Energy Finance Report

Van Hilderbrand

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The New Gold Standard for Building Performance - PEER

Posted by Van Hilderbrand on 7/19/16 10:20 AM

Co-authors Jeffrey M. Karp and Morgan M. Gerard 

PEER.jpgElectricity-grid vulnerabilities were deeply exposed in the wake of Superstorm Sandy and its associated storm surge, as a single outage at a substation caused a sweeping black-out across downtown Manhattan, New York. Making matters worse, climate change science anticipates that future storms will be both stronger and more frequent.  To facilitate and improve the security, resiliency, and reliability of the macrogrid system, the U.S. Green Building Council (USGBC) has developed PEER, Performance Excellence in Electricity Renewal, the nation’s first comprehensive, consumer-centric, data-driven tool for evaluating power system performance. 

Modeled after the Leadership in Energy and Environmental Design (LEED) certification program, PEER seeks to incentivize the development of smarter buildings and communities by adopting a rating system that addresses power quality and supply availability, ability to manage interruptions and mitigate risk, and increase restoration, redundancy, and microgrid capabilities.

The expectation is that as a critical mass of buildings and developments achieve PEER certification, the electricity-grid system will become stronger and more resilient, thus preventing disasters caused by extreme-weather events.

PEER Will Help Create a Market to Capture the Benefits of Smart Grid Capabilities

Today, there are no adequate markets and metrics to capture the benefits that smart grid capabilities and smarter buildings provide to the larger electrical system, although proceedings like Reforming the Energy Vision (REV) in New York are attempting to tackle this challenge. PEER helps fill this major market gap by providing an opportunity for power technologies, systems, and other innovations to gain competitive advantage. 

The PEER program also may serve to assist in the creation of monetization pathways for service providers seeking to enable grid secure benefits.  For example, once the PEER rating system is used more broadly, commercial tenants and buyers may demand resiliency benefits for which they may be willing to pay a premium to reduce exposure to power-outages, business interruptions, and other grid losses.  For instance, a Whole Foods may be willing to pay an energy premium for the security that its refrigerators and air-conditioning will not lose power in a storm event, hedging the risk of spoiled stock.  Similarly, an investment bank with on-site servers may also be willing to pay the premium for the security that their servers will not stop trading—preventing potential losses from reconciliation events.  Thus, PEER may bring new participants into the energy mix such as main street corporates and traditional real estate firms as they learn about the benefits of and opportunities provided by expanded demand response capabilities, distributed renewable generation, and smart grid readiness.

Projects eligible for PEER certification may involve everything from retrofits to existing buildings and infrastructure, to a newly developed business campus. Projects first must be registered with the Green Business Certification Inc. (GBCI), which administers the LEED certification program, as well as several other performance standards rating certifications.  GBCI provides a toolkit for developers to self-screen projects and prepare their application for certification.  To achieve certification, projects are considered against four metrics: (1) reliability and resiliency; (2) energy efficiency and environment; (3) operational effectiveness; and (4) customer contribution.  The PEER process is relatively new, with only a few projects working their way through the new program, but once the new standard catches on certifications are expected to increase.

Microgrids, the Nation’s Capital, and PEER

A particular concern for national security is the susceptibility of the District of Columbia to flooding and black-outs due to its close proximity to several rivers. This concern has prompted the White House to announce significant targets for federal buildings to combat grid vulnerabilities and the D.C. Public Service Commission to further examine grid modernization through an open case, Formal Case 1130.

Earlier this month, USGBC and GBCI, in partnership with Urban Ingenuity, sponsored a meeting to support the District of Columbia’s efforts to encourage the development of microgrids, generally a localized, self-contained, contiguous power generation system within close proximity to demand. Microgrids provide grid efficiencies and resilience because they can “island” themselves off from larger macrogrid disturbances.  Thus, during a stress event on the macrogrid, microgrids can help service the larger system, isolate the event and prevent it from causing sweeping outages, and serve as a “power oasis” to the affected public.  

The development of microgrids are the kind of project that will be supported by a PEER evaluation and certification. The availability and widespread acceptance of PEER’s metrics will serve as a tool to incentivize the development of microgrids and other types of energy innovations that help facilitate movement of the electrical system towards a smarter-grid marketplace.  

 

The Energy Finance Report will continue to monitor PEER as the program matures.

Topics: Distributed Energy, Renewable Energy, United States Green Building Council, USGBC, LEED, Resiliency, Performance Excellence in Electricity Renewal, PEER

Update: Confluence of Emissions Regulations Favor Renewable Energy Development

Posted by Van Hilderbrand on 7/1/16 12:29 PM


This posts continues our discussion regarding the status of several major recent regulations by the U.S. Environmental Protection Agency (EPA) that target reductions in emissions from the oil, natural gas, and coal industries, and how these regulations will drive increased investment in cleaner and renewable energy. In particular it provides updates to Part 1 in this series on EPA’s Carbon Pollution Standards for New, Modified, and Reconstructed Power Plants and Part 2 on EPA’s Mercury and Air Toxics Standards (MATS).

Carbon Pollution Standards for New, Modified, and Reconstructed Power Plants

Confluence_of_Emissions_Standards.jpgAs previously discussed, EPA’s October 23, 2015 final rule, Standards of Performance for Greenhouse Gases From New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units (80 Fed. Reg. 64,510), has been challenged in the U.S. Court of Appeals for the District of Columbia Circuit. State of North Dakota v. EPA (Consolidated Case No. 15-1381). Responding to a request from several states and industry groups challenging the final rule, the Court recently suspended the briefing schedule and allowed additional parties until July 12 to file petitions for review. During the administrative process, EPA denied several petitions for reconsideration of the final rule. It is expected that many of the parties who had their petitions rejected will file again and their petitions will be consolidated with the current litigation.

Mercury and Air Toxics Standards

On April 25, EPA issued a Supplemental Finding that it is Appropriate and Necessary to Regulate Hazardous Air Pollutants from Coal- and Oil-Fired Electric Utility Steam Generating Units, 81 Fed. Reg. 24,420, and affirmed that the MATS rule was appropriate and necessary to regulate air toxics after including a consideration of costs. EPA conducted the cost-benefit analysis and published the Supplemental Finding at the direction of the U.S. Supreme Court. Michigan v. EPA, 135 S. Ct. 2699 (2015). The MATS rule remained in place while EPA considered the associated costs and prepared its findings. The decision to keep the MATS rule in place was appealed to the U.S. Supreme Court by a coalition of 20 states, led by Michigan. Michigan v. EPA, C.A. No. 15-1152. Earlier this month, the Obama Administration and EPA scored a key win when the Supreme Court refused to hear the appeal, thus leaving the rule in place as the Supplemental Finding is challenged in the U.S. Court of Appeals for the District of Columbia Circuit.

