Accelerating the Growth of a Major New Global Business Sector – Low Carbon Power

Thank you Dean. Good morning everyone.

It’s an honour to be asked to give the keynote speech today. It’s an honour because I know that I’m looking at the business leaders of today and of the future.

I want to spend most of my time today on a subject that business leaders increasingly need to understand very well. That subject is the environment and its relationship to energy.

And in keeping with the theme of today’s conference, I will set out how business can act as a catalyst to growing not just a new business in the ‘green area’ – but a major new business sector.

I hope you’ll forgive me talking about my own business, but it is a subject I am passionate about – not only as a business woman but as a mother – and I want to share some of the issues with you so that you can reflect on them in your own work.

My own business experience of creating opportunities
But before I talk about energy issues in more detail, I want to talk briefly about my own experiences over the last few years of being in business and creating opportunities in an evolving business world.

It can be difficult to create the means and appetite for change, particularly in large corporations, but I believe there are ways that make it easier to see and seize the opportunities for new business.

To be a good business – to satisfy several needs at once and make a return – you need to be a smart business. To be a smart business you need to harness everyone’s talent and ideas – to release the power of what is sometimes called the ‘big brain’ – the collective wisdom of an organisation.

Early last year, we assembled a team of people with a variety of backgrounds and skills and gave them licence to explore the strategic space around clean and sustainable energy provision. The results were remarkable. In a small number of months, the team moved from blue-sky considerations of strategic space to developing a fully worked and highly distinctive business proposition and model that received Board approval in October 2005.

BP Alternative Energy – a low carbon power business that combines solar, wind, CCGT and hydrogen power – was launched the following month underpinned by a commitment to invest $8 billion over the next 10 years.

No one individual can claim credit for creating this remarkable new business venture. It was a collective effort. And collective efforts aren’t easy. They too often end up in trying to do detailed things by committee or alternatively by no-one taking ownership of the fundamentals.

And that in a sense is why in my remarks today I want to share with you some of our new ideas on how we can believe this new business opportunity can be a catalyst for accelerating the growth of a whole new global business sector – that of low carbon power

Because the more people that are tuned in to issues around energy and climate, the more people will demand solutions and the more ideas people will have to deal with the issues. Businesses will identify the best of these ideas and find a way to make them commercial and in this way we can find solutions to problems that can sometimes seem insurmountable.

Energy and the environment – strategic context
So what is the strategic context in terms of energy and the environment which forms the backdrop to my remarks today? At the moment "alternative" energy can sound like a fringe activity. But 200 years ago so did coal. 100 years ago so did oil. 30 years ago so did natural gas.

The mix is constantly changing and is responsive to price, technology and need. Oil responded to the need for mobility. Now new forms of energy are responding to the need for energy security and a lower carbon economy.

In BP we have long been convinced about the issues of climate change. We used to say that the precautionary principle required us to take action. Now, as Scientific American said in its headline “the debate on global warming is over”. Action is urgently required on energy efficiency, biofuels and renewables. In BP we are involved in all of these.

One of the reasons we came up with the idea of BP AE was that we realised that one of the most important areas to address with great urgency in tackling climate change and emissions of CO2 was power – or electricity generation.

We don’t tend to feel so guilty about the kettle as the car, do we? But we should. I often meet people who think that transport is the biggest global source of carbon dioxide emissions or CO2. In fact it’s not.

Power – electricity generation – produces twice the CO2 emissions of transport globally – that is 40% of global emissions.

Here in the UK, there was general astonishment earlier this year when an analysis of UK emissions revealed that a single coal fired power station in the north of England emitted the same amount of CO2 emissions as one quarter of the cars on the country’s roads.

We need that power station today – it is critical to keeping the lights on. So I mention it only to illustrate the importance of the power sector to the issues we face on carbon.

On a global basis, the problem is growing. By 2030 the world is expected to want twice as much electricity as today – around 8000GW. That’s partly because of the rapid economic growth of the developing world – a highly positive trend where it influences greater life expectancy and higher quality of life.

So while the world energy demand will and should grow there are consequences of what type of electricity generation the world builds.

Much of this growth will be met by the projected doubling - at least - of coal-fired power, particularly in the US and China. And coal produces twice the CO2 as gas when burned for power generation.

The expected growth is equivalent to 3,600 new coal-fired power stations worldwide, or 12 a month for the next 25 years. One every 60 hours. But I always prefer to look on the positive side - the challenge is also an opportunity.

Because worldwide, around half of the power capacity needed in 2030 is still to be built. If we can make a large chunk of that new capacity from the cleaner alternatives, then we’ll make a significant reduction in carbon emissions.

