Energy efficiency, innovation and technology Solving the global energy challenge

Dr Ivan Marten

Global Leader Energy Practice

November 30, 2012

1

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Solving the global energy challenge

Global

Challenges

Supply:

innovation

Demand:

efficiency

Policy &

Partnership

• The global energy system faces a range of fundamental challenges

• Innovation and technology are extending the frontiers of supply

• Improvements in efficiency can have a major impact on demand

• Effective public-private partnership needed to ensure progress

1

4

3

2

2

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Energy challenges: Demand growth

Global energy demand will continue rising fast

Primary energy

demand (Btoe1)

20

15

10

5

0

+47%

2035

18.2

67%

2030

17.0

66%

2020

14.9

62%

2010

12.4

56%

1990

8.6

47%

Global demand will rise 47% to 2035, with

non-OECD countries driving about 90% of this

Non-OECD demand will rise 76% to 2035,

driven by China and India

OECD NON OECD

1. Btoe: billion tonne of oil equivalent Source: IEA WEO 2011 – Current Policies Scenario, UK Department of Energy and Climate Change

91% of new growth is forecasted to come from non-OECD countries

1

5

Primary energy

demand (Btoe)

15

10

0

+76%

2035

12.2

1.7

4.4

2030

11.2

1.4

4.1

2020

9.3

1.0

3.5

2010

7.0

0.7

2.4

1990

4.1

0.3 0.9

E. Europe/Eurasia

Mid. East & Africa

Latin America

Other Asia

India

China

3

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Energy challenges: Supply constraints

Today's energy sources will struggle to meet rising demand

Forecast oil production reliant on

production from "yet-to-find" fields...

...but volumes discovered have declined

significantly in recent decades

World oil production (M bbl/d1)

100

80

60

40

20

0

Discovered

(crude)

NGLs

Unconv. oil

Yet-to-find

(crude)

2030 2025 2020 2015 2010 2005 2000 1995 1990

1. bbl/d: billion barrels per day 2. Data is for Estimated Ultimate Recovery (EUR) of conventional oil f ields only Source: IEA, Rystad UCube, BCG Analysis

Total resources discovered on

conventional oil fields (B bbls2)

400

300

200

100

0

2000s

115

90s 80s 70s 60s

394

50s 40s 30s 20s 10s 1900s

1-10 B bbls

100-1000 M bbls

10-100 M bbls

>10 B bbls

1

Field size:

4

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Supply

initiatives

Demand

initiatives

"New

Policies"

Energy challenges: Environmental

Meeting climate challenge requires action on many fronts

43

Increase

without "New

Policies"

14

Renewables2

29

1990

21

+38%

2035

"450

Scenario"

22

2009 Energy

efficiency

7

Nuclear

1

4

CCS

3

2035

"New

Policies

Scenario"

+50% -50%

0

10

20

36

30

40

50

Worldwide annual

CO2 emissions

(billion MT3)

Savings

with "New

Policies1 "

7

2035

"Current

Policies

Scenario"

1. New Policies Scenario assumes policies announced to date are implemented 2. Renew ables including Biofuels 3. MT: million ton Sources: IEA World Energy Outlook 2011

Meeting the climate challenge necessitates action on both

the supply and demand side

1

Emission reduction levers

5

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

1 2

Supply innovation

Our energy supplies aim to balance three objectives

Cost

Availability

Sustainability

• The relative economics of our alternative energy sources

- Finding, development, production and transport costs

• The availability of these sources

- Both on an absolute level – do we have enough? - ...and on a national level, to support energy independence

• Their relative environmental, health and social impacts

1

3

2

All sources have advantages and drawbacks; our energy

mix results from the trade-offs we choose

6

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Supply innovation: Oil & gas (I)

Innovation has created a shale gas boom in the US

8 20

US Natural gas price

Henry Hub ($/MMBtu1)

10

0

US Shale gas production

(Bcf/d2)

10

5

15

25

0

2012E

24.4

2.5

2011 2010 2009 2008

8.9

2007 2006 2005

1.4

8.7

2

4

6

1.MMBtu: million British Thermal Unit, 1BTU = 1.055 kjoules. 2012 Henry Hub gas price is YTD average 2.bcf/d: billion cubic feet per day Source: EIA; Rystad, LCI Energy Insight

2

US natural gas

total: 69bcf/d

US shale gas production

US natural gas price

7

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Supply innovation: Oil & gas (II)

The boom was enabled by innovative well technologies

2014

2013

2012

22%

2007

2006

2005

2004

0

Horizontal

Vertical

Other

2018

396

70%

2017

2016

100

300

200

2015

2011

334

57%

2010

2009

219

35%

2008

340

2003

2002

2001

2000

149

5%

Footage drilled (mil)

Surface to TD1

400

1. TD: total depth Source: Spears and Associates

Financial crisis &

drop in oil price

2

Forecast

Horizontal drilling...

