Energy Finance Report

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

U.S. EPA Earns Early Victory in Opponents' Challenge to Clean Power Plan

Posted by Jeffrey Karp on 1/22/16 5:47 PM

Co-authors Van Hilderbrand and Morgan M. Gerard

On January 21, the United States Environmental Protection Agency (U.S. EPA) won an initial victory as the D.C. Circuit refused to grant opponents a stay of the Clean Power Plan (CPP or Rule).

Clean_Power_Plan_Legal_Challenge.jpgThe Rule, promulgated pursuant to section 111(d) of the Clean Air Act (CAA), limits carbon dioxide emissions from existing fossil fuel fired electric generating plants (generating units).  The CPP’s goal is to cut emissions by 32 percent from 2005 levels by 2030, and each state is provided an emissions reduction target. Qualifying state emissions reductions under the Rule generally prompt the retirement of coal plants and the greater adoption of natural gas and renewable resources.  States must submit their implementation plans (SIP) in 2016 demonstrating that they will achieve the requisite emissions reduction by 2022, or request a two-year extension. However, if a state fails to submit an adequate implementation plan by the 2016 due date or request an extension for plan development until 2018, U.S. EPA will assign a federal implementation plan (FIP) that will enable that state to meet its emissions reduction target.

The timing of SIP submittal is a critical element in achieving the Rule’s objective of curbing emissions.  Thus, if the challengers had obtained a stay of the Rule’s effective date, the Agency’s ability to demand compliance by states with the SIP submittal date may have been jeopardized.

Hours after the regulation was published in the Federal Register, 27 states filed more than 15 separate cases against the U.S. EPA that were consolidated before the U.S. Court of Appeals for the District of Columbia Circuit. Eighteen other states, including New York and California, have joined in the consolidated lawsuits in support of the CPP. Although the final disposition of the Plan is still uncertain, the Rule remains in effect unless and until it is set aside by a court.

The opening maneuver of the Rule’s opponents was to request a stay with the goal of halting SIP submittal and U.S. EPA’s authority to enforce deadlines until the court ruled on the merits. The Agency and its allies prevailed in this initial squirmish, as the court found the Rule’s challengers “did not meet the stringent standard to grant a stay pending court review.” The result of the Court’s ruling is that all states must begin preparing to meet the CPP’s requirements or risk EPA’s imposition of a FIP.

Topics: Carbon Emissions, CPP, Clean Power, clean power plan, Environmental Protection Agency, EPA, State of West Virginia v. EPA, EPA Victory, West Virginia, Stay of the Rule, Climate change, Clean Air Act, Section 111(d), Global Warming, Greenhouse Gas Emissions, Stay

Mid-Atlantic: Distributed Energy Opportunities

Posted by Joshua L. Sturtevant on 11/3/15 11:58 AM

Solar panels at a roof with sun flowersThe Mid-Atlantic region (Maryland, Delaware, Virginia and the District of Columbia) is currently at the forefront of discussions regarding the next generation of distributed electricity markets. Notable developments pushing the region into the spotlight recently include M&A activity, creativity on the part of public service commissions, local innovations in PACE finance, and increasing flexibility on the part of local utilities.

Programs and developments of particular note include:

- Net metering and renewable portfolio standards in Maryland

- PACE financing in Montgomery County, Maryland

- Discussions around undertaking a REV-like proceeding in Maryland

- Interconnection standardization in D.C.

- Microgrid studies being undertaken in D.C.

- Potential third-party bidding for large-scale solar in Virginia

- Renewable portfolio standards and net metering in Delaware

- Community solar innovations and discussions throughout the region

Please join SEIA and Sullivan & Worcester’s Energy Finance team on November 5th live in SEIA’s new offices, or by dial-in, as we host a roundtable discussion on developments in the region and the unique business opportunities they could present. After Rhone Resch’s introductory remarks, Elias Hinckley will moderate a panel comprised of industry experts with unique opinions, including Maryland PSC Commissioner Anne Hoskins, Dana Sleeper of MDV-SEIA, Anmol Vanamali of the DC Sustainable Energy Utility, Bracken Hendricks of Urban Ingenuity and Rick Moore of Washington Gas. Interested parties can register here.

Topics: Water Energy Nexus, Utilities, Water, Carbon Emissions, Energy Security, Thermal Generation, Energy Policy, M&A, Structured Transactions & Tax, Energy Storage, Energy Efficiency, Power Generation, Microgrid, Energy Finance, Distributed Energy, Energy Management, Solar Energy, Renewable Energy, Wind, Oil & Gas

REV Conference Recap: Opportunities for Distributed Generation in New York

Posted by Joshua L. Sturtevant on 10/21/15 11:38 AM

REV PictureThe Sullivan & Worcester LLP Energy Finance team recently hosted an event on New York’s Reforming the Energy Vision (REV) initiative. In particular, the panel participants, including former New York Public Service Commission Commissioner Bob Curry, Mike Pantelogianis of Investec, Sarah Carson Zemanick of Cornell University and Jay Worenklein of US Grid Company, focused on how deals will get done under the new framework.