Replace a traditional coal-fired power station with a gas one and you halve the emissions. Replace it with a series of wind farms and you eliminate them. These technologies are available today. They need no leap of faith – and offer great potential for further development in driving efficiencies and lowering costs.

That said, we cannot pretend that solving climate change will come at no cost. But at the macro level, academic studies indicate they are a tiny fraction of projected global economic growth.

At a micro level, our role as business leaders is to minimise those costs – and in power we know they are already of an order that is not prohibitive.

For example, in general terms we estimate the UK could displace 10% of its

high carbon power electricity with very low carbon alternative sources at a cost roughly equivalent to a 0.5% increase per annum in retail electricity prices over a 10 year period. This all tells me that we can make large, early strides if we make good choices on where to start. It tells me that the power sector is an ideal place for policy makers and business to find common cause to convert aims into real measurable outcomes, although encouraging energy efficiency and reducing emissions from transportation are also important. And it tells me that the costs of doing this are not beyond reach as is sometimes commonly thought.

So there is a massive opportunity for business and policy-makers to work together here and create a new business sector that will include all forms of power that have low carbon emissions – including wind, solar, gas and hydrogen.

And it's because of that opportunity that we created BP Alternative Energy.

Accelerators for low carbon power
So what must we do to enable this new sector to grow? We've learned a lot about what might accelerate this growth in the last year through our BP Alternative Energy business, mostly through finding out what is holding us back from growing faster. We’ve identified four factors which we believe would speed up the development of more low carbon power capacity. I am going to talk about two of these factors in detail – the exciting prospects offered by new technology and the importance of carbon pricing, but before I discuss these in detail I will just mention the other two accelerators briefly. In geographies such as the US and in the developing world we need major new electricity infrastructure projects. We need the investment and the policy support to build - and scale up - the physical links to carry power from the new low-carbon power plants to the markets where the electricity is used. One example of a region where we see infrastructure as a particular barrier is in the US. The second important factor is consumer awareness and action. The more that people understand the nature and scale of the carbon problem, the more they will act to create the momentum for change. Business will find solutions where there is demand. We can all make a difference in this through our day to day choices.

So onto the two factors I will talk about in detail.

The first is low carbon power technology. We need to accelerate the development and take up of the technologies that can help reduce carbon emissions.

There are technologies available today that can significantly reduce the greenhouse gases emitted from coal fired power stations. They need to be used more widely. There are opportunities to create new types of solar cells, new types of wind turbine, and new types of power plant. We need to make them a commercial reality - and at scale.

One very important technology relates to the capture and storage of carbon dioxide or CCS. In simple terms – we have developed the means to remove carbon from the process of making electricity at scale – and to pipe it away for long term storage in underground geological structures.

This type of technology can generate electricity while capturing 90% of the carbon from the plant.

BP is doing this at a small scale today in Algeria. Others are doing this each day in the Norwegian North Sea and onshore in the United States.

This technological breakthrough is encouraging a range of industrial scale projects to be brought forward to produce clean electricity using various generating technologies.

One such project is the world’s first industrial scale hydrogen power station project with carbon capture and storage which BP has proposed in Scotland. We have a second in planning in California. And with our partner GE we have indicated the potential to build ten more.

The Scottish Project represents an important new contribution to the low carbon power choices available to the UK and presents it with the opportunity to take the first-mover advantage in this significant new industry. It will be capable of generating electricity with some 90% of the CO2 removed for almost three quarters of a million UK homes.

Most importantly, it will offer a material step forward in the journey to enabling large-scale low carbon electricity generation using coal – fundamental to addressing the huge rises in carbon emissions predicted in the developing world that I mentioned earlier.

Technologies for generating clean electricity with carbon capture and storage are ready to be deployed at full scale – but require support mechanisms which reward their carbon abatement contribution.
This isn’t subsidy. This is economic recognition that much conventional energy use has a range of impacts which are not currently reflected in their prices – and which policy mechanisms can rectify by ensuring that the various high and low carbon technologies compete on a level playing field.

To illustrate this importance, delaying the beginning of commercial take-up of such CCS technology in power by just two years may lead to some six billion tonnes of additional CO2 emissions worldwide over time through the missed opportunities to make good low carbon choices in new generating capacity.

That is why deriving a cost – or a price – for carbon is so important – whether through emissions trading schemes or other policy instruments – so that we can encourage the best outcomes in both carbon and economic terms.

Setting a Price for Carbon
This leads me on to the second factor that would make a big difference to accelerating the low carbon power economy which is to set a price on CO2.

So what kind of policies might be used to make this transition? In theory, a single global carbon price would solve the problem. It’s the nirvana solution. But in practice this is unrealistic – for two reasons.