The first challenge to the Supplemental Finding was filed on April 25 by Murray Energy Corporation. Murray Energy v. EPA, C.A. No. 16-1127. On June 24, as the window to file petitions for review closed, fifteen states, again led my Michigan, joined Murray Energy and filed a challenge. Michigan v. EPA, D.C. Cir., No. 16-1204.  Several additional utilities also filed challenges. The addition of the states and utilities was expected as many of the opponents participated in prior challenges of the MATS rule.

Future posts on the Energy Finance Report will provide updates, so please check back.

Confluence of Emissions Regulations Favor Renewable Energy Investment (Part 2)

Posted by Van Hilderbrand on 5/24/16 12:01 PM

In yesterday’s Part 1, we discussed the Environmental Protection Agency’s (EPA) rules regulating emissions from existing and new stationary electricity generating units. In today’s post, we discuss EPA’s regulations regarding emissions of mercury and air toxics, and emissions of methane and other volatile organic compounds.

Mercury and Air Toxics Standards

MATs_Rule.jpgOn February 16, 2012, EPA published its Final Rule regarding air toxics standards for coal‐ and oil‐fired electricity generating units, also known as the Mercury Air Toxics Standards or “MATS” rule. The MATS rule regulates power plant emissions of mercury and other hazardous air pollutants. 

Industry and state petitioners challenged the MATS rule asking the court to determine whether EPA erred when it concluded that the appropriate and necessary finding under Clean Air Act Section 112 could be made without consideration of cost.

  • On June 29, 2015, in Michigan v. EPA, 135 S. Ct. 2699 (2015), the Supreme Court ruled 5-4 that EPA had erred when the agency concluded that cost did not need to be considered in the appropriate and necessary finding supporting MATS. Despite the ruling, the MATS rule has remained in place while EPA considered the cost question.
  • On December 1, 2015, in response to the Supreme Court’s direction, EPA published a proposed supplemental finding that a consideration of cost does not alter its previous determination that it is appropriate and necessary to regulate air toxic emissions from coal‐ and oil‐fired electricity generating units. EPA solicited public comment on the proposal.
  • On April 25, EPA issued a Supplemental Finding that it is Appropriate and Necessary to Regulate Hazardous Air Pollutants from Coal- and Oil-Fired Electric Utility Steam Generating Units, 81 Fed. Reg. 24,420, and affirmed that the MATS rule was appropriate and necessary to regulate air toxics after including a consideration of costs.
  • On the same day, April 25, Murray Energy Corporation filed a petition in the U.S. Court of Appeals for the District of Columbia Circuit asking the court to review the supplemental finding. Murray Energy v. EPA, C.A. No. 16-1127. The window to file petitions for review is open until June 24, so other parties most likely will file challenges and the cases will be consolidated into a single action.

The Supreme Court is also considering a petition from a coalition of 20 states, led by Michigan, that argues the MATS rule should have been vacated entirely and that the lower appeals court’s decision to keep it in place while the agency addressed legal flaws was itself illegal. Michigan v. EPA, C.A. No. 15-1152.  In briefs filed earlier this month, the U.S. Department of Justice argued that, amongst other arguments, the state coalition has no standing and can not show any injury resulting from the 2015 decision because the MATS rule imposes obligations on the power sector, not the states.  

Finally, another litigation, ARIPPA v. EPA, C.A. No. 15-1180, which was put on hold while EPA reconsidered the cost issue, was moved back to the active docket on May 11 by the U.S. Court of Appeals for the District of Columbia Circuit.  Petitioners, Utility Air Regulatory Group, and ARIPPA, are challenging EPA’s previous decision to deny administrative reconsideration requests on the MATS rule.

Future posts on the Energy Finance Report will provide updates as to the status of the MATS rule, so please check back.

Methane Emission Standards for New, Reconstructed, and Modified Sources

Methane_Rule.jpgAccording to EPA, methane has a global warming potential more than 25 times greater than carbon dioxide. Thus, while the power sector is reducing its carbon dioxide emissions by shifting from coal to natural gas generation, EPA felt is necessary to limit the impact of emissions of methane and other ozone-causing volatile organic compounds from shale gas production.

EPA published its final rule, Emission Standards for New, Reconstructed, and Modified Sources, limiting emissions of methane and other ozone-causing volatile organic compounds (VOCs) from new and modified oil and gas infrastructure on May 12. Under the President’s Climate Action Plan: Strategy to Reduce Methane Emissions and the Clean Air Act, EPA also finalized rules clarifying air permitting rules as they apply to the oil and natural gas industry, and a rule that will limit emissions while streamlining the permitting process for the oil and natural gas production industry in Indian country. According to the agency, these rules will reduce methane emissions up to 45 percent from 2012 levels by 2025.

In general, the Emissions Standards rule updates the New Source Performance Standards associated with methane and other VOCs and requires oil and gas companies to prevent leaks, capture methane from hydraulic fractured wells, and limit emissions from various types of oil and gas extraction and transmission equipment, including pumps, compressors, and pneumatic controllers. Challenges to the final rule are expected to be filed by industry associations, states, and other stakeholders who have argued that the new requirements are costly and unnecessary.

EPA also released a proposed information collection request seeking a broad range of information on the oil and gas industry. This request is a precursor to the agency’s evaluation of potential regulatory requirements for methane emissions from existing oil and gas sources and, similar to the Clean Power Plan, could be the beginning of a much larger legal battle. 

Future posts on the Energy Finance Report will provide updates as to the status of the methane regulations, so please check back.

Conclusion

With the time left in office for the Obama Administration, EPA is moving toward finalizing additional climate change and air pollution rules that reduce emissions from power plants, refineries, and the transportation sector. Operating, maintenance, and financing costs will undoubtedly increase for the oil and natural gas industries as companies come into compliance with these new emissions-reductions rules and regulations.  There is a significant opportunity for zero-emission sources such as wind, hydro, and solar to step in and fill the gap left when the utility energy sector retires existing fossil-fuel sources and begins planning for future energy needs.

Topics: Renewable Energy, Mercury Air Toxics Standards, Methane Emissions Standards

Confluence of Emissions Regulations Favor Renewable Energy Investment (Part 1)

Posted by Van Hilderbrand on 5/23/16 3:39 PM

New_Source_Clean_Power_Plan.jpgGOP Presidential Candidate Donald Trump made several sweeping promises while on the campaign trail vowing to reopen shuttered mines and bring coal back to its dominance of a decade ago. These promises, however, are dated as the coal industry continues to face multiple hurdles: (1) greater availability of affordable natural gas and renewable resources; (2) stricter emissions standards for fossil-fuel fired electricity generating sources; and as a result, (3) reluctance in the investor community to finance new coal projects.  What candidates on both sides of the political spectrum could say is that, although the mines will close, the country remains dedicated to training displaced miners to work in a new renewable energy future.

