Energy Finance Report

The New Administration’s Efforts to Deconstruct the Obama Climate Initiatives

Posted by Jeffrey Karp on 8/11/17 2:22 PM

President Trump is spearheading a government-wide roll back of Obama Era climate initiatives. The president and his EPA Administrator, Scott Pruitt, have delivered a one-two punch.  They both have denied the impact of human activity on climate change, while seeking to resurrect the moribund fossil fuel sector.  In March 2017, the President issued a wide-ranging “Energy Independence” Executive Order requiring review and reconsideration of any rule that might burden development of domestic energy sources, particularly oil, gas, coal and nuclear energy. After much drama, in June 2017, President Trump fulfilled a campaign promise to withdraw the United States from the Paris Climate Accord (“Accord”).  Moreover, in seeking to implement the new Administration’s energy independence strategy, government departments and agencies are pursuing delay or repeal of regulations aimed at curbing greenhouse gas (“GHG’) emissions, most notably EPA’s targeting for elimination the Clean Power Plan rule (“CPP”).

Under the Accord, the United States had pledged to reduce its greenhouse gas emissions 26-28% below 2005 levels by 2025, and to contribute up to $3 billion in aid to an international fund that helps the world’s poorest nations mitigate the effects of climate change.  It was expected that one of the President’s first acts following the inauguration would be to withdraw the country from the Accord.  On the campaign trail, Mr. Trump had not minced words about his view of the Accord, and his belief that climate change was a hoax.  Nonetheless, the President delayed his decision, while considering the views of many who advocated that the United States remain in the Accord, including several of his advisors, former Vice President Gore, the leaders of the G-7 nations, state governors and corporate executives.  President Trump, however, announced on June 2, 2017 the country’s withdrawal from the Accord, declaring the overarching need to protect United States workers and businesses from intrusive environmental restrictions, and negative impacts on economic growth.  In response to the President’s decision, a coalition of states, companies, and institutions have pledged to fulfill the United State’s emissions reduction commitment.

The withdrawal from the Accord appears unlikely to affect ongoing domestic efforts to reduce GHG emissions.  Currently, 29 states and the District of Columbia have enacted renewable portfolio standards (RPS) to increase the amount of electricity generated from renewable energy sources.  Since the beginning of 2016, seven states have even increased their commitments for additional wind and solar-generated power. 

Image1-1.jpg

Furthermore, according to an EPA report, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990–2015 (April 15, 2017), GHG emissions have decreased in all major economic sectors since 2005.

Image2-2.jpg

Between 2005 and 2015, GHG emissions decreased by roughly 20% in the electricity sector, 10% in the transportation sector, 4% in the industry sector, and 0.7% in the agriculture sector.

In addition to negating the impact of global warming, the Trump administration seeks to resuscitate the fossil fuel sector by removing regulatory impediments to growth.  As noted, on March 28, 2017, President Trump issued an EO that instructed EPA to reconsider the CPP and “as soon as practicable, suspend, revise or rescind” the rule.  Promulgated in 2015 under the Clean Air Act, the CPP is expected to facilitate a reduction in carbon dioxide emissions from the utility power sector by 32 percent below 2005 levels by 2030.  However, the rule has been tied up in litigation.  Shortly after promulgation, the Supreme Court stayed the CPP’s implementation.  A ruling on the CPP’s validity is awaited from the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”)  following an en banc hearing in September 2016.  In the meantime, on April 4, 2017, EPA issued a notice of intent to review the CPP, while seeking to delay the D.C. Circuit’s impending decision on the rule’s validity.  On April 28, 2017, the court denied the EPA’s request to indefinitely delay the litigation while the Agency reconsiders the need for the CPP.  Instead, the D.C. Circuit agreed to hold the litigation in abeyance for 60 days, and ordered the parties to submit briefs addressing whether the court should continue to delay its decision or dismiss the litigation and remand the rule to the EPA.  After reviewing the parties’ briefs, on August 8, 2017, the court ordered that the cases remain in abeyance for an additional 60 days, and that EPA submit status reports in 30-day intervals. 

More recently, EPA attempted unsuccessfully to secure a lengthy delay in implementing another Obama Era emissions reduction regulation.  That rule requires that oil and gas companies fix methane leaks and upgrade equipment at extraction sites.  Siding with the NGOs, who challenged EPA’s announced two year delay, the D.C. Circuit ruled that EPA lacked authority under the Clean Air Act to stay the regulation while the Agency reconsiders it.  On August 10, 2017, the D.C. Circuit rejected industry groups and states’ request to reconsider the ruling.