While REV is in its relative infancy, and while it is perhaps difficult to draw too many conclusions regarding business models as a result, the panelists nonetheless made some interesting points that policymakers would do well to take under consideration. In particular, the participants seemed to agree that uncertainty is one of the largest risks to investment coming into the market. Additionally, the panelists seemed to agree that getting the role of the utilities correct will not be an easy task, but could lead to interesting investment opportunities, particularly in the microgrid space.

The issues the panelists addressed can be added to others we have discussed in the past, including: 1) addressing technology risk; 2) ensuring reliability; 3) containing cost; and, 4) avoiding regulatory issues.

Those interested in viewing the program in its entirety can find it here: REV Roundtable

 

Topics: Carbon Emissions, NY REV, Structured Transactions & Tax, Energy Efficiency, Power Generation, Energy Finance, Distributed Energy, Energy Management, Renewable Energy

First Democratic Presidential Debate Recap— Where Do the Candidates Stand on Energy?

Posted by Jeffrey Karp on 10/16/15 9:59 AM

American Republican and Democratic party animal symbolsIn stark contrast to the Republican match up in September, energy and climate change related policy was freely discussed during the first Democratic presidential debate. For energy industry participants, the question becomes: how will climate policies affect the kinds of projects that get built and financed if a Democrat becomes President? The takeaway after surveying the positions of the candidates presented on Tuesday night is that Americans would be building a great deal of new energy infrastructure.

Martin O’Malley: Former Maryland Governor O’Malley advocated for a green energy revolution, and put forward a plan to move the country to a 100% clean electric grid by 2050. He claims that his clean energy plan would create 5 million jobs along the way. Stressing the fact that he was the only candidate to set forth a compressive energy plan, Mr. O’Malley took issue with President Obama’s current “all of the above” strategy. In particular, Mr. O’Malley’s plan would ease financing for solar and wind energy project development by extending tax incentives through the Investment Tax Credit (ITC). His plan also calls for stricter rules to curb greenhouse gas emissions and to encourage energy efficiency. Although hawkish on clean energy, Mr. O’Malley did not address the recent domestic oil and natural gas boom. He also did not address the country’s transition towards 100% clean energy while maintaining base load and peaking.

Jim Webb: Former Virginia Senator Jim Webb was the outlier pro coal candidate on the slate who also supports offshore drilling and the Keystone XL oil pipeline. He touted his Senate record as an “all of the above” energy policy legislator, and highlighted his introduction of alternative energy legislation. Mr. Webb also pledged his strong support for nuclear energy as both clean and safe.

Bernie Sanders: Senator Bernie Sanders challenged Mr. Webb on the issue of nuclear energy as “safe,” but wants to act aggressively on the climate change front. Although, Mr. Sanders did not promote a plan for the nation’s energy future, he advanced a bill in July in the Senate that would make solar energy more accessible to low income families. The Sander’s bill would allocate $200 million of Department of Energy loans to offset the upfront costs of installing solar facilities.

Hillary Clinton: Former Secretary of State Hillary Clinton did not address energy policy, but seems comfortable following an “all of the above” strategy. She is a defender of the Clean Power Plan. According to Mrs. Clinton’s “climate change fact sheet,” she would extend the ITC and expand installed solar capacity to 140 gigawatts by the end of 2020, a 700% increase from current levels. Mrs. Clinton’s plan lacks a strategy on the natural gas shale boom occurring in America, but she just may be holding back discussing her complete energy policy as she did with her decision to oppose the Keystone XL oil pipeline.

Lincoln Chaffee: Former Rhode Island Governor Lincoln Chaffee stated that he consistently has taken on the coal lobby during his time in the Senate and named the lobby the enemy he is most proud of combating. Although he didn’t have an opportunity to comment on energy policy, his campaign website states that he always has opposed the Keystone XL oil pipeline, as well as drilling in the Artic region.

Energy and climate change issues will remain a priority topic for the Democratic candidates on the campaign trail and it will be interesting to watch the role these issues play in future debates. Both parties appear to support building more energy infrastructure. However, they seem to diverge on the types of projects that would be promoted, with Republicans leaning towards building oil and gas pipelines with varying stances on renewables while Democrats favor solar energy development. Although the primary season has just begun and it is early in the election cycle, participants in the energy sector should be mindful of how the candidates’ energy policies may impact their business model.