Affordable natural gas is not a new topic, so it won’t be discussed here. Instead, this post provides an overview and the status of several major recent regulations by the Environmental Protection Agency (EPA) that target reductions in emissions from the oil, natural gas, and coal industries, and how these regulations will drive increased investment in cleaner and renewable energy.  These regulatory actions are being driven, in large part, by increased bilateral and multilateral engagement and cooperation on climate change by the United States.  Two recent examples include the Paris Agreement, an international accord addressing greenhouse gases emissions mitigation, adaptation and finance, negotiated in December 2015 at the 21st Conference of the Parties of the United Nations Framework Convention on Climate Change (COP21), and the United States-Canada Joint Statement on Climate, Energy, and Arctic Leadership.

The regulations that will be discussed here are EPA’s rules regulating emissions from existing and new stationary electricity generating units. Tomorrow, EPA’s regulations regarding emissions of mercury and air toxics, and emissions of methane and other volatile organic compounds will be discussed in a separate post. 

Clean Power Plan, Existing Stationary Sources

Existing_Stationary_Source_Rule.jpgFirst and most prominent are EPA’s final rules addressing Existing Stationary Sources and New Stationary Sources. Both have been challenged in the U.S. Court of Appeals for the District of Columbia Circuit.  

EPA’s final rule, Existing Sources, Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units (80 Fed. Reg. 64,662), was published in the Federal Register on October 23, 2015 and was challenged the same day. More commonly known as the Clean Power Plan (the CPP), the CPP sets emissions rates goals and mass equivalents for each state.  Some of the major points of the CPP are: 

  • The emissions goals, which are required to be met by 2022, consider the current energy generation composition of each state and although the CPP sets the standards to be met, it allows the states great flexibility to implement target solutions;
  • Tools are provided to assist states in implementing market-based approaches;
  • The CPP provides incentives for early deployment of renewable energy and energy-efficiency measures that benefit low-income communities;
  • The CPP offers an alternative Federal Implementation Plan (or FIP) if a state chooses not to develop its own implementation strategy; and
  • Execution of the CPP is expected to drive a carbon emissions reduction of 32 percent from 2005 levels by 2030.

In January of this year, a group of 29 states and state agencies filed for an immediate stay of the CPP pending review by the U.S. Court of Appeals for the District of Columbia Circuit.  In early February, the U.S. Supreme Court, in a 5-4 decision, overturned the lower court and granted the petition to stay the CPP until a legal challenge against it could proceed on the merits.  That legal challenge, brought by several states, state agencies, and industry, is State of West Virginia v. EPA (Consolidated Case No. 15-1363).  

The litigation has moved quickly and the briefing period has closed. Oral arguments were set for June 2-3 before a three-judge panel; however, on May 16, the Court of Appeals announced that oral arguments were postponed until September 27 and will now be heard en banc, meaning the arguments will be heard by the full court, not just a three-judge panel.  This was an unusual step for the Court to take.  The Court usually holds an en banc hearing when it feels that doing so is necessary to secure or maintain uniformity of the Court’s decisions or the matter involves a question of exceptional importance.  Both of these could be true and may have driven the Court’s decision.  Chief Judge Merrick Garland, President Obama’s Supreme Court nominee, and Judge Cornelia Pillard have recused themselves from this case, so the arguments will be heard by nine judges.  

Environmental_Regulation_CPP.jpgPractically speaking, the postponement speeds up the Court of Appeals’ final decision and the timing of a Petition for Writ of Certiorari to the U.S. Supreme Court, which is likely from whichever side does not prevail. This is because after a three-judge panel renders a decision, the parties can request an en banc review.  There is no guarantee such a hearing would have been granted, but this latest move eliminates the intermediate three-judge panel step.

Much will be learned from oral arguments in September regarding the positions of the judges. Many legal professionals believed that the Court of Appeals’ original three-judge panel was a favorable bench for EPA and the CPP.  This has obviously changed with the announcement of a hearing en banc.  It is difficult today to predict how each judge will vote, but it is instructive to note that of the nine judges that will hear the case, five were appointed by Democratic Presidents. 

Given the three-month delay, the decision will most likely not be handed down until after the November election. No matter how the Court of Appeals rules, the decision will certainly be appealed to the U.S. Supreme Court. 

Under the current eight-justice Supreme Court composition, a 4-4 decision would be likely, which has the affect of affirming the decision of the lower court. Although an EPA victory in the Court of Appeals and a subsequent 4-4 decisions at the U.S. Supreme Court would be seen as a win for the agency, such an outcome wouldn’t create the kind of national precedent in support of greenhouse gas regulations that the agency wants.  That said, with a hearing from the full panel of judges, the decision would carry more weight. 

The postponement, however, also means that the case most likely won’t be heard by the U.S. Supreme Court until 2017, when conceivably a justice has been appointed to fill the seat left vacant by the death of Justice Antonin Scalia.  The current Obama Administration nominee, Chief Judge Merrick Garland, is widely viewed as voting for EPA and the CPP, but his appointment is being held up by the Republican-majority Senate.

Future posts on the Energy Finance Report will provide updates as to the status of the Existing Stationary Sources final rule, so please check back.  

Carbon Pollution Standards for New, Modified, and Reconstructed Power Plants

Clean_Power_Plan_Workers.jpgOn the same day the Existing Stationary Sources final rule was published, October 23, 2015, EPA’s final rule, Standards of Performance for Greenhouse Gases From New, Modified, and Reconstructed Stationary Sources: Electric Utility Generating Units (80 Fed. Reg. 64,510), was also published in the Federal Register.

This New Stationary Sources rule has not received the same level of attention as the Existing Stationary Source rule because very few new coal plants are in the construction pipeline due to the abovementioned availability of affordable natural gas and reluctance in the investor community to finance new coal projects. In general, the New Stationary Source rule provides that:   

  • If any new coal plants are constructed, emissions are limited to 1,400 pounds of carbon dioxide per MWh of electricity produced, which would require the use of carbon capture and storage technology; and
  • The hundreds of new natural gas power plants in the pipeline would be required to meet the emissions standard of no more than 1,000 pounds of carbon dioxide per MWh. According to the rule, plants can achieve these emissions reductions through efficient generation technology like combine cycle combustion turbines.

Similar to the CPP, the New Stationary Sources rule has been challenged. The litigation, State of North Dakota v. EPA (Consolidated Case No. 15-1381), has not moved as quickly, but final briefing has been scheduled to conclude in November 2016.  Oral argument will be set thereafter.   

In the administrative process, EPA denied several petitions for reconsideration of the New Stationary Sources rule on April 29. These petitions, filed by energy companies, trade and advocacy groups, and the State of Wisconsin, were filed, in part, to exhaust administrative remedies and to gain an additional avenue for appeal.  In general, the petitioners challenged the rule on the basis that carbon capture and sequestration technology, which EPA relied on as a foundation to issue the rule, has not been adequately demonstrated on a commercial scale.  Further, the petitioners argued that the agency had not responded appropriately to comments in the rulemaking process and used incorrect or inaccurate information in setting the standards.