Moreover, the President’s Energy Independence EO lifts the moratorium on leasing federal land for coal mining, and instructs the Department of Interior (“DOI”) to consider rescinding the 2015 regulation of hydraulic fracturing on federal and tribal lands.  In June 2016, a Wyoming federal judge struck down the rule, which subsequently was appealed to the Tenth Circuit.  DOI’s Bureau of Land Management (“BLM”) has requested the Tenth Circuit to stay the litigation while it reviews the need for the regulation.  On July 25, 2017, BLM published a proposal in the Federal Register to rescind the 2015 regulation, asserting that it  needlessly burdens industry with unjustified compliance costs.  The Tenth Circuit has yet to rule on BLM’s stay request.

To further assist the domestic energy sector, President Trump’s Energy Independence EO also seeks to ease permitting of fossil fuel energy projects.  In particular, the EO rescinds an Obama Era directive that federal agencies performing National Environmental Policy Act (“NEPA”) project reviews must consider GHG and climate change impacts.  Shortly after taking office, President Trump approved the permits for the TransCanada Corp’s Keystone XL pipeline and the Dakota Access pipeline.  In response, the Standing Rock Sioux Tribe and other Native American tribes challenged issuance of the final permit to complete construction of the Dakota Access pipeline in the U.S. District Court for the District of Columbia.  On June 14, 2017, the court ruled that aspects of the Army Corps of Engineers’ (Corps) environmental assessment were inadequate, and ordered the Corps to conduct further  review.  But, the court refused to grant the plaintiffs’ requested injunctive relief to halt oil pumping operations pending the Corps performance of further environmental review, which is expected to be completed by the end of the year.

Despite President Trump’s efforts to provide a “leg up” to the fossil fuel sector, it seems doubtful that the decline in coal-fired power generation will be reversed for several reasons. First, coal is not competitive with lower-priced and widely-available natural gas.  Second, the cost of developing renewable energy resources continues to drop.  Third, state RPS programs and corporate commitments to reduce greenhouse gas emissions continue to drive the growth of the renewables market.  Fourth, carbon emissions from power plants have fallen by 5% during each of the last two years, which is largely due to the switch by the utility sector, coal’s largest customer, to natural gas and renewables.  Currently, coal’s market share is in the low 30% range, and is unlikely to increase despite the new administration’s efforts to revitalize the industry.

Image3-1.jpg

Furthermore, withdrawal from the Paris Climate Accord is unlikely to have short-term impacts in the United States.  Carbon dioxide emissions from United States’ energy sources are expected to hit a 25-year low in 2017, and to continue to decrease.  Thus, it appears that the train already has left the station regarding  the overriding support by many corporations and states for the increased development of renewable energy resources, and the ongoing conservation and sustainability measures to further reduce greenhouse gas emissions.  In light of the foregoing developments, it seems that market forces, not President Trump’s EO or government agencies’ efforts, will dictate the fate of the fossil fuel industry.

Jeffrey Karp is a partner and Leigh Ratino is a law clerk with Boston-based law firm Sullivan & Worcester LLP.

Topics: clean power plan, Climate change, Trump Administration, Energy Independence Executive Order, Paris Climate Accord

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

New Jersey's Proposed Renewable Portfolio Standard- Ambitious, but Uncertain

Posted by Jeffrey Karp on 4/20/16 11:28 AM

Co-authors Emma Spath and Morgan M. Gerard

New Jersey is poised to become a national leader in renewable energy by virtue of pending legislation that would substantially decrease the Garden State’s greenhouse-gas emissions through an ambitious Renewable Energy Portfolio Standard (RPS). An RPS is a regulatory mandate that requires utility companies to obtain a certain percentage of the energy they sell from renewable sources such as wind and solar, or purchase renewable energy credits (RECs) from qualifying energy sources. Recently passed by the State Senate, a new bill would require utilities to source 80 percent of their electricity from renewable energy by 2050.  If the General Assembly passes the bill and it survives the pen of Governor Christie, utilities must procure 11 percent of their electricity from renewables by 2017, with an increase every five years of approximately 10 percent until the 80 percent threshold is reached in 2050.

Although New Jersey passed its original RPS mandate in 1999, and has since updated its program to reach 20 percent by 2020-21 (including a solar energy “carve out” requirement of nearly 4 percent), the ambitious new bill faces an uncertain outcome. First, although the bill already has passed one legislative chamber, the Senate vote was strictly divided along party lines.  Second, the General Assembly, which is the next destination for S1707, delayed voting on a similar Senate bill in December 2015.  However, this General Assembly, like the Senate, has a Democratic majority; thus, it seems likely that the bill would pass.  Finally, the bill faces a veto-threat by Governor Christie, which could be overcome by a two-thirds majority in both houses.  In this scenario, a lack of bi-partisan support could doom the legislation due to a failure to obtain the requisite super-majority vote to overturn a veto. 

