhouse gas reductions. Fuels that can be scaled up in terms of feedstock production, conversion facilities, distribution and infrastructure. And fuels that are sustainable, both environmentally and in their social impacts.
The key thing to understand is that biofuels aren’t a new venture for BP. We’ve already made significant investments to become a global producer of ethanol over the past 10 years and have had a dedicated biofuels business since 2006.
We’ve spent 100 years developing fuels from carbon compressed below the ground in a fossilized state and with finite volumes. Now we’re developing fuels that are created from carbon absorbed in plants above the ground and which can be recreated again and again.
Our experience tells us that access to advantaged feedstock is the key to success in this market and consequently we’re pursuing a three-part strategy:
We’ve spent 100 years developing fuels from carbon compressed below the ground in a fossilized state and with finite volumes. Now we’re developing fuels that are created from carbon absorbed in plants above the ground and which can be recreated again and again.
Our experience tells us that access to advantaged feedstock is the key to success in this market and consequently we’re pursuing a three-part strategy:
- in Brazil we’re investing in Sugar Cane ethanol – creating a renewables fuel production base that utilizes tried and testing feedstocks, with no new technologies required
- in the US we’re investing in Cellulosic ethanol, harnessing new technology to produce higher energy feedstocks at a lower land-use cost
- we’re also a global player in the development of biobutanol, a new advanced transportation fuel molecule with huge potential
- and in the UK, we have a joint venture which is currently constructing a world-scale ethanol plant
Our biofuels business is aligned with strong existing demand and anticipated future growth of mandates such as those for US cellulosic biofuels and advanced biofuels, including biobutanol.
Brazil’s supply growth is expected to be supported by robust domestic demand of more than 12% per year. Export call on Brazilian product will come from the US, EU and Asia, exceeding Brazil’s surplus.
We hold a 50% stake in Tropical BioEnergia SA – a joint venture that’s investing $1 billion to build two ethanol refineries, the first of which began operating in September 2008. Both refineries will use sugar cane (the most efficient feedstock currently available), which can deliver greenhouse gas reductions of up to 90% compared with conventional fossil fuels. We are now actively exploring opportunities to expand our sugarcane business in Brazil.
In the US, last year, we acquired Verenium Corporation's lignocellulosic biofuels assets. As a result of the acquisition, BP became the sole owner of Vercipia Biofuels and will build one of the first commercial-scale cellulosic facilities in the country. We also now have our own dedicated biofuels technology research centre, based in San Diego.
We’re investing $500 million over 10 years in the US in the Energy Biosciences Institute. Our partners in the project are the University of California Berkeley, the University of Illinois, Urbana Champaign and the Lawrence Berkeley National Laboratory.
In the UK, we’re aligning our business with the support that exists for competitive biofuels. Together with DuPont and British Sugar, we’re building a $400 million commercial-scale ethanol plant in the UK on an existing BP site at Hull. The plant, operating under the name Vivergo Fuels, will have capacity to produce 420 million litres of ethanol and 500,000 tonnes of animal feed annually – with potential to be retrofitted to produce the advanced biofuel biobutanol in future.
Brazil’s supply growth is expected to be supported by robust domestic demand of more than 12% per year. Export call on Brazilian product will come from the US, EU and Asia, exceeding Brazil’s surplus.
We hold a 50% stake in Tropical BioEnergia SA – a joint venture that’s investing $1 billion to build two ethanol refineries, the first of which began operating in September 2008. Both refineries will use sugar cane (the most efficient feedstock currently available), which can deliver greenhouse gas reductions of up to 90% compared with conventional fossil fuels. We are now actively exploring opportunities to expand our sugarcane business in Brazil.
In the US, last year, we acquired Verenium Corporation's lignocellulosic biofuels assets. As a result of the acquisition, BP became the sole owner of Vercipia Biofuels and will build one of the first commercial-scale cellulosic facilities in the country. We also now have our own dedicated biofuels technology research centre, based in San Diego.
We’re investing $500 million over 10 years in the US in the Energy Biosciences Institute. Our partners in the project are the University of California Berkeley, the University of Illinois, Urbana Champaign and the Lawrence Berkeley National Laboratory.