Topics: Carbon Emissions, Energy Policy, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy, Wind, Oil & Gas

Can the Clean Power Plan Achieve Its Carbon Emission Reduction Goal Through Increased Renewable Energy Development?

Posted by Jeffrey Karp on 9/22/15 10:41 AM

photovoltaic cells and high voltage post.

Co authors Van P. Hilderbrand and Morgan M. Gerard

As the dust settles amidst the hoopla and angst surrounding the Environmental Protection Agency’s (U.S. EPA) final promulgation of President Obama’s Clean Power Plan (CPP or the final Plan), a theme has emerged – renewables are expected to be a major energy source. From proposal in 2014 to U.S. EPA’s final rule in August 2015, the share of renewables in the agency’s forecast of the U.S. power sector in 2030 jumped from 22 to 28 percent. Concomitantly, the final Plan further highlights the anticipated strong presence of renewable energy resources in the states’ future energy mix.

The question now arises whether enough renewable energy resources can be built to enable the states' to meet their respective carbon emissions from power plants. The answer depends on whether investors will have adequate incentives and financing mechanisms to “prime the pump” and generate the requisite megawatts of renewable energy to help meet the final Plan’s emission reduction targets.

The Final Plan’s Approach to Carbon Emission Reduction

The CPP’s goal is to reduce carbon emissions from stationary energy-generating sources such as coal and gas power plants. In the final Plan, U.S. EPA assigned each state a specific emissions reduction target. The agency then provided the states with discretion and flexibility to decide how to meet those targets within the context of the CPP’s designated “building blocks” (discussed later). However, if a state fails to submit an adequate implementation plan by the 2016 or request an extension for plan development until 2018, U.S. EPA will assign the state a federal implementation plan (FIP) that will enable that state to meet its emission reduction target. A sample FIP, which creates an opted-in cap-and-trade marketplace, was released with the final Plan on August 3, 2015.

Establishment of Emissions Reduction Rates: Section 111(d) of the Clean Air Act requires that U.S. EPA determine the “best system of emissions reduction” (BSER) for pollutants such as carbon dioxide. To achieve this result, the agency examined the technologies, strategies, and measures previously implemented by states and utilities to reduce emissions at existing power plants.

Power NightThis examination yielded three “building blocks” in the final rule that a state may use to meet emission reduction targets. It may improve heat rates at existing power plants to make them more energy efficient (Building Block 1); use more lower-emitting energy sources like natural gas rather then higher-emitting sources like coal (Building Block 2); and/or use more zero-emitting energy sources like renewable energy (Building Block 3). U.S. EPA then considered the ranges of reductions that could be achieved at existing coal and natural gas power plants at a reasonable cost by application of each building block.

The building blocks were applied to coal and natural gas plants across the three U.S. interconnection regional grids - the Western interconnection, the Eastern interconnection, and the Electricity Reliability Council of Texas interconnection. The analysis conducted by U.S. EPA produced regional emission performance rates - one for coal plants and one for natural gas plants. The agency then chose the most readily achievable rate for each source (both calculated from the Eastern interconnection) and applied the rate uniformly to all affected sources nationwide to develop rate-based and mass-based standards. Although this approach created uniformity, nonetheless, each state still was assigned a different emissions target based on its own specific mix of affected sources.

Plan Implementation: As noted, U.S. EPA has enabled the states to decide the manner in which to meet their reduction targets. Thus, the CPP does not mandate specific changes to a state’s fuel mix; rather, states are free to determine how best to meet their emission reduction targets. For example, as applicable, a state may focus solely on Building Block 1 and making efficiency improvements at existing coal and natural gas plants. Conversely, a state may focus on Building Block 3 and incentivize development of more zero-emitting energy sources. Or, all three of the building blocks may be used to achieve a state’s targets.

The CPP’s approach to achieving compliance is notable because critics have argued that, under Section 111(d) of the Clean Air Act, U.S. EPA cannot regulate beyond the “fence line” (e.g., the agency can only regulate a power plant itself, and cannot count unrelated energy efficiency measures and renewable energy development toward achieving compliance). In an apparent effort to shield the CPP from legal challenges, the agency removed demand-side energy efficiency improvements as a building block in the final rule. Moreover, by not forcing the states to utilize a particular mechanism to achieve compliance, the agency’s decision-makers seem to believe the final Rule is better positioned to withstand the inevitable appeals process.