The denial was formally published in the Federal Register and triggered a 60-day period for filing a petition for judicial review with the U.S. Court of Appeals for the District of Columbia Circuit. It is very likely that any appeals of the agency’s denial of the petitions for reconsideration will be consolidated with the existing litigation, State of North Dakota v. EPA.

Future posts on the Energy Finance Report will provide updates as to the status of the New Stationary Sources final rule, so please check back.  

Conclusion

With the time left in office for the Obama Administration, EPA is moving toward finalizing additional climate change and air pollution rules that reduce emissions from power plants, refineries, and the transportation sector. Operating, maintenance, and financing costs will undoubtedly increase for the oil and natural gas industries as companies come into compliance with these new emissions-reductions rules and regulations. There is a significant opportunity for zero-emission sources such as wind, hydro, and solar to step in and fill the gap left when the utility energy sector retires existing fossil-fuel sources and begins planning for future energy needs.

Topics: Renewable Energy, clean power plan, Environmental Protection Agency, EPA, renewable energy investment, new stationary source rule, existing stationary source rule

India Considers Coupling its Government Incentives with Innovative Financing Mechanisms to Achieve its Aggressive Renewable Energy Targets

Posted by Van Hilderbrand on 5/7/16 12:33 PM

Co-author Morgan M. Gerard

India_Green_Bank.jpgIndia’s story for the last decade has been one of rapid industrialization and a growing thirst for energy, regardless of the carbon profile of the energy source. As the world moves towards carbon conscious energy generation, there has been a global push to direct this rapid industrializer towards more low- and zero-emission sources.

India signed the climate reduction plan realized at the United Nations Framework Convention on Climate Change, Twenty-First Conference of the Parties (COP 21). Even before India became a party to the Paris Agreement, its central government pushed for aggressive renewable energy targets –100 GW of solar energy, 60 GW of wind energy, 10 GW of small hydroelectric energy, and 5 GW of biomass-based energy projects to be operational by March 2022. Moreover, India’s Minister of Power, Coal, and New & Renewable Energy, Piyush Goyal, articulated recently that the government would try to achieve some of these targets ahead of schedule. With all of this said, the country’s leaders still note that financing remains a key barrier to the proliferation of lower emitting energy resources. India requires over $140 billion of energy investment in the next six years to reach these targets and to increase clean energy access according to the International Energy Agency and the Natural Resources Defense Council (NRDC).

To date, the push towards renewable energy in India has been mostly achieved through government incentives that make renewable energy projects more economically attractive, including the enactment of a national offshore wind energy policy, generation-based incentives, and favorable accelerated depreciation for renewable energy assets. However, according to a report by NRDC and the Council on Energy Environment and Water, India’s plans could be greater facilitated by innovative financing efforts, such as a green bank and a market for green bonds.

Green Banks Leverage Public Funds to Cover Project Financing and Reduce Market Inefficiencies Inherent in Green Energy Solutions

A green bank is within the same vein as a government incentive; however, it may seek to assist projects by leveraging its loan portfolio or that of private investors, rather than to simply provide monetary incentives. In essence, a green bank is a public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon emissions projects by leveraging public funds through the use of various financial mechanisms to attract private investment. A green bank bridges the gap between commercial financing and riskier projects that require government assistance.

Green banks have been successful in raising capital for renewable energy projects in more developed economies such as the United States, the United Kingdom, and Japan. In the United States, green banks have been generally State instrumentalities. Although their financing is only available in select States, the banks have been able to effectively leverage capital to improve the renewable generation composition in their locality.  

Green banks can take on a variety of structures, as exemplified by Connecticut, New York, and Hawaii. Connecticut’s green bank acts as standalone, quasi-independent entity, which allows for flexibility and autonomy in its lending and operational practices. On the other hand, the green banks in New York and Hawaii are divisions of an existing state agency. For example, the New York green bank is housed within the New York State Energy Research and Development Authority (NYSERDA), and its current mission is to support the initiatives of the State’s energy market restructuring taking place through the Reforming the Energy Vision (REV) initiative. Lastly, a green bank can act as an infrastructure bank separate and apart from the government.

Green banks are able to provide many different kinds of financing tools, and banks may choose which they prefer. Such products include long-term and low interest rate loans, revolving loan funds, insurance products (such as loan guarantees or loan-loss reserves), and low-cost public investments or it may design new financial products.

Green Bonds Create an Attractive Investment in Environmental and Climate Change Projects with both Financial and Social Benefits

A green bond, on the other hand, is not a government incentive, but a fixed-income debt instrument earmarked for environmental or climate change initiatives. Green bonds offer a new opportunity for cash-strapped state and municipal governments looking for new finance flows to fund green assets. A central hurdle to constructing renewable energy assets faced by India’s localities is the high debt faced by its local utilities. Recently, the Reserve Bank of India provided relief to local banks taking on debt from their state electricity providers as part of the country’s massive bailout of its utilities. According to Reuters, “India’s state utilities are reeling under debt of 4.3 trillion rupees ($64.42 billion), after years of undercharging customers for electricity as state governments sought to win votes.”

Green bonds are currently a booming asset class that provides the issuer upfront cash and long-term payouts with the ability to structure favorable interest rates, creating an attractive investment with both financial and social benefits. To date, the NRDC Report states that India has used green bonds to finance only about $1.85 billion in clean energy projects to date. For comparison, Apple, Inc. recently issued green bonds valued at $1.5 billion.

If Indian states are permitted to issue green bonds, there is a question as to whether their credit rating will support the maneuver in light of the bail-out provided to state-run utilities. As mentioned above, states are in the midst of taking on their utilities’ cost of non-compliance with their loans. An energy ministry statement said that “the quantum of loans being taken over by states that have adopted so far adds up to Rs.1.96 trillion rupees, accounting for 45% of the Rs. 4.3 trillion utility debt outstanding as of 30 September 2015.”

The Addition of Green Banks and Green Bonds to Existing Government Incentives May Drive Renewable Energy Investment 

The financing mechanisms of a green bank and green bonds could help India scale its renewable energy sector to achieve its generation and emissions targets. These financing tools are not simply government incentives, but an active push towards commercial financing of the renewable energy sector. This type of government policy can attract those with renewable energy market expertise that are looking for ways to take advantage of growing markets and access to capital. And credit support by the central government or an independent green bank credit rating could be helpful in providing liquidity. However, India must carefully steer its plans to incentivize new renewable generation while trying to climb its way out of a utility debt crisis.  