In the UK, we’re aligning our business with the support that exists for competitive biofuels. Together with DuPont and British Sugar, we’re building a $400 million commercial-scale ethanol plant in the UK on an existing BP site at Hull. The plant, operating under the name Vivergo Fuels, will have capacity to produce 420 million litres of ethanol and 500,000 tonnes of animal feed annually – with potential to be retrofitted to produce the advanced biofuel biobutanol in future.
We’re working with DuPont to develop and market the advanced biofuel, biobutanol – with a new first-of-its-kind technology demonstration facility that is expected to open this year in Hull.
In August 2009, we announced a joint development agreement to advance the development of a step-change technology for the conversion of sugars into biodiesel. Our partner in this agreement is Martek Biosciences Corporation. This technology offers an alternative to the current process used to produce biodiesels from vegetable oils. We believe sugar-to-diesel technology has the potential to deliver economic, sustainable and scalable biodiesel supplies.
Biofuels constitute a great growth market for companies and investors within what will be a relatively flat market for liquid transport fuels because increasing volumes of biofuels are needed to help meet demand alongside new sources of oil.
In power, by contrast, there will simply be raw growth. Power generation will be the main driver for aggregate energy growth over the next two decades, with huge amounts of additional power required as populations grow and developing economies scale up.
Millions of people are moving from villages to cities. Millions of new companies are starting to do business. Millions of units of industrial production are being added to those already running in the emerging powerhouses of production, from Shanghai to Sao Paulo and Moscow to Mumbai.
Diversification in the fuel mix is being largely driven by developments in the power sector rather than transport, where the focus is on efficiency improvements, lubricants and biofuels. Power generation accounted for 53% of the growth in primary energy generation between 1990 and 2010 and is projected to account for 57% of growth to 2030.
In August 2009, we announced a joint development agreement to advance the development of a step-change technology for the conversion of sugars into biodiesel. Our partner in this agreement is Martek Biosciences Corporation. This technology offers an alternative to the current process used to produce biodiesels from vegetable oils. We believe sugar-to-diesel technology has the potential to deliver economic, sustainable and scalable biodiesel supplies.
Biofuels constitute a great growth market for companies and investors within what will be a relatively flat market for liquid transport fuels because increasing volumes of biofuels are needed to help meet demand alongside new sources of oil.
In power, by contrast, there will simply be raw growth. Power generation will be the main driver for aggregate energy growth over the next two decades, with huge amounts of additional power required as populations grow and developing economies scale up.
Millions of people are moving from villages to cities. Millions of new companies are starting to do business. Millions of units of industrial production are being added to those already running in the emerging powerhouses of production, from Shanghai to Sao Paulo and Moscow to Mumbai.
Diversification in the fuel mix is being largely driven by developments in the power sector rather than transport, where the focus is on efficiency improvements, lubricants and biofuels. Power generation accounted for 53% of the growth in primary energy generation between 1990 and 2010 and is projected to account for 57% of growth to 2030.
Here again, we are matching our capabilities to the potential for growth. We have a substantial US based wind portfolio and a solar energy business that is focused on the main areas of opportunity that are open to us.
We now have 10 wind farms, with total power generation of over 1.3GW, making us the number six developer in the US today. Wind is an exciting area to be in and carries relatively low operational costs and commercial risks.
Ultimately, meeting this challenge will require new and innovative partnerships between multiple companies and organizations and may require new models for ownership and funding. >br>
Solar
BP has been providing solar power for more than 35 years. Today our focus is on increasing our market share in residential, commercial and emerging utility customer markets.
International Energy Agency projections suggest that installed solar photovoltaic capacity could increase from 15 GW in 2008 to 410 GW in 2035, with 40% of the total in 2035 expected to be installed in non-OECD countries including China and India. Our own projections are even more optimistic.
Adjusting to these changing market conditions, we have exited our manufacturing operations in OECD countries and we are focusing on manufacturing joint ventures in China and India.
Our strategy is to design BP products in-house and take advantage of third-party manufacturing in key sales regions around the world with partners who produce products to BP’s high-standard specifications, and with BP’s quality assurance oversight. This allows us to benefit from the lower cost of high-volume manufacturing that we cannot achieve in house.
In 2010, our third-party sales grew by 60% from 203MW to 325MW. And in the US along with our investment partner we are developing the Long Island Solar Farm, a 32MW solar farm constructed with over 164,000 BP Solar crystalline silicon photovoltaic modules.