  • Larger Role Expected for Renewables: U.S. EPA contemplates that renewable energy will play a prominent role in the evolving U.S. power sector. The draft rule estimated that by 2030, 22 percent of the country’s electricity would be generated by renewable resources. In the final Plan, EPA estimates the share of renewables at 28 percent. According to the agency, this increase is a function of market forces and a continued decline in energy prices. It also is in line with the final Plan’s deeper cuts to emissions overall. The final Plan targets a 32 percent decline in carbon dioxide emissions from 2005 levels by 2030, whereas the proposed rule had a 30 percent reduction goal. Nonetheless, whether sufficient renewable energy resources are developed to help meet the final Plan’s emission reduction targets depends on whether sufficient incentives exist and risks can be adequately minimized. Potential investors dislike uncertainty, especially when it involves committing large amounts of funding to development projects over a lengthy time horizon.
  • Incentives for Renewables: The final Plan seeks to incentivize the deployment of renewable energy through early renewable procurement under EPA’s Clean Energy Incentive Program, which makes available additional allowances or emission credits for investments in zero-emitting wind or solar power projects during 2020 and 2021, prior to the rule's 2022 implementation date. As discussed below, other incentives may be provided by the U.S. Department of Energy and Congressional action on favorable tax legislation.
  • Coordinating Role with the Department of Energy: President Obama recently announced a coordinating role for the Department of Energy (DOE) in connection with the CPP. The DOE’s Loan Programs Office (LPO) will make available up to one billion dollars in loan guarantees to support commercial-scale distributed energy projects, such as rooftop solar with storage and smart grid technology. Expanded funding also is available though DOE’s Advanced Research Projects Agency–Energy (ARPA-E), which has awarded $24 million for 11 high-performance solar photovoltaic power projects.
  • Seeking Congressional Clarity on Tax Credits: By extending the compliance deadlines from 2016 in the proposed Plan to 2018 in the final Plan, U.S. EPA provided states with additional time to build out the necessary infrastructure to achieve compliance. The deadline extension also provides more time for Congress to establish clarity regarding the federal investment tax credit (ITC). The ITC presently enables investors to credit 30 percent of a project’s costs to their taxable basis, but the credit is scheduled to decrease to 10 percent on January 1, 2017 without a Congressional extension.

70,000 solar panels await activation.For renewable energy, and particularly solar, to play a seminal role in effectuating the final Plan requires a functioning solar market. Solar projects are characterized by high upfront costs and long payout periods. Without supportive policies like the ITC, solar developers may face difficulties finding suitable power purchasers, thus negatively impacting the ability to procure financing. Further, utilities may be unable to bear the full costs of the CPP without assistance from the private market. Utilities typically procure power from already-financed projects. If required to underwrite solar on their own, utilities may need to finance such projects using their credit rating and balance sheet, thus passing along infrastructure costs to ratepayers.

Although some solar proponents believe the ITC step-down will not negatively affect the market’s vitality because the price of renewables is now cost competitive enough to survive the shift, others in the industry dispute this view. Irrespective, the upcoming ITC step-down creates uncertainty in the market. The Production Tax Credit (PTC), generally associated with wind projects, recently passed through the Senate Finance Committee, provides the potential for a similar ITC revival. With the additional compliance period granted to the states in the final rule, Congress now has the opportunity to provide clarity by acting favorably on both of these tax credits by late-2016.

State Incentives

Renewable energy-friendly states have enacted legislative, promulgated regulatory enforcement mechanisms, and provided financial incentives to encourage the development of renewable energy resources. For example, some states participate in cap-and–trade programs (e.g., Regional Greenhouse Gas Initiative (RGGI)), have enacted renewable energy portfolio standards, provide favorable treatment under public utility commission regulations (e.g., favorable net-metering schemes and third-party financing for renewable energy development), and offer other state or local tax credits. The impact of such programs on carbon emission reduction is reflected in the lower targets assigned under the final Plan, for example, to California and Massachusetts - 13.2 percent (126 lbs. CO2 / MWh) and 17.8 percent (179 lbs. CO2 / MWh), respectively.

Despite Emphasis in the Final Plan, Uncertainty Still Remains Regarding Renewables Development

The final Plan provides a level of regulatory clarity, but the path forward remains uncertain in light of looming legal battles regarding whether the Plan oversteps U.S. EPA’s authority under the Clean Air Act and political divisiveness in Congress. It also is unknown whether the next U.S. President will support the rule or try to dismantle the Plan.

These uncertainties, coupled with concern over the future of the ITC, may lead to substantial implementation delays, or even complete eradication or substantial revision of the final Plan. Even if the CPP withstands challenge, nonetheless, some states may be unable to meet their emission reduction targets if adequate renewable energy financing mechanisms have not developed by 2018, the time by which state's must submit their emission reduction plans. Understandably, potential investors may be leery about committing substantial funds to renewable energy projects unless or until the likely outcome of legal challenges to the CPP can be better assessed, and regulatory and political risks more accurately calculated.

While renewable energy resources seem to be a favored approach under the final Plan, a comprehensive strategy that effectively facilitates the financing of such projects is essential to achieve the Plan’s emission reduction targets.