Topics: Green Bonds, Renewable Energy, India Green Bank, India, India Green Bond, Green Bank, India Renewable Energy

Apple Leads the Way as Green Bonds Set to Grow in 2016

Posted by Van Hilderbrand on 3/4/16 3:04 PM

Co-author Morgan M. Gerard

Green_Bonds.jpgGreen bonds are fixed-income debt instruments earmarked for environmental or climate change initiatives. As companies undertake more “green” initiatives, including investing in renewable energy generation, the green bond market has grown rapidly. According to Climate Bonds Initiative, in 2015 there were $41.8 billion green bonds outstanding—a dramatic increase from the $2.6 billion in bonds in 2012. In the United States, municipalities and utilities entered the market first through new green offerings; however, it has long been predicted that private corporations with sustainability and other climate change reduction goals would soon flood the market.

Last month, technology giant Apple Inc. entered the environmental financing arena and filed a nine-tranche debt offering, including the Fruit’s first ever green bond. The seven-year bond’s profits will be reserved to develop the company’s green buildings infrastructure and fuel sustainability improvements along its entire supply chain, as well as to increase investment in renewable energy. According to Reuters, Apple’s first bond issuance was $1.5 billion and became the largest green bond to be issued by a U.S. corporation.

Although Green Bonds have Many Benefits, They also have Drawbacks

As more corporations jump into green bond issuances, accounting firm KPMG notes that the financing tool has both benefits and drawbacks. On the benefits side, green bonds “can give issuers access to a broader range of investors,” and “attract new investors focused on environmental, social and governance (ESG) performance.” Additionally, investors may be more comfortable with the green bond model since with these ‘use of proceeds bonds,’ repayment is tied to the issuer, not the project. Therefore, issuers are able to raise capital for riskier projects, while investors are better secured against non-performance. Yet, reporting and transparency are keys to validating the green credentials of the bonds; investors need to know that their bond holdings are financing green endeavors. Thus, KPMG notes that drawbacks of the bonds include the need for more tedious accounting for projects to ensure their “greenness” and the associated additional verification costs.

The Climate Bond Initiative reports that the accounting mechanisms have improved over time and are becoming more standardized and transparent. For instance, the Climate Bond Standard V2 was launched in December 2015, along with the development of sector specific standards on water, geothermal, bioenergy, low carbon transport and low carbon buildings projects. Another key development was the update of the Green Bond Principles to include more emphases on reporting and assurance. These initiatives will work to grow the market by helping companies and investors alike become more comfortable with this financing instrument.

Apple is Changing the Distributed Generation Landscape

Apple’s offering and increased green bond transparency standards will change the landscape as more large energy consumers opt to own or purchase distributed generation rather than to accept what the regulated utility has to offer. Other technology giants are moving to reduce their carbon footprint and increase their energy security as well, particularly in the data center sector. Thus, Apple’s green bond issuance may be a harbinger of things to come as companies turn to green bonds and other innovative financing mechanism to reach their sustainability goals and to fund their investment in distributed renewable energy generation.

Topics: Green Bonds, Renewable Energy, Green Energy, Distributed Generaton, Renewable Energy 2016, Apple

With Proper Policies, A $12.1 Trillion Investment Opportunity for Renewable Energy Can Be Realized

Posted by Van Hilderbrand on 2/19/16 1:20 PM

Solar_Investment.jpgCo-author Morgan M. Gerard

Despite the currently low prices of oil and natural gas, renewable electric power generation is poised for rapid growth. Based on a “business-as-usual” scenario, Bloomberg New Energy Finance’s New Energy Outlook, June 2015 predicted a $6.9 trillion investment in new renewable electric power generation over the next 25 years. A newly published report by Ceres, Bloomberg New Energy Finance, and Ken Locklin, Managing Director for Impax Asset Management LLC, predicts a much greater opportunity for private sector companies and commercial financiers to invest in new renewable energy.

Mapping the Gap- the Road from Paris

Mapping the Gap: The Road from Paris concludes that achieving a temperature change goal of 2ºC or below, as outlined in the recent climate accord reached in Paris at the United Nations Framework Convention on Climate Change’s (UNFCCC) twenty-first session of the Conference of the Parties (COP 21), is now a $12.1 trillion investment opportunity. (This is in addition to a predicted $20 trillion investment in legacy low-carbon electric power generating sources such as large-scale hydro and nuclear.) Thus, the current investment trajectory of $6.9 trillion in a “business-as-usual” scenario leaves a massive gap of $5.2 trillion needed to reach international goals. Financial markets have the capability to close this gap, especially given the dropping price of renewables, a maturing market offering lower-cost capital deployment, an expanding need for global energy, and the ability of this level of investment to drive local jobs and economic growth.

United Nations Policy Analyst and Global Strategy Advisor of the Citizens Climate Lobby, Sarabeth Brockley, agrees. According to Ms. Brockley, who witnessed first-hand the participation at the conference by the private sector, particularly large power purchasers such as Google and Facebook could provide the catalyst for energy investments in renewables and drive the future direction of the global energy economy. Ms. Brockley notes that with the accord in place and with an increased push to decarbonize, the private sector recognizes that energy investments in zero- and low-carbon emitting resources are the planet’s future while the unknowns surrounding the future of fossil fuels make them a riskier proposition.

New Policies Are Needed to Bridge the Investment Gap

Some investment opportunities are available today under existing policy frameworks and market conditions; however, new policies will need to be deployed to assist in this endeavor. “There is huge opportunity for expanded clean energy investments today. But to fully bridge the investment gap, policymakers worldwide need to provide stable, long-lasting policies that will unleash far bigger capital flows. The Paris agreement sent a powerful signal, creating tremendous momentum for policymakers and investors to take actions to accelerate renewable energy growth at the levels needed” says Sue Reid, Vice-President of Climate & Clean Energy at Ceres, a nonprofit organization promoting corporate responsibility and environmental stewardship.

This article explores which incentives, policies, and approaches may be on the horizon for U.S. energy market participants – both generators and consumers – as the global energy mix moves towards carbon consciousness.

Carbon Pricing

As the world looks ahead to the twenty-second Conference of the Parties (COP 22) in Marrakesh, Morocco, Ms. Brockley believes that carbon pricing will certainly be on the agenda. Pricing carbon emissions will help create incentives to develop new, cleaner energy technologies and to encourage demand reduction.

One way to price carbon is by placing a tax on harmful emissions. A carbon tax places a price on emissions and allows the market to determine the quantity of emission reductions. An alternative way to price carbon is through a cap-and-trade program. Here, the program sets the quantity of emissions reductions while giving market participants the opportunity to determine price and trade credits to meet overall emissions reduction goals which are lowered over time to reduce the amount of pollutants released.

Some countries are moving ahead with plans to implement carbon pricing. For example, in September 2015, President Xi Jinping of China made a landmark commitment to start a national program in 2017 that will limit and price greenhouse gas emissions in the country. Other countries are implementing similar measures based on discussions at COP 21. The United States, however, has a long road ahead. Congress came close to a greenhouse gas cap-and-trade system in 2010 with the Waxman-Markey Climate Bill; however, the legislature ultimately balked at passing the bill and discussions involving climate change on Capitol Hill have been somewhat toxic ever since.