The bill also may be perceived as political by some or a “hot potato.” In addition to an increased RPS mandate, the legislation would allow the Board of Public Utilities (BPU) to establish an “emissions portfolio standard applicable to all electric power suppliers and basic generation service providers, upon a finding that [t]he standard is necessary as part of a plan to enable the State to meet federal Clean Air Act or State ambient air quality standards.”  The provision may reflect the State Senate’s desire to assure New Jersey’s compliance with President Obama’s Clean Power Plan, an Environmental Protection Agency (EPA) regulation presently under court review that seeks to limit greenhouse gas emissions under authority of the Clean Air Act.  In an omnibus litigation pending before the United States Court of Appeals for the D.C. Circuit, twenty-seven states, including Governor Christie’s administration, seek to block the Plan’s implementation.  Recently, the Supreme Court stayed the regulation and suspended any deadlines for state compliance until resolution of the litigation.

Another possible objection to the N.J. bill—based on the reaction to a similarly aggressive RPS in California—may be its potential significant implications for the power grid. A review of a study concerning the potential impact of California’s plan to increase renewables to 50 percent by 2030 provides insight into the challenges that such measures may pose. That study found that an aggressive RPS could result in over-generation of renewable energy. The study showed that once California reaches a 50 percent RPS, excess power would be generated for 23% of annual hours.  Such an occurrence could result in grid forecast uncertainty, which is very costly for utilities.  Thus, New Jersey lawmakers instructed the BPU to concomitantly evaluate how to ameliorate solar energy volatility. It may behoove the BPU to also look at longer-term grid strategies to mitigate the substantial increase in renewable energy.  Such viable mitigative methods may include requiring steps such as energy storage, smart inverters with future solar photo-voltaic installations, or encouraging a diverse renewable energy portfolio.  While each of these measures may come with its own political baggage, the consideration of such grid solutions may be the palliative that enables New Jersey to substantially increase its RPS.

Topics: Energy Storage, Solar Energy, Renewable Energy, clean power plan, Wind Energy, renewable portfolio standard, Clean Air Act, New Jersey, Grid Security

S&W Lawyers Filed Legal Brief for Major Brand Companies Supporting EPA’s Clean Power Plan

Posted by Morgan Gerard on 4/4/16 4:25 PM

 

ZAG-SW-color-300dpi.jpg

On April 1, 2016, Jerome C. Muys, Jr., Jeffrey M. Karp and Van P. Hilderbrand, Jr. with the assistance of Morgan M. Gerard filed an Amicus Brief on behalf of Adobe Systems, Inc., Blue Cross and Blue Shield of Massachusetts, Inc., Ikea North America Services LLC and Mars Incorporated in support of the Environmental Protection Agency’s (EPA) Clean Power Plan (CPP). The Motion and Brief, described the challenges that these major brands from diverse industries face in procuring low- and zero- greenhouse gas emitting energy, and the challenges that climate related risks pose to their businesses.

The following press release issued by Ceres is republished below.

Four global brand companies with significant energy footprints in nearly every state in the country are filing an amicus brief today in the U.S. Court of Appeals for the D.C. Circuit supporting the U.S. Environmental Protection Agency’s Clean Power Plan aimed at reducing carbon pollution from the nation’s electric sector.

The signatory companies include Adobe Systems Inc.; Mars Incorporated; IKEA North America Services, LLC; and Blue Cross Blue Shield of Massachusetts, Inc.

Calling the economic risks from climate change “staggering” and citing precipitous drops in renewable energy costs, the diverse companies praise the EPA plan as a viable “national market solution” that will create market certainty and warn of “economic and social disruptions” if it is delayed.

“Companies currently are facing and will face future damage … from rising sea levels and increasing intense weather events. They will also encounter climate-driven impacts to supply chains and agricultural production, as well as unreliable energy supply, decreased labor productivity and threats to public health,” wrote the companies in a 30–page brief, among numerous legal filings from companies this week in favor of the rule. At the same time, “the costs of doing business without a national carbon mitigation strategy subjects the Amici companies to undesirable risks.”

“(We) believe the Clean Power Plan, when fully implemented, would not cause business harm to (our) operations as large energy consumers and purchasers,” the companies concluded. “Swift and full implementation of the Clean Power Plan will directly benefit the Amici companies’ operations.”

“The scale of the sustainability challenges in the world require bold commitments and bold action,” said Rob Olson, Chief Financial Officer, IKEA North America Services, LLC. “IKEA supports long-lasting, robust policies like the Clean Power Plan, which encourage the innovation needed to grow a low-carbon economy.”