We now have 10 wind farms, with total power generation of over 1.3GW, making us the number six developer in the US today. Wind is an exciting area to be in and carries relatively low operational costs and commercial risks.
Ultimately, meeting this challenge will require new and innovative partnerships between multiple companies and organizations and may require new models for ownership and funding. >br>
Solar
BP has been providing solar power for more than 35 years. Today our focus is on increasing our market share in residential, commercial and emerging utility customer markets.
International Energy Agency projections suggest that installed solar photovoltaic capacity could increase from 15 GW in 2008 to 410 GW in 2035, with 40% of the total in 2035 expected to be installed in non-OECD countries including China and India. Our own projections are even more optimistic.
Adjusting to these changing market conditions, we have exited our manufacturing operations in OECD countries and we are focusing on manufacturing joint ventures in China and India.
Our strategy is to design BP products in-house and take advantage of third-party manufacturing in key sales regions around the world with partners who produce products to BP’s high-standard specifications, and with BP’s quality assurance oversight. This allows us to benefit from the lower cost of high-volume manufacturing that we cannot achieve in house.
In 2010, our third-party sales grew by 60% from 203MW to 325MW. And in the US along with our investment partner we are developing the Long Island Solar Farm, a 32MW solar farm constructed with over 164,000 BP Solar crystalline silicon photovoltaic modules.
The farm, the largest of its kind on the East Coast of the US is due to be operational in late 2011 and is expected to generate enough energy to meet the needs of 4,500 average Long Island homes.
Technological advances are making a big difference. In the past five years, BP has developed and demonstrated several key innovative solar technologies to increase the energy output, improve longevity, ease of installation and operating and maintenance. Let me move on now from technologies that are now being commercialised at scale to our involvement in the kinds of areas that many of you are very familiar with – the emerging technologies that are still being tested and developed, but with potential to scale up to commercial level in time.
In this area of the landscape, two of our activities are relevant. We have set up an entrepreneurial ventures business to invest in a range of promising technologies and we are continuing to maintain our interest in carbon capture and storage.
Our track record in developing carbon capture and storage reaches back over ten years and we are still growing our capability. We’re already demonstrating that it can work at scale through our In Salah joint venture with Sonatrach and Statoil in Algeria where we’ve separated and sequestered over 3 million tonnes of CO2 since 2004.
In keeping with today’s emphasis on playing to our strengths, our focus in CCS going forward will be on leveraging our expertise in key areas such as sub-surface geology and storage.
Scaling up CCS around the globe presents a number of challenges, the greatest of which is cost and the requirement for policy support. Other challenges include practical engineering issues and regulatory, commercial, social and policy matters.
Technological advances are making a big difference. In the past five years, BP has developed and demonstrated several key innovative solar technologies to increase the energy output, improve longevity, ease of installation and operating and maintenance. Let me move on now from technologies that are now being commercialised at scale to our involvement in the kinds of areas that many of you are very familiar with – the emerging technologies that are still being tested and developed, but with potential to scale up to commercial level in time.
In this area of the landscape, two of our activities are relevant. We have set up an entrepreneurial ventures business to invest in a range of promising technologies and we are continuing to maintain our interest in carbon capture and storage.
Our track record in developing carbon capture and storage reaches back over ten years and we are still growing our capability. We’re already demonstrating that it can work at scale through our In Salah joint venture with Sonatrach and Statoil in Algeria where we’ve separated and sequestered over 3 million tonnes of CO2 since 2004.
In keeping with today’s emphasis on playing to our strengths, our focus in CCS going forward will be on leveraging our expertise in key areas such as sub-surface geology and storage.
Scaling up CCS around the globe presents a number of challenges, the greatest of which is cost and the requirement for policy support. Other challenges include practical engineering issues and regulatory, commercial, social and policy matters.
Along with our partners we’re addressing these challenges. We’re a member of the CO2 Capture Project in which seven oil and gas companies are carrying out detailed studies on how to lower capture technology costs and ensure safe geological storage of CO2. We also belong to the Advisory Council of the EU’s Zero Emissions Power Technology Platform.
Let me turn now to the venturing business. In 2006 we set up the BP Ventures team with a remit to create ‘deep strategic insights’ into innovation for BP and to invest in ‘high-potential disruptive innovations’ that are aligned to our core business activities.