Moreover, any type of binding international agreement on a price for carbon will be difficult to adopt given the aggressive opposition towards President Obama’s Clean Power Plan (CPP). The CPP is currently facing attack by Congressional Republicans and an omnibus litigation brought by twenty-seven states and an amalgam of private actors. The Supreme Court recently granted a delay for implementation of the CPP, leaving the policy strategy to lower carbon emissions in jeopardy.

Meanwhile, states and private companies in the U.S. are starting to act. California’s state-wide, expanded cap-and-trade program is off to the races and is being intently watched as a potential model that could be replicated in other states or regions. Amongst the private sector, Microsoft is leading the way by already accounting for the price of carbon internally, which industry leaders believe is both changing internal behaviors and saving the company more than $10 million annually. Additionally, many traditional fossil companies are pricing carbon. ExxonMobil is assuming a cost of $60 per metric ton by 2030, BP currently uses $40 per metric ton, and Royal Dutch Shell uses a price of $40 per ton.

Tax Incentives

Tax incentives use the U.S. tax code to subsidize the development of renewable energy. These incentives include accelerated depreciation for investment in renewable power-generating plants or manufacturing facilities and tax credits tied to a renewable power project’s output or overall capital expenditures. Conversely, there is increasing interest in phasing out traditional fossil fuel subsidies, long deployed in support of high carbon emitting resources.

The driving incentives behind renewable energy in the United States are the federal Production Tax Credit (PTC) and the Investment Tax Credit (ITC). The PTC has been the largest driver of the wind energy industry as it provides 2.3 cents per kilowatt-hour generated. The ITC, which has been the major driver of solar energy and also has served as a potential alternative credit for wind energy, provides a credit for 30% of the development costs of a renewable energy project. The credit is applied as a reduction to the income taxes for that person or company claiming the credit.

The ITC was originally slated to be cut from 30% to 10% for non-residential and third-party-owned residential systems, and to zero for host-owned residential systems by the end of 2016. However, Congress authorized the extension of both the PTC and ITC at the end of 2015. The ITC will now be in place for an additional five years, including three years at the current value followed by graduated step-downs. The impact of the tax incentives extensions are set to be significant, and will likely inject new life into abandoned projects, protect existing jobs, support additional job creation, and ensure that the renewables sector remains poised for an upward growth trajectory.

Renewable Energy Targets

Governments can set renewable energy targets to drive lower carbon emissions. Also known as Renewable Portfolio Standards (RPS), these targets generally requires local utilities to generate electricity through renewable energy sources or purchase Renewable Energy Credits (REC) that represent essentially the environmental benefit of the zero-carbon power system. Typically, these involve annual goals which increase over time.

In the aftermath of the defeat of the Waxman Markey Climate Bill, many renewable energy friendly states such as Massachusetts, New York, and California, enacted RPS frameworks. This approach has been successful in lowering carbon emissions, but remains a patchwork method that has no national systemization. There have been calls to create a national RPS, all of which have been soundly defeated in Congress to date.

Net Energy Metering

Net energy metering (NEM) programs allow renewable energy system owners, such as homeowners with photovoltaic solar systems, to sell their excess power back to the electric grid. NEM has been enacted domestically on the state level and is only available in certain jurisdictions, such as Maryland, California, Massachusetts and the District of Columbia. Although studies have found that NEM has greatly contributed to the adoption of rooftop solar generation, there are battles being waged around the country between utilities and distributed generation advocates about the future of the incentive.

For example, the Nevada Public Utilities Commission (NPUC) voted recently to cut net metering payments by half while simultaneously raising the fixed fees for solar customers to around 40% by 2020. Additionally, the NPUC is applying these changes retroactively, which distinguishes actions in Nevada from those in other states that have altered their net metering. This means that these new prices will apply not only to new solar customers, but to existing customers as well. The result has been that many prominent rooftop solar companies have exited the market, and some solar customers have joined a class action law suit against the NPUC and their local utility, NV Energy.

On the other hand, some jurisdictions like New York are seeking to incorporate more distributed generation into their electricity grid systems and reevaluating NEM as an efficient mode of compensation to the non-utility generator. New York is trying to create an interactive distributed generation marketplace where generators sell their power not only to the electric grid, but also to neighboring energy customers. New York is exploring whether or not a fixed NEM charge is the best way to handle marketplace transactions, or if determining the value of distributed generation to the electric grid is more efficacious. If successful, New York’s model could become the template for growth in other states.

Feed-in-Tariffs

Feed-in-tariffs (FIT) enable renewable power generators to sell their electricity at a premium above typical market rates. Historically, FITs have been utilized in Germany and the rest of Europe, where the government mandates that utilities enter into long-term contracts with renewable generators at specified rates; typically well above the retail price of electricity.

On the federal level in the United States, regulators have chosen to enable tax credits versus utilizing the FIT approach. However, there is a recent example of a FIT from 2013 in Virginia where Dominion Virginia Power allowed a voluntary FIT for residential and commercial solar photovoltaic (PV) generators. Participants received 15 cents/kilowatt-hour (kWh) for a contract term of five years for all PV-generated electricity provided to the electric grid, and will continue to pay the retail rate for all electricity that they consume. In 2012, the average retail electricity price was 10.5 cents/kWh for residential customers and 7.8 cents/kWh for commercial customers.

Conclusion

The United States is already experimenting with many of the above incentives and approaches, but more work will be required on the policy side to meet the investment target projected by the Ceres-BNEF report.

While the scale of this new investment opportunity is massive, the report finds that it is dwarfed by the capacity of global financial markets to unleash the needed investment capital. In the United States alone, consumers borrowed $542 billion over the past year to purchase cars, and assumed $1.4 trillion in new mortgage debt. Clearly, the financial markets have the capacity to absorb the financing “gap” between “business-as-usual” and the 2ºC goal outlined at COP 21. Thus, Ceres remains optimistic about the investment opportunities. “Renewable energy investment volume needs to more than double in the next five years,” noted Ms. Reid. “With the tailwind of the Paris Climate Agreement, buttressed by advancements around the world such as the US renewable energy tax extenders, there is tremendous opportunity ahead for clean energy investors.”

Although our markets have the capability of achieving the COP 21 pledge, those looking to capitalize on this unprecedented opportunity should understand the policies on the horizon that could promote safe returns on their investments.