Topics: Utilities, Carbon Emissions, Energy Policy, Structured Transactions & Tax, Energy Efficiency, Power Generation, Microgrid, Energy Finance, Legislation, Distributed Energy, Energy Management, Renewable Energy

Is the Tide Turning for Offshore Wind in the United States?

Posted by Van Hilderbrand on 8/6/15 11:58 AM

BLOG_offshore wind turbines_ThinkstockPhotos-505771725

Co-authors Jeff Karp and Jim Wrathall

Offshore wind has long been touted as the next big addition to the U.S. energy mix. With the start of construction of the Block Island Wind Farm off the coast of Rhode Island, many are hoping the project will trigger a gale force of offshore wind energy. Offshore wind resources are abundant, stronger, and blow more consistently than land-based wind resources. The U.S. Department of Energy (U.S. DOE) estimates that 4 million megawatts (MW) of capacity could be accessed in state and federal waters along the coasts of the United States and the Great Lakes.

Indeed, macro energy supply, economic considerations, and climate-related concerns support the development of U.S. offshore wind projects in regions such as New England and the Mid-Atlantic. As traditional fossil-fuel power plants are retired from states’ energy portfolios, offshore wind energy is ready to step into the void to help meet demand through a renewable medium.

Still, offshore wind in the United States remains in its infancy. Large scale offshore projects face difficult regulatory obstacles, including a maze of permitting and environmental laws and requirements. This is no more evident than in the long-awaited 130-turbine Cape Wind project in Nantucket Sound off the coast of Massachusetts, which remains in limbo after more than a decade of planning, regulatory proceedings, and federal court litigation. Other proposed projects off the coasts of New Jersey and Delaware have succumbed to these obstacles as well.

The Outlook for Offshore Wind Energy is Bullish as All Eyes Turn to the Coast of Rhode Island

At the moment, attention is focused on the first commercial-scale offshore wind project to commence construction: Block Island Wind Farm, off the coast of Rhode Island. Deepwater Wind, the project developer, estimates the proposed wind project will generate over 100,000 megawatt hours of energy annually, supplying the majority of Block Island’s electricity needs. The first of five 1,500-ton foundations, which will support the 30 MW project, was installed last month. The project is expected to begin producing energy in late 2016.

There is optimism that if this project succeeds, it will open the door for other economically sound offshore wind projects. And, as discussed below, the factors that previously impeded development of such projects are beginning to line up favorably, thus causing industry leaders to be bullish on the future of offshore wind.

BLOG_offshore wind turbine_ThinkstockPhotos-100815677Regulatory and Legal Clarity: It is important to note that the current road block for the Cape Wind project is purely economic. During the project’s pendency, many of the regulatory and legal uncertainties driven by challenges from opponents were resolved in court rulings. Earlier this year, however, the project stalled over financing issues when its energy off-takers withdrew from their power purchase agreements. Previously, other uncertainties were resolved by the passage of the Energy Policy Act of 2005. In particular, questions of federal versus state jurisdiction and the authority of the federal government in waters up to 200 miles from the shoreline were resolved by this legislative action, which established permitting authority in the Bureau of Ocean Energy Management (BOEM), a federal agency within the Department of the Interior.

The Block Island project has clearly benefited from lessons learned by Cape Wind, as witnessed by the speed with which the former moved through the offshore wind approval process. Although the Block Island development is in Rhode Island state waters, Deepwater Wind already has “steel in the water” as a result of collaborative efforts of state regulators and BOEM. The federal agency timely awarded a right-of-way (ROW) grant for an eight nautical mile-long, 200-foot wide corridor in federal waters on the OCS for transmission to connect the wind farm to the mainland.

In part, these achievements occurred due to Deepwater Wind’s successful engagement with stakeholders. The project developer worked closely with the U.S. Army Corps of Engineers to analyze the potential environmental effects of the project under the National Environmental Policy Act, and received a Finding of No Significant Impact (FONSI) in late 2014. Also, environmental groups like the National Resources Defense Council (NRDC) were engaged and their concerns addressed by altering the construction schedule to allow migratory whales to mate from November through April, and agreeing to utilize the best available technology to protect marine life from sound harassment.

Favorable Political Climate: The political climate for offshore wind also appears to be brightening. The U.S. DOE has promulgated a national plan to support deployment of 10 gigawatts (GW) of offshore wind capacity by 2020 and 54 GW by 2030. Additionally, there remain glimmers of hope that federal wind tax incentives will remain in place, with the Production Tax Credit (PTC) extender bill passing the Senate Finance Committee in July 2015. Moreover, the U.S. Environmental Protection Agency’s final Clean Power Plan, which was announced on August 3, 2015 by the Obama administration, requires a 32 percent reduction from 2005 levels in carbon emissions from existing power plants by 2030. To reach this goal, the plan incentivizes states to implement zero-carbon emitting sources of energy, such as solar and wind.