...and hydraulic fracturing

8

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

wholesale

electr. price

Supply innovation: Renewables (I)

The challenge: becoming cost effective without subsidies

1. Including f inancing at 5% WACC, CapEx, O&M and CO2 cost 2. Effects of increasing safety requirements in the future not yet foreseeable 3. Assumed annual cost increase for coal and gas: 2% for O&M and 5% for fuel and CO2 cost 4. Average European insolation level Note: Calculations do not include additional transmission or storage capacity for stabilizing intermittent renew ables Sources: IEA (2010); Fraunhofer ISE (2010); EPIA (2010); IRE Univ. Stuttgart (2008); BMWi; BCG analysis

20

10

0

PV utility

scale4

16-18

7-8

Wind

offshore

13,5

11-12

Biogas

16,0

13,0

Biomass

9,0

7-9

Wind

onshore

7,0

5-6

R-o-r hydro

(< 5MW)

7,0

CCGT

9,0

6,0

Hard coal

8,0

5,5

Lignite

Levelised cost of electricity €ct/kWh1

5,0

Nuclear

(?) 2

5,5

6,5

15

5

2010 20203

(Increasing up)

Renewables

(Decreasing down)

Conventional

2

Fuel Poverty a highly important issue in the UK. How to

balance energy costs and the demand for renewables?

9

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Supply innovation: Renewables (II)

Wind and Solar costs are falling continuously

Wind turbine price index,

1984–2011

The Solar PV module experience curve,

1976–2012

1. S: price index as cumulative volume doubles; S= 0.95 means as cumulative volume doubles, price drops to 95% of before Note: WTPI is w ind turbine price index, WTPI excl comm is adjusted for commodity prices 2002–10, Inflation adjustment using US PPI, R2 of c-Si regression = 0.94, R2 of FSLR regression = 0.98 Source: Bloomberg new energy f inance; Extool; Law rence Berkeley laboratory; FSLR filings

Log (M€/MW)

100.0

10.0

1.0

0.1

Log (MW)

1,000,000 100,000 10,000 1,000 100 10 1

First solar thin-film module cost

Chinese c-Si module prices

Historic prices

1976

1985

2003

2012

2006

2012

Log (M€/MW)

1

Log (MW)

1,000,000 100,000 10,000 1,000 100

10

Historic prices

1984

1990

2000

2004

2011

Thin-film experience curve

Experience curve

Experience curve

2

-48%

s = 0.79

s = 0.89

s = 0.95

s= price index as cumulative volume doubles1

- 93%

- 56%

10

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Increased efficiency of fossil fired

generation in major economies Increase in gas role in fuel mix...

...and increased efficiency of

gas-fired power generation

Supply innovation: Generation efficiency

Efficiency of fossil fuel power generation has increased

2005 2000 1995 1990

US

UK & Ireland

Efficiency, fossil-fired generation (%)

2010

50

25

45

Germany 40

35

30

China

US

UK & Ireland

Germany

30

25

2010 2005 2000 1995 1990

Efficiency, gas-fired generation (%)

35

55

50

45

40

Source: Ecofys, Mitsubishi Research Institute

2

Continued switching to natural-gas fired power

generation will drive efficiency increases

Germany

US

China

UK & Ireland

50

2005

40

2000

30

20

2010

10

1995 1990

Gas share of all fossil-fired generation (%)

60

0

11

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Nuclear Alternatives

Gen III+

Supply innovation: Nuclear power

Despite technological evolution, nuclear faces challenges

Early prototype

reactors

Commercial power

reactors

Advanced

LWRs

• EPR

• ESBWR

• AP-1000

• Liquid metal-

cooled reactors

• Traveling-wave

reactors

• Shippingport

• Dresden, Fermi I

• Calder Hall/

Magnox

• LWR-PWR,

• BWR

• CANDU

• VVER/RBMK

• ABWR

• System 80+

• CANDU-6

• AP600

Gen I Gen II Gen III Gen IV

1950 1960 1970 1980 1990 2000 2010 2020 2030

2

Generation I Generation II Generation III Generation III+ Generation IV

Evolutionary Designs

?