Topics: Carbon Emissions, Biomass, Solar Energy, Renewable Energy, COP21, ITC, Energy Investment, Investment Tax Credit, renewable energy investment, PTC, carbon tax, Wind Energy, Climate change, Ceres, United Nations, UNFCCC, production tax credit, cap-and-trade, renewable portfolio standard, feed-in-tariff, COP22, carbon pricing

A High Stakes Game—COP 21 and Climate Policy in the United States

Posted by Van Hilderbrand on 12/9/15 4:38 PM

COP_21.jpgCo-author Morgan Gerard

“Never have the stakes been so high because this is about the future of the planet, the future of life” notes French President Francois Hollande with respect to the 21st Session of the Conference of the Parties (COP 21). Representatives from more than 190 nations are currently gathered in Paris to discuss a possible new global agreement on climate change, aimed at reducing greenhouse gas emissions. Global emissions have steadily increased over the past 15 years, but according to a study, published in the journal Nature Climate Change and presented at COP 21, global emissions from fossil-based fuels and industry are likely to have fallen 0.6 percent in 2015, even as the world’s economy has grown. The representatives attending the conference hope to capitalize on this opportunity and continue the work to reduce emissions.

The U.S. Energy Market is Following the COP 21 Talks Closely

The stakes have also never been higher for the U.S. energy market. The outcome of the climate talks may guide which types of energy projects are able to raise capital in a more carbon conscious economy.  Even before the talks began, energy market participants were provided signals on the future U.S. energy policy. In a pre-conference bi-lateral agreement with China, President Obama promised the world that the U.S. would cut its own emissions by at least 26 percent by 2025.  To achieve this pledge, the U.S. Environmental Protection Agency (U.S. EPA) recently promulgated the Clean Power Plan, a rule that incentivizes states to retire traditional coal-fired sources and high carbon polluting sources, and to replace them with natural-gas plants and renewables. The Clean Power Plan aims to reduce emissions from power plants by an estimated 32 percent below 2005 levels by 2030.

If the COP 21 talks are successful and a global agreement with definable goals is created, there will be much work to be done and substantial investment to be made. In fact, the International Energy Agency (IEA) estimated in a “World Energy Outlook, Special Briefing for COP 21” that $13.5 trillion worth of investment between now and 2030 would be needed to meet the likely goals agreed upon at the conference. Hundreds of billions of dollars have been committed from business and governments alike to finance clean energy innovations and carbon mitigation, and significant clean energy lending targets have been established by the largest U.S. multinational banks. This influx of capital represents a significant opportunity for the development of low- and zero- emitting energy sources in the U.S. and globally.

 President Obama’s Vision of the Future U.S. Energy Policy has its Critics

President Obama’s plan to reduce emissions is not without its hurdles.  The politics behind the COP 21 negotiations will focus on whether national pledges to reduce carbon emissions will be binding and what countries will sign up for an enforceable commitment. While France has pushed for a climate treaty, President Obama and other U.S. representatives have sought to maneuver the talks away from the creation of a treaty that will be subject to the consent of the Republican-controlled Senate, where approval would be difficult.  In a symbolic move in anticipation of the COP 21, two Senate resolutions were passed in late November that would effectively quash the efficacy of the Clean Power Plan. The resolutions would prevent the U.S. EPA from placing emissions limits on existing power plants and would also block the carbon rule for newly built power plants.

Additionally, the Clean Power Plan is under fire as West Virginia and 23 other states filed a federal lawsuit that claims that the U.S. EPA created an unprecedented regulatory scheme without legal backing. State of West Virginia, et al. v. U.S. Environmental Protection Agency, et al., 15-1363 (Consolidated) (D.C. Cir 2015). Opponents of the rule have asked the U.S. Court of Appeals for the District of Columbia to delay implementation of the Plan until the case has been resolved, which would effectively prevent states from developing compliance plans that meet the emission target goals. Moreover, those betting on solar to help meet the Plan goals are doing so as the main incentive for the renewable resource, the Investment Tax Credit, is set to step down from 30 percent to 10 percent for commercial systems in 2017.

The U.S. is at a crossroads – which direction will the country’s energy future go? Will the results of the COP 21 shed light as to how the U.S. will proceed or will the uncertainty surrounding the Clean Power Plan and several energy policies continue to distort the signals?  Only time will tell.

Topics: Energy Policy, Renewable Energy, COP21

Tech Update: Another Use for EV Batteries?

Posted by Van Hilderbrand on 12/3/15 4:28 PM

Co-author Emma Spath

EV_Batter.jpgIn the midst of the Fukushima Daiichi nuclear disaster in March 2011, electric vehicle (EV) batteries were used in an unusual and innovative way—as energy storage.  The earthquake caused a plant shutdown, but the following Tsunami waters damaged the back-up diesel generators responsible for cooling the plant’s systems.  Many do not realize that as the situation in the nuclear reactors became increasingly dire and with no ability to generate power onsite, the Tokyo Electric Power Co. (TEPCO) brought in fully-charged EV batteries to supply electricity, restart the pumps, and reestablish steady water circulation for cooling.  Fukushima demonstrated to the world that EV batteries can not only be used for transportation, but also as mobile power sources able to resupply the power grid.

Use of EV Batteries for Storage is Growing

Elsewhere in the world, traditional EV batteries are gaining support not only to power vehicles, but also as battery storage.  For example, car manufacturer Nissan has partnered with Canadian electric company PowerStream to pilot tests to determine the potential of using its popular model, the Nissan Leaf, for battery storage.  The concept has been called Vehicle to Home, or V2H, and the vehicle would essentially communicate with the power grid, its charging station, and the house to determine when and how much electricity is needed in times of grid strain, such as brownouts in heat waves, or general power outages.  Additionally, V2H could be used to avoid peak energy demand charges.  Nissan states that the 24 kWh of energy could power the average home for 24 hours without power conservation attempts.  The special V2H charging station also has the load capacity to power common household appliances at the same time.

Elon Musk and Tesla have introduced the $3,500 Powerwall, to be delivered in late 2015. Based on the technology used in the Tesla Model S battery, the Powerwall is a home battery that charges using electricity generated from solar panels and has the additional benefit of automatically recharging in the middle of night when energy demand is at its lowest.  This new technology may be most feasible for someone who already has solar panels and a power inverter installed, so one can avoid buying an additional ac/dc inverter. 

In April 2015, Musk also unveiled the Powerpack, a $25,000 version of the Powerwall for businesses. Even before the public announcement, Walmart signed a deal with Tesla to test its stores with Powerpacks in conjunction with existing solar panels.  Musk informed shareholders at the April announcement that as much as 80% of the non-vehicle battery business will likely be to utilities and large industrial customers like Walmart. 

Recycled EV Batteries for Power

Companies are getting involved in EV batteries in a different way—recycled EV batteries.  Recycling EV batteries extends their life and prevents the immediate disposal in landfills.  The typical lifetime of an EV battery is 10 to 12 years, but after the batteries have exhausted their use within a vehicle such as the Chevrolet Volt or Nissan Leaf, the batteries still maintain up to 80% of their capacity.  For example, Chevrolet is currently using five recycled Chevy Volt batteries to power the new General Motors Enterprise Data Center at its Milford Proving Ground, helping the Center to annually deliver net-zero energy use.  The batteries also provide back-up power to the building for four hours in the event of an outage and can provide excess energy to the grid that supplies the Milford campus.  Because electric car sales are currently depressed in Japan and in the United States thus causing supply to be low, time will tell if recycled EV batteries will cause a significant and broad energy impact. 