Additional Leases: The availability of lease sites, a crucial factor for successful project development, also appears to be trending upward. BOEM, in conjunction with several coastal state governments, is poised to open the procurement process in New York and New Jersey, while stakeholders presently are being engaged in North Carolina and South Carolina. On the other hand, there are less than ten active leases, which were awarded on a competitive basis. Recipients of these leases must submit to BOEM a Site Assessment Plan and Commercial Operation Plan for approval. Thus, a BOEM-issued lease does not authorize any construction; instead, it paves the way for a full Environmental Assessment (EA) which adds at least a year onto a project’s timeline before ground breaking may occur. Acquiring projects in mid-development is also an option, but proposed lease assignments are also subject to approval by BOEM.

Financing: Obtaining project financing has been a challenge too. Financiers are wary of unproven technologies and the other risks associated with offshore wind energy, preferring to fund land-based resources with which they are familiar. Although offshore wind is a proven energy producing technology in Europe, the same can’t be said for the U.S., where the only examples are failed projects.

BLOG_offshore wind turbines_ThinkstockPhotos-465147453Yet, the landscape seems to be shifting on the financing front as well. The Cape Wind project blazed a trail through the federal and state permitting landscape identifying and removing many of the administrative and regulatory obstacles that had haunted offshore wind projects. The Block Island project secured its required $290 million in debt and equity financing earlier this year. Given the relative speed with which the Block Island regulatory approvals were obtained, regulatory risks may become less of a concern for investors. It bears reminding, however, that the Block Island project is small compared to other pending offshore projects, which have price tags in the $1-3 billion range. That said, having secured the needed permits, successfully navigated the regulatory reviews, and obtained financing, there is reason for optimism that the Block Island project will open the door for future offshore wind projects.

One such 68-turbine project being planned by US Wind, Inc., off the coast of Ocean City, Maryland, will be capable of generating 500 MW of electricity. To cover the project’s nearly $2.3 billion cost, the company plans to pursue a mix of financing mechanisms including a substantial state subsidy to be repaid after the turbines are constructed and operating. Another project from the same developer as Block Island, Deepwater Wind, is Deepwater ONE also in Rhode Island Sound. This planned 150-200 turbine project will be capable of generating from 900 to 1,200 MW. It too will carry a much larger price tag than the Block Island project. Thus, the proponents of these projects and others will look to Block Island’s success to help overcome investor reluctance to finance offshore wind projects.

Offshore Wind is Poised to Fulfill Expectations

With added certainty in the regulatory and legal landscape and a more favorable political climate, financing opportunities are poised to increase as the technology and financing models are proven. Thus, the offshore wind industry finally may fulfill its promise as a crucial resource that will curb greenhouse gas emissions and help wean the U.S. off fossil-based fuels. The Block Island project is the first to have “steel in the water,” but we believe it will most certainly not be the last.

**Sullivan & Worcester served as pro bono counsel for the Conservation Law Foundation, assisting the non-profit organization’s participation as an amicus curiae party in the federal court litigation supporting the proposed Cape Wind project.

Topics: Carbon Emissions, Energy Policy, Power Generation, Energy Finance, Legislation, Distributed Energy, Renewable Energy, Wind

Green Tea: A Burgeoning – and Unexpected - Coalition Bodes Well for the Geographic Growth of Renewables

Posted by Joshua L. Sturtevant on 6/26/15 5:27 AM

Green TeaIn an era which often seems to be defined by partisanship, renewable energy has recently shown that it is one issue that can defy party lines.

Partisanship is, of course, not a new phenomenon, and a past where ‘folks would walk across the aisle to get deals done’ is often highly romanticized. In fact, anyone with a passing knowledge of the American Revolution with its Patriots and Loyalists will know that the nation itself sprung out of the seeds of partisanship. However, it does seem that recent debates on issues of importance – healthcare and immigration come to mind - have tracked party lines so closely as to leave little room for compromise.

Until recently, renewable energy was such an issue. Most states with policies that support the adoption of clean tech are typically considered “blue.” It is in these largely Democrat-leaning jurisdictions such as Massachusetts, New York, New Jersey and California where policies that support the adoption of renewables, including Renewable Portfolio Standards (RPS) and net metering, have been implemented and made the most impact.

However, in traditionally red states, clean energy has found less support. Most likely caused by an adverse gut reaction to the topic of climate change, many Republican-leaning states – including those in the Southeast – handily rejected policies that would support renewables. That trend shows signs of reversing, however, as some unlikely allies in some unlikely states, including Georgia and Florida, are working to break down partisan barriers.