Technology offers improved safety, security and efficiency,

but Fukushima disaster a clear setback for nuclear

Source: American Academy of Arts and Sciences "Nuclear Rectors, Generation to Generation", Argonne National Laboratory, US Department of Energy

12

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Supply innovation: Emerging technologies

Emerging technologies are progressing very slowly

Technology Functioning Proven application Current impediment

• Pre-combustion

capture • Post-combustion

(scrubbing)

• Oxy-fuel combustion

• Pre-combustion (in

gas processing) – Sleipner &

Snøhvit,

Norway

• Costs: powergen costs

increase by up to 75% • Delays to commercial-

scale power plant

demonstration projects

• Barrier / Fence:

block current • Turbines: absorb

current

• Oscillating: absorb current with aerofoil

• Utility scale only for

tidal barrier: – France 240MW,

Rance River

(1966)

• Other technologies

only small scale / prototype phase

• Barriers / fence require

special geo. conditions

• "Pelamis" snake

module: waves induce hydraulic movement driving a

generator

• Large (non-utility)

scale: – 2.25MW

Aguçadoura,

Portugal

• Proof of concept for

utility scale still missing

2

CCS

Tidal

Wave

Source: Global CCS Institute, "The Global Status of CCS: 2012", BCG Research

13

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

1,250

1,000

750

500

250

0

-42%

Reduced

2030 demand

686

EU energy demand

savings potential (Mtoe)

Services

71

Industrial

88

Transport

156

Domestic

187

Baseline

2030 demand

1,188

13%

29%

32%

26%

Energy efficiency: Savings potential

Efficiency Potential in EU Energy Demand

Domestic and Transport sectors offer greatest

potential for EU energy efficiency savings

3

Source: Federal Ministry for the Environment, Germany; Fraunhofer ISI

Services

Industrial

Transport

Domestic

Efficiency savings potential by sector

14

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Energy efficiency: Domestic sector

Major scope for improvement in domestic sector

The biggest efficiency savings lie with

refurbishing & updating existing buildings

...and the elements and materials needed to

upgrade existing buildings already exist

1. Fenestration include w indows and curtain walls Source: Federal Ministry for the Environment, Germany; Fraunhofer ISI; Electro Magazine; EAA; BCG analysis

Efficiency improvements on buildings could also have

wider implications on fuel poverty issue

3

1

3

Blind and shade 5

Fencing

4

Fenestration1

Pipes

Doors 2

Roofing

Metallic Frames

6

7

8

9

10

Ceiling

Siding

Ducts (HVAC)

1

8

10

3 4

2

7

5

6

9

0

Total potential savings 187

Exist. buildings - refurb. 41%

Exist. buildings - heating 23%

New buildings 20%

Sanitary hot water 7%

Electric appliances 6%

Efficient lighting 5%

200 150 100 50

Energy demand, savings potential (Mtoe)

15

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d. More powerful...

130

Power (HP)

200

150

100

50

0

+31%

2010

170

1972

...heavier...

Weight (kg)

2,000

1,500

1,000

500

0

+31%

2010

1,635

1972

1,250

...and more economical

20

Fuel Efficiency (mpg)

40

60

0

+45%

2010

41.5

1972

28.5

Efficiency: Transport (I)

Carmakers have achieved major efficiency advances

3

Source: BMW

1972 BMW 520i 2012 BMW 520i

16

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Efficiency: Transport (II)

Many competing vehicle technologies are emerging

3

Levers • Design

optimization

(resistance

coefficient and

front area)

• Tire optimization

• Vaporization

and combustion

optimization

• Reduction of

energy loss

(pump, friction,

heat)

• Lower weight

• Better automation

of transmission

• Continuous

variable

transmission

• Double clutch

• Vaporization and

combustion

optimization

• Reduction of

energy loss

(pump, friction,

heat)