Through Tragedy Comes Opportunity

The future for EV batteries as storage should gain additional momentum due to a 2013 order from the California Public Utilities Commission, which requires Edison, San Diego Gas & Electric and Pacific Gas & Electric to install or contract for more than 1,325 megawatts of electricity storage throughout the state by 2020, thus creating a significant market for batteries such as the Powerwall and recycled EV batteries.  Additionally, the Department of Energy is conducting extensive research on EV batteries, including ways to reduce size and production costs, both of which may make use of new EV batteries as storage more feasible.  Although in some ways the use of EV batteries as storage was brought to the public eye by a tragedy, the future for this type of battery storage has serious potential, especially as more technological improvements are made regarding size, weight, capacity and costs.

 

Topics: Energy Storage, Renewable Energy, Electric Vehicles

Managing the Rise of Distributed Energy - Emerging Utility Trends

Posted by Van Hilderbrand on 8/19/15 11:39 AM

Co-author Morgan Gerard

Much has been written and discussed over the last few years regarding the conventional utility’s “death spiral.” America’s power generation utilities have become increasingly fearful that a significant majority of their customers will generate their own electricity through innovative distributed energy technologies like rooftop solar. In other words, their customers become their competitors. As these customers migrate off the power grid, the utility’s revenues drop due to reduced load and the traditional monopoly model folds.

Utility Sunset 2Utilities have been aware of this emerging threat for some time. Now, as the price of renewables plunges and traditional coal-fired power plants are decommissioned under the Environmental Protection Agency’s Clean Power Plan, utilities have to respond to this changing environment with a new set of tools. In this post, we discuss a few trends developing across the country toward a cleaner, more affordable and more reliable grid.

Performance Based Rate Making

In Minnesota, the state’s leading utility, Xcel Energy, is pushing legislation (HF 1315) to create a performance based rate (PBR) regime that adjusts the utility’s revenue model to align with the state’s energy policy objectives while still protecting the utility’s business interests. Standard ratemaking in most states is based on the cost-of-service versus the rate-of-return. Instead of minimizing costs to achieve higher rates and greater revenues, the PBR de-couples the rate-of-return from the amount of kilowatt-hours sold, and focuses utility returns on its ability to meet a series of performance metrics that, for example, enhance the grid-system, energy efficiency, or customer value. PBR relies on setting a threshold performance level; thus, rewarding utilities for meeting targets and penalizing them for under-performance. An added benefit for utilities and ratepayers is that the PBR method may decrease the number of rate cases, which can be costly and time consuming. Thus, PBR can incentivize utilities to adapt to technological changes and promote distributed generation while continuing to recoup cost of investment and creating returns for shareholders.

Performance-based regulations will inevitably change the relationship between customers, utilities, and regulators. By tweaking their business model to meet state performance goals and create a distributed energy project-friendly market, traditional utilities in Minnesota will not only survive, they may thrive.

Platforms for Distributed Technologies

The New York Public Service Commission (NYPSC) is proactively exploring revamping incumbent utilities as “platforms for distributed technologies.” NYPSC’s Reforming the Energy Vision (REV) docket envisions these platforms as a transmission line “gatekeeper,” and the conventional utility will fulfill this role. The gatekeeper’s purview would include grid demand response, energy efficiency, and distributed generation. The NYSPC envisions utilities as Distributed System Platforms (DSP) constructing a multi-sided platform market with the utility functioning as the platform provider, similar to the interfaces found in the financial markets, credit card services, video game systems, and many internet businesses. In these markets, transactions take place in a triangular rather than linear exchange, in which buyers, sellers, and the platform provider each interact with two or more other parties rather than one counterparty exclusively. The platform provides the technology, protocols or structure through which users can interact. The NYPSC’s Staff has released its second White Paper that analyzes how to transition utilities towards the DSP market, and a feature of this transition seems to be a version of PBR that incentivizes distributed generation, low cost electricity and grid resiliency. Therefore, instead of spiraling to their deaths, New York utilities will have the opportunity to adapt as this market interface, connecting energy customers to energy producers-- a redefined role in a new energy industry as distributed generation clearing houses.

DG solarCalifornia has taken note of the REV trend and the California Public Utility Commission is in the process of creating distribution resource plans (DRPs) that incorporate distributed energy resources into utility grid-planning and investment regimes. Further, California’s model would place utilities in the role of brokering wholesale and retail grid energy, and perhaps empower the utility as a grid-edge operator similar to an independent system operator of a transmission grid. Again, such strategy may call for incentivized performance-based rate structures.

Net Metering Pushback

Utilities are not all for adapting to new and innovative business models, and in many states are continuing to push back against distributed generation. Net metering, which has incentivized hundreds of distributed energy projects, is a legislative policy that allows generators to sell back unused electricity into the utility grid. Once supported by utilities, these policies are becoming more contentious across the country since in cost-of-service versus the rate-of-return regulatory jurisdictions, there is the argument that net metering prevents utilities from recouping their full return on grid investment. Utilities have raised concerns that net metering policies create an inequitable cost sharing paradigm, whereby customers are paid for over-generation, but do not bear the responsibility or cost for updating and maintaining transmission lines.

For example, contention over net metering in Hawaii brought a regulatory proceeding to halt as the island’s utility maintains that costs are shifted to non-net metering customers. The utility recommends a model for distributed energy resources where owners would be compensated for net-metered electricity at $0.18 per kWh, which lengthens the payback period for solar infrastructure investments. Similarly, the Arizona Public Service Company (APS) established a charge for new rooftop solar panel installations connected to the electric grid through net metering, amounting to $0.70/kW—approximately a monthly charge of $4.90 for most customers. The policy was effective starting January 2014, and will be in effect until the next APS rate case.

Considering that utilities maintain ownership of the transmission lines, and in many jurisdictions that their energy generation role is still a necessity for grid stability and reliability, these companies retain a considerable amount of power over the destiny of our power markets. However, customers that have installed distributed energy projects like solar, expect to receive the net metering rates they were promised. As more utilities stop supporting net metering policies, distributed generation continues to proliferate. Thus, there needs to be a compromise between the utility, customers, and regulators that fairly accounts for all costs. Only then can a win-win solution be developed.

Thoughts for the Solar Customer, Developer, Investor

The unprecedented amount of distributed energy coming online will have to be accounted for in the future power generation industry model. Ultimately, the states will serve as arbiters that will guide the evolution of the electric industry. Many states are closely watching the developments in New York, Minnesota, California, Hawaii, and Arizona as each regulatory body considers its own solutions to balance renewable energy developments with grid maintenance, safety, and reliability. The attractiveness of distributed energy to the customer, developer, and investor will certainly depend on the solution chosen.

Topics: Utilities, NY REV, Energy Policy, Energy Efficiency, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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