First it relies on huge progress being made in the international political process. The provisions of the current Kyoto Treaty run out in 2012. Negotiations have started on what the international framework will be after that.

And second it is unrealistic to assume that a simple carbon price will drive all the right decisions – something I will return to in a moment.

So how do we move towards a system in which a price is set on carbon in a way that really rewards and stimulates clean energy and penalises high carbon energy? And at the same time, how do we encourage those new technologies which can provide us with the cleanest energy?

We see the need for action in a number of policy areas – but I will pick out two which are especially important for the low carbon power economy.

Emissions Cap and Trading
One option is to use an emissions trading system such as the EU’s scheme.

In a system like this, a cap is set on the total emissions from a community of emitters. This community could be a group of businesses or a group of countries. Each individual participant is then given an allowance for its own emissions. If it wants to emit more than its allocation, it has to buy emission allowances from a participant which has some to spare, or potentially from projects outside the system that create credits.

Typically an emitter like a power station or refinery which has installed energy efficient equipment will have credits to spare while one which still has inefficient plant will overshoot its limit.

We are deeply committed to participating in emissions trading systems such as the EU’s. However we also recognise that such a trading system has its limitations. It is an excellent tool to find the lowest cost routes for reducing emissions from a community of large installations.

However even then it has to be said that there are many of these opportunities which – even with a price signal – will take some time for emitters to identify and execute.

And the very strength of such a trading system gives a clue to its limitation – it will inevitably find the lowest cost opportunity – and for some time this is likely to be an incremental solution rather than a step-change solution.

It will typically be an additional piece of kit to reduce energy consumption by a few percentage points rather than a major investment in the new technologies such as solar, wind or carbon capture and storage that are essential to transforming the carbon landscape of 2030 and beyond.

We also need to recognise that cap and trade systems like the EU’s cover a very large part of the regional economy. In fact approaching half of all of the EU’s CO2 emissions are covered in the EU system. And if there isn’t a global agreement to make such systems universal, governments may well hesitate to set tight caps on emissions because they fear damaging the competitiveness of their energy intensive industries.

So emissions trading – while part of the answer - isn’t the whole answer in moving towards a future in which carbon is priced.

Transitional Incentives
If we are going to enable the newer technologies to reduce costs and gain scale so that they can compete with the traditional ones, we also need some effective transitional incentives

It is when new technology is deployed at scale that the real learning and cost reductions can be demonstrated. For example, onshore wind – one of the more mature low-carbon power technologies – has seen cost reductions of 80 percent in the last 30 years thanks to targeted policy support.

Such support also helps to build real competence and competitiveness in these new businesses. It’s no accident that the Danish government policy to encourage wind power has resulted in a very strong Danish wind turbine industry.

Other step change possibilities are of course solar and the hydrogen power station concept I spoke of earlier. For every year we delay the advance of this technology, a lot of old technology coal plants are built.

So to explain it another way, we need emissions trading to generate large volumes of low cost reductions from a broad slice of the economy while – in parallel – we need to have targeted incentives that encourage the deployment of advanced technologies

The incentives pull down the cost of low-and-no carbon energy, while emissions trading raises the cost of high carbon energy.

Conclusion
I began my remarks today by briefly recounting how 18 months ago a small team of people set about creating a major business opportunity which is in tune with the great challenges and changes that face our world in terms of energy and the environment.

In 12 months of operation, BP AE has grown rapidly to join the front ranks of the world’s leading wind energy developers. It has completed the doubling of BP’s solar energy business. It has advanced plans for two unique industrial scale hydrogen power stations and formed a joint venture with GE to develop 10+ more. And it is on track to be profitable in its first year

So we have begun to demonstrate that this is more than a set of ideas – but a real, material new business in the making.
I also said at the beginning that by sharing our ideas and experiences we believe this new opportunity can be a catalyst for accelerating the growth of a new global sector.

Those are ambitious words I know. But that is what I’ve been doing today and I’ve done it very deliberately because I’m talking to a group of people who have a lot of influence and wide networks.

The message I would like to go out, very simply is this. Protecting the planet means reducing carbon emissions. This is an issue where there is both urgency and hope. 40% of the world’s CO2 emissions come from power stations. Yet today’s power stations are being replaced. They need to be replaced with clean power. We need to build a strong low carbon power sector. Carbon trading can help in this. But to usher in the new technologies of the future, we also need specific incentives and regulation. And we need millions of people to understand the problem and demand change.

This is not an obscure policy issue. It's about the future of the world.

As businesses we hold the technologies that can build the future in our hands. Now we need to work with policy-makers to create the space in which they can be deployed. I am convinced that we will do it – and that we will preserve our environment for future generations. Thank you.

Thank you very much.