While the well-tread environmentalist case for renewables centers on climate change, resource management and environmental impact, the conservative case is slightly more novel, at least in the context of renewable energy. The case being presented by those on the right is that renewable energy is a freedom of choice issue, complete with the rhetoric that goes with that approach. As an example, Georgians for Solar Freedom, a group that recently worked to get the Solar Power Free-Market Financing Act of 2015 passed and signed by the Governor in that state, has the following talking points on its website:

National Security - Our dependence on foreign oil puts our security at risk. While we support new traditional energy projects like the Keystone XL pipeline and more drilling, we want a true “all of the above” domestic energy plan. By combining the responsible utilization of fossil fuels with increased affordability of solar, we can achieve energy independence and cut off funding to those who may wish to do use harm.

Free Market Competition - The free market is a powerful force. With energy costs from traditional energy sources increasing, we need more competition from new sources to help drive overall prices down. That’s how we deliver affordable energy for businesses that create jobs, as well as families that are feeling the crunch in household budgets. We want to compliment- NOT do away with- fossil based sources of energy.

Technological Innovation - The 20th Century was the “The American Century” due to our ability to innovate. From mass producing the automobile, to developing a weapon to end a World War, and then connecting us all via personal computers and the internet, America led the world for 100 years. Now some of our country’s brightest minds and most forward thinking venture capitalists are driving innovation in solar technology for the 21st Century.

These talking points typically have more appeal for conservatives than those regarding climate change. And, advocates in other states have taken note of them. For example, while Florida is slightly behind Georgia legislatively, coalitions in that state, which include tea party groups and environmentalists, are showing that clean-energy advocates can make advances in even the most difficult of political environments with the right message. The trend looks set to continue in other states as groups like the Green Tea Party are making headway in the Carolinas and Louisiana in the South, and in Midwestern states including Minnesota, Michigan and Kansas.

It seems that cross-party consensus on broader policy challenges like Obamacare and immigration policy will be hard to reach any time soon. Happily, those issues are outside the purview of this page. However, the budding coalition between two groups at ends of the political spectrum that are so often at odds with each other mean that national consensus on renewable energy is closer than ever.

Topics: Carbon Emissions, Energy Policy, Distributed Energy, Solar Energy, Renewable Energy

Will Methane Emission Reduction Requirements Affect Renewable Energy Investment?

Posted by Natalie Lederman on 6/2/15 8:15 AM

oil and gas well-178604463Early this year, the White House announced its plans to impose new regulations on the oil and gas industry’s methane emissions. Controlling methane emissions from oil and gas well flaring and leaks has been identified as a critical step in slowing global warming. Domestic oil and gas production has surged over the past few years, and with it concerns have been growing over the potential global warming effect of methane emissions. Beyond the obvious direct impact on methane emissions, there are concerns that the new regulations could have a meaningful impact on the energy market at large.

The rules, if enacted, would be the first direct regulation of methane emissions from oil and gas production in the U.S., and would be a further expansion of Environmental Protection Agency (“EPA”) powers under the Clean Air Act. Proposed regulations are due this summer, with final regulations expected in 2016. Initial targets call for reduced emissions by up to 45% from 2012 levels by 2025. While the President’s announcement did not suggest how the industry would accomplish these reductions, it did specify that the EPA’s proposal would apply to new and modified oil and gas sources.

Critics of President Obama’s new requirements have argued that the cost of emission control is already excessively high; the proposed regulations don’t just further increase operating costs, but they are also redundant, particularly in an industry that operators claim is already self-regulated. However, the oil and gas industry emits more methane than any other nation-wide, suggesting that existing state laws and voluntary measures being taken are not, in themselves, sufficient.

The regulations and the oil and gas industry’s complaints come at a time when oil and gas prices are plummeting. In the short term, natural gas spot prices are currently projected to average $3.05 Million British Thermal Units (MMBtu) in 2015 ($1.34/MMBtu lower than in 2014), which could mean increased consumption of natural gas for power generation. However, U.S. oil and gas drilling companies are currently operating well below their $70/per barrel break even point, and prices are as low as $48 in 2015. As operators face cash flow problems resulting from low returns on capital expenditures, exploration and production related spending in North America is expected to decrease by 30% this year. Obama’s methane regulations could add an additional cost for new wells as exploration and drilling slows down.

Renewable Investment Operating Along Side Low Oil and Gas Prices

Notably, the long-term forecast for U.S. natural gas per MMBtu is projected to increase, which may stabilize the oil and gas industry. As natural gas sets the marginal price of wholesale electricity in many U.S. markets, this upward pressure may increase electricity prices (particularly when considered in conjunction with the newly proposed regulations). The result could be a shift in the balance of natural gas and renewable use due to renewable energy becoming more cost-competitive.