Since then we have built a portfolio of investments, amounting to $120m so far. And last year we started to see returns.
Our ventures team partner with early and growth stage businesses, incubate R&D from universities and use BP’s resources to help develop these technologies.
The team consists of 11 professionals operating in the UK, US, China and India who have access to BP’s network of expertise and set out to form strategic partnerships with leading research centres.
For BP this is partly about having a financial stake as an investor but also about having a strategic stake as a global energy provider. The ventures business keeps us in touch with all of the excitement of cleantech innovation. And this is in keeping with BP’s general approach. Since the nationalisations of oil and gas in the 1970s in the Middle East and elsewhere, international oil companies such as BP have only survived by operating at the frontiers of exploration and development in the industry. So we are conscious of where the next frontiers are and it would be unnatural for us not to have a foothold at the clean tech frontier. So with this strategic mandate in mind, the Ventures team acts as the corporate venture capital arm of BP Alternative Energy in three main ways.
Let me turn now to the venturing business. In 2006 we set up the BP Ventures team with a remit to create ‘deep strategic insights’ into innovation for BP and to invest in ‘high-potential disruptive innovations’ that are aligned to our core business activities.
Since then we have built a portfolio of investments, amounting to $120m so far. And last year we started to see returns.
Our ventures team partner with early and growth stage businesses, incubate R&D from universities and use BP’s resources to help develop these technologies.
The team consists of 11 professionals operating in the UK, US, China and India who have access to BP’s network of expertise and set out to form strategic partnerships with leading research centres.
For BP this is partly about having a financial stake as an investor but also about having a strategic stake as a global energy provider. The ventures business keeps us in touch with all of the excitement of cleantech innovation. And this is in keeping with BP’s general approach. Since the nationalisations of oil and gas in the 1970s in the Middle East and elsewhere, international oil companies such as BP have only survived by operating at the frontiers of exploration and development in the industry. So we are conscious of where the next frontiers are and it would be unnatural for us not to have a foothold at the clean tech frontier. So with this strategic mandate in mind, the Ventures team acts as the corporate venture capital arm of BP Alternative Energy in three main ways.
First, it provides cleantech venture capital, supporting start-ups in innovations hotspots and selected leading cleantech funds.
Second it specifically targets carbon offsets, supporting our belief that robust carbon pricing will - however gradually - become a reality, triggering the nascent market for offsets.
Third, it scans the academic frontiers and supports selected proprietary technologies, looking at those with a five year horizon for market readiness.
The Ventures team can deliver both financial and strategic value for BP:
A little more on the venturing approach. We scan very widely and invest very sparingly. As in everything we look for solutions that can be scaled up commercially.
We know that we don’t know everything and so we work with expert partners. But we also look for ways we can add value and align the investments with our business.
Second it specifically targets carbon offsets, supporting our belief that robust carbon pricing will - however gradually - become a reality, triggering the nascent market for offsets.
Third, it scans the academic frontiers and supports selected proprietary technologies, looking at those with a five year horizon for market readiness.
The Ventures team can deliver both financial and strategic value for BP:
- by affording us early insights into tomorrow’s technologies and businesses
- by allowing us to access new technologies and partners ahead of competition and incubating proprietary R&D in order to create market-ready options
- by deliver top-quartile returns on our investments over time
A little more on the venturing approach. We scan very widely and invest very sparingly. As in everything we look for solutions that can be scaled up commercially.
We know that we don’t know everything and so we work with expert partners. But we also look for ways we can add value and align the investments with our business.
The idea is to have a venturing business which sits at the hub of a network of knowledge and innovation, linking BP’s resources and those of other multinationals to entrepreneurs, investors, researchers and market leaders.
In many cases we have been able build a three way partnership with investors and innovators, adding in the extra ingredients that come with BP’s scale and capability.
The team invests off the balance sheet in six main areas as shown here. Cleantech funds, biotech, carbon offsetting, solar, energy efficiency and storage.
To focus on some of the names on this portfolio slide, which demonstrate the range of AE Ventures, the team has recently completed a deal with a US company that has engineering capability for micro-organisms that will accelerate our ability to reduce costs for lignocellulosic biofuels, as part of a joint development with the BP biofuels team. Another example is the recent investment in the Swedish clean-tech company REAC Fuel, which is developing a new method for converting a wide range of biomass to fuel.