• Power train

technology

• Battery and

power

management

technology

• Battery and

power

management

technology

• Recharging

infrastructure

CO2

emission

reduction

potential

~10-11% ~40% ~5-10% -40% -65% -100%

Cost per

vehicle ~$ 600 ~$ 2,000-2,500 ~$ 100-200 ~ $ 4,000 ~ $ 5,000 $ 10, 000

ICE technology

(Gasoline) Transmission Aerodynamics

and mass

ICE technology

(Diesel) Hybrid

Conventional

Electric

vehicle

Diesel, hybrid, electric

Note: ICE: Internal combustion engine

17

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Efficiency: Transport (II)

Higher oil prices drive more efficient vehicle choices

45

40

35

30

25

20

15

Fuel efficiency (mpg)

2005 2000 1995 1990 1985 1980 1975

24

22

20

18

16

14

12

Larger personal vehicles1

share of light vehicle production (%)

2010

• Oil crisis

• Dramatic rise in fleet fuel

efficiency

1. Larger personal vehicles includes: Pick ups, passenger vans and large SUVs. Small 2 w heel drive SUVs are categorized as cars Source: EPA

3

• Prolonged period of lower fuel prices

• Rising share of inefficient trucks in US light vehicle fleet

• Oil price rises

• Buying shifts to greater efficiency

Not just about technology: efficiency impact affected

by energy prices and regulatory framework

11 mpg

49 mpg

20 mpg

Large personal vehicle production share (%)

Fuel efficiency (mpg)

18

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Kyo

to b

ound

Policy & Partnership: Kyoto

Kyoto process has failed to curtail global CO2 emissions

Mt CO2

6,000 4,000 2,000 0 -2,000

Russia2 -464

Europe -238

Japan 51

USA 384

LatAm 496

Middle East 958

China 5,437

Variation CO2 emissions1 (1990-2009)

Increase Decrease

1. IEA estimates only include emissions from fossil fuel combustion. 2. Decrease due to the partial closure of Soviet Union's industry. Source: IEA emissions database, World Resources Institute

4

Top-down global policy alone will not

solve the world's energy challenge

19

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Policy & Partnership: Investment

Need for financing new energy is larger and more complex

4

(US$bn)

300

200

100

0

CAGR:

+31%

Asset finance1

Small distributed capacity

Public markets

VC/PE

Corporate R&D

Government R&D

2011

258

158

76

10

167

2007

133

2006

97

2005

61

220

2009 2004

39

161

2008 2010

Challenge for industry and governments is to ensure

capital directed towards most effective solutions

1. Adjusted for re-invested equity Source: Bloomberg New Energy Finance, UNEP

Global new investment in renewables

20

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Policy & Partnership: Investment

Financing new energy is increasingly challenging

Project bonds

?

Direct equity

investors

?

Gap

2020

17

Additional trad.

funding sources

18

3

3

4

8

Already

financed

6

40 GW

EU target

40

Remaining gap

?

Public equity

?

Investment decision will depend on

risk-return-profile of wind offshore parks

GW

Balance sheet

financing

Utilities and commercial banks only capable to

finance ~58% of required investments

Can financial investors be attracted in

sufficient scale to close the gap?

Project

financing

PF public banks

PF comm. banks

PF equity

Source: BCG analysis

4

21

Co

py

rig

ht ©

20

12

by

Th

e B

os

ton

Co

ns

ultin

g G

rou

p,

Inc

. A

ll rig

hts

re

se

rve

d.

Conclusions

Global

Challenges

• The global energy system faces a range of fundamental challenges

– Rising demand, constrained supply and environmental issues

• These challenges can only be met by sustained action on multiple fronts

– Including both new sources of supply, and more efficient consumption

1

Supply:

innovation

2 • Innovation is extending the frontiers of energy supply

– Major advances are transforming prospects for natural gas and renewables

• Other technologies remain promising, but lack investment momentum

– Nuclear faces challenges post-Fukushima; CCS awaits commercial testing

Demand:

efficiency

3 • Energy efficiency has great potential to reduce demand and emissions

– Particular scope to achieve savings in domestic and transport sectors

• However, implementation of efficiency measures remains challenging

– Perverse incentives have undermined policy aims in the past

Policy &

Partnership

4 • Global-level policy alone is not solving the world's energy challenges

– World-wide attempts to curtail carbon emissions have so far failed

• The outlook is challenging, but significant scope for progress

– Public-private partnership to align incentives through efficient regulation

Energy efficiency, innovation and technology Solving the global energy challenge

Dr Ivan Marten

Global Leader Energy Practice

November 30, 2012