Deutsche Bank and Lazar published reports in 2014 that hold that renewables are now cost competitive in many U.S. states. With national oil and gas market price set to rise, and the regulations set to increase costs on new and modified wells, renewables may become more attractive in states that have not reached price parity. Additionally, though the Administration did not explicitly state that the EPA would develop regulations applicable to already-existing oil and gas sources, its regulation under Section 111(b) of the Clean Air Act creates a legally implied requirement to regulate facilities under Section 111(d) of the Clean Air Act.

Given the current Administration’s “all of the above” energy strategy, natural gas and renewable energy sources will likely continue to evolve as complimentary. However, the low cost of oil and gas coupled with the President’s new regulations may encourage a shift toward more renewable energy options where natural gas was previously preferred. The newly proposed regulations could foreseeably raise the floor for natural gas pricing, providing low-end pricing certainty. This, in turn, will attract more interest and investment in competitive alternatives in the wholesale power markets.

Topics: Carbon Emissions, Energy Policy, Renewable Energy, Oil & Gas

The IMF Just Destroyed the Best Argument Against Clean Energy

Posted by Elias Hinckley on 5/21/15 9:03 AM

IMF.jpgFor more than a decade, fossil fuel supporters have insisted that new clean energy technologies like wind and solar are far “too expensive” to replace our traditional fossil fuel dominated energy industries. A recent report published by the International Monetary Fund (IMF) has put a price on the direct and indirect subsidies that support fossil fuels as a counter argument to the renewables are “too expensive” message.

The numbers are staggering. The expected subsidy for fossil fuels during 2015 is projected to be $5.3 TRILLION – for one year! This means that approximately 6.5% of global gross domestic product (GDP) will be dedicated in 2015 to just subsidizing our use of fossil fuels. Or as The Guardian pointed out in its summary of the IMF report, taxpayers are paying $10 MILLION per minute globally in subsidies for fossil fuels.

The idea that fossil fuels benefit from both direct and indirect subsidies has been around for years, but analysis has generally been done in pieces (some of it done very well – Nancy Pfund and Ben Healy at DBL Investors published an excellent analysis of direct subsidies in the U.S. a couple years back) or without complete data robust enough to stand up to critique. The IMF report looks at direct incentives, local pollution and public health effects, climate changes, and a host of other costs to arrive at its projected subsidy number.

IMF’s numbers are already being attacked. UK climate economist Nicholas Stern questioned the report for vastly underpricing the cost of climate change, and Brad Plummer at Vox outlined some of the odd items that arguably shouldn’t have been included in the calculation. Regardless of whether the IMF report gets to exactly the right number, the report provides a very credible starting point to argue over the right value to place on fossil fuel subsidies, and will be a baseline to begin rethinking the right pace for our global transition to clean energy.

According to the report, the largest subsidy will be for coal, largely because of the enormously underpriced effects of emissions and other environmental costs on public health and local resources – although the global climate impact is very significant as well. A real world demonstration of these costs can be seen in China right now with its massive build-out of coal generation rapidly coming to a close and the nation making a hard pivot towards clean energy in the face of deteriorating air quality and spiraling health costs from pollution.

The vast portion of the remaining fossil fuel subsidies will be to support petroleum. More petroleum subsidies will be in the form of direct supports, especially among oil producing countries, but the indirect costs were again significant (and curiously the report seems to leave out military costs dedicated to maintaining regular supply of crude to global markets, which have been long identified as a very significant subsidy).

Governments around the globe are struggling with the practical and economic realities of an accelerating energy transition away from fossil fuels, as well as the incredibly challenging politics surrounding these markets. The presence of a well respected financial institution, like the IMF, measuring the enormously ignored, but very real, costs of fossil fuel use will be important in shaping these discussions.

This report alone won’t end the constant claims that clean energy is “too expensive.” There have been remarkable declines in the cost of wind and solar power over the past decade. Add the breakthroughs in storage, electrification of vehicles, and promises of economically competitive new nuclear technologies (which will accelerate when investors have a clear and accurate price target for these alternatives) and the pace of global change could be revolutionary.

By putting hard data on the real price of the energy status quo (a lesson being lived in real time by Chinese authorities facing massive new costs from its overzealous coal fleet expansion), the report allows us to seriously consider the economic reality of the currently distorted and inaccurate marketplace. A better baseline, even a remotely accurate one, combined with the economic reality that clean energy has become stunningly more economic over the past decade, should re-write the fundamentals of the discussion about our energy future.

 

Topics: Carbon Emissions, Thermal Generation, Energy Policy, Energy Finance, Renewable Energy

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