AE Ventures also plays a role in ‘incubating’ new exploratory technologies – investing in GMZ Energy, a spin-out from MIT/Boston college for example, to support the development of promising advanced thermo-electric materials.
There are a lot more examples I could expand on if I had time: including, the team’s support for Mendel Biotechnology in San Francisco, a company that’s pioneering genetic solutions to boost crop yield and improve drought tolerance.
Ultimately our AE ventures team will only succeed if it is intimately connected to our core business; so the key challenge for the team is to provide BP with a bridge to the innovative entrepreneurial start-ups that are challenging the status quo in this area – and most importantly, to build relationships with them that work. That’s how we will be able to bring innovation to scale in the energy industry.
In many cases we have been able build a three way partnership with investors and innovators, adding in the extra ingredients that come with BP’s scale and capability.
The team invests off the balance sheet in six main areas as shown here. Cleantech funds, biotech, carbon offsetting, solar, energy efficiency and storage.
To focus on some of the names on this portfolio slide, which demonstrate the range of AE Ventures, the team has recently completed a deal with a US company that has engineering capability for micro-organisms that will accelerate our ability to reduce costs for lignocellulosic biofuels, as part of a joint development with the BP biofuels team. Another example is the recent investment in the Swedish clean-tech company REAC Fuel, which is developing a new method for converting a wide range of biomass to fuel.
AE Ventures also plays a role in ‘incubating’ new exploratory technologies – investing in GMZ Energy, a spin-out from MIT/Boston college for example, to support the development of promising advanced thermo-electric materials.
There are a lot more examples I could expand on if I had time: including, the team’s support for Mendel Biotechnology in San Francisco, a company that’s pioneering genetic solutions to boost crop yield and improve drought tolerance.
Ultimately our AE ventures team will only succeed if it is intimately connected to our core business; so the key challenge for the team is to provide BP with a bridge to the innovative entrepreneurial start-ups that are challenging the status quo in this area – and most importantly, to build relationships with them that work. That’s how we will be able to bring innovation to scale in the energy industry.
A couple of specific examples – we’ve invested in Breathing Buildings – a UK business based in Cambridge that develops and commercialises ultra low-energy natural ventilation systems.
We also have a commitment to the Ecotality EV project in the US, the largest electric vehicle trial in the world. Today there are several barriers to electric vehicles, not least the fact that most electricity comes from coal, gas and other hydrocarbons and so electric cars are far from carbon free upstream.
It may seem counter intuitive to have a stake in electric cars when we have a material biofuels business but we fully accept that electrification is a wild card, capable of developing faster than current estimates suggest. And the EV project is testing the potential for electrification at scale and in a way that will clearly demonstrate its potential.
We also have a commitment to the Ecotality EV project in the US, the largest electric vehicle trial in the world. Today there are several barriers to electric vehicles, not least the fact that most electricity comes from coal, gas and other hydrocarbons and so electric cars are far from carbon free upstream.
It may seem counter intuitive to have a stake in electric cars when we have a material biofuels business but we fully accept that electrification is a wild card, capable of developing faster than current estimates suggest. And the EV project is testing the potential for electrification at scale and in a way that will clearly demonstrate its potential.
I hope I’ve covered the areas you invited BP to reflect on: the outlook for world energy, trends in the alternative energy market and our investment philosophy and strategy in this area.
The primary conclusions I draw from the information presented to you this evening are these:
The primary conclusions I draw from the information presented to you this evening are these:
- Fossil fuels aren’t about to disappear from the fuel mix, but the next 20 years will see the development of a more diversified mix than ever before – creating real opportunities to bring renewable energies to scale
- Biofuels have huge potential to provide a viable alternative/complement to fossil fuel liquids – and the use of new technology can help us achieve this without paying a profound cost in terms of food production and subsistence farming
- Wind and solar can both develop to play an increasingly important role in lower carbon power generation
- The clean energy space has seen significant changes as a result of the global crisis, BUT – there is a great richness of new technologies out there to explore and BP is well placed to invest in them and, if viable, bring them to industrial scale
- Finally, while it may be for governments to determine the pace of transition to a lower carbon economy, BP and other energy businesses can make a huge contribution to this transition by ‘shaping’ the alternative energies that will enable it.