“Mars takes climate change very seriously and believes the security of the world’s food supply depends on it. We know we have a responsibility to mitigate the impact of our business on climate change, and we have committed to eliminating fossil fuel energy use and greenhouse gas emissions, minimizing our impact on water quality and availability, and mitigating the impacts of waste by 2040,” said Barry Parkin, Chief Sustainability Officer, Mars, Incorporated. “We know we can succeed faster toward these goals through collaboration with industry, government and non-government organizations, and with the timely implementation of the EPA’s Clean Power Plan.”

"Blue Cross Blue Shield of Massachusetts is committed to reducing our own impact on the environment and creating healthy environments for our associates, members and communities,” said Kyle Cahill, Director of Sustainability and Environmental Health at Blue Cross. “Implementing the Clean Power Plan will bring significant health benefits through improved air quality and helping to address climate change, one of our biggest public health threats today.”

The brief, being filed in advance of key oral arguments before the D.C. Circuit Court on June 2, makes wide-ranging arguments in support of the EPA rule that was placed under “an emergency stay” by the U.S. Supreme Court earlier this year. Among its key points:

    • Relying on traditional fossil fuel power generation is increasingly unattractive to businesses due to its high carbon footprint, consequences to air quality and volatile fossil fuel prices. Renewable energy costs, on the other hand, are falling precipitously and provide more price certainty in the long term since the fuel source is free, making this a mutually beneficial energy source for industry and the planet on which we work and live.
    • Uncertainty around the Clean Power Plan and the future of high-emitting fuel sources, both domestically and globally, makes long-term business planning a “difficult challenge” and unnecessarily prolongs strains on the environment.
    • Most of the country’s largest U.S. businesses, including all of the signatories, have set specific goals to boost renewable energy use in order to “cut costs and hedge the risks of relying on entirely on increasingly volatile fossil fuels.” Keeping the Clean Power Plan on track will stimulate more renewable investments, “long-term price certainty” and improve the quality of public health in the long run. 

About Ceres

Ceres is a non-profit organization that is mobilizing many of the world’s largest investors and companies to take stronger action on climate change, water scarcity and other global sustainability challenges. Ceres directs the Investor Network on Climate Risk, a group of 120 institutional investors managing about $13 trillion assets focused on the business risks and opportunities of climate change. Ceres also engages with 100-plus companies, many of them Fortune 500 firms, committed to sustainable business practices and the urgency for strong climate and clean energy policies. For more information, visit www.ceres.org or follow on Twitter @CeresNews.

Topics: Clean Power, clean power plan, Clean Air Act, Blue Cross and Blue Sheild of Massachusetts, Adobe Systems, Inc., Mars Incorporated, Ikea

Renewable Energy Remains Poised for a Banner Year in 2016

Posted by Joshua L. Sturtevant on 2/25/16 1:24 PM

Co-author Morgan M. Gerard

Solar_Poised_for_Growth.jpgOpposition to the Clean Power Plan (CPP), promulgated by the EPA and championed by the Obama administration as a path to a cleaner energy future, recently came to a head as the Supreme Court granted opponents a stay halting implementation of the plan. The future of the CPP is full of uncertainty; motivated states on both sides of the debate, the recent passing of Justice Antonin Scalia, one of the votes against implementation, and the tumult created by the presidential election cycle make prognostication a difficult task. However, despite the uncertainty surrounding the CPP, renewable energy remains poised for a banner year in 2016.

The objective of the CPP, as currently constituted, is to reduce carbon emissions through the retirement of coal plants, improve the efficiency of natural gas generation and encourage the development of more renewable energy facilities. Renewable energy proponents had hoped that the implementation of the plan would help to drive the adoption of policies intended to stimulate renewable energy project development, particularly in states where deployment of renewables has lagged behind national averages. However, that hope may be missing the broader point; even with the uncertain fate of the CPP, the market data seems to be pointing to cost reductions as the driving forces behind what has been an extraordinary uptick in renewables coming online in recent years.

While some, particularly large consumers of electricity, have tapped into the commodity price hedge opportunities afforded by solar and wind deployment, and while those in off-grid situations and those with green goals have been utilizing renewables for decades, observers point to price declines which have made renewables more competitive with traditional sources as the main driver behind explosive mainstream adoption in recent years. While renewable install costs were very high in the early to mid 2000’s, the declines since then are nonetheless striking. AWEA has noted a two-thirds drop in wind power costs over the past six years while Lawrence Berkeley National Laboratory reports a seventy percent drop in solar panel cost since 2009. National Laboratory reports also point to a 50% decline in solar installation costs over a similar time period.

The impact of these price declines has been stark, and renewables are well on their way toward reaching the holy grail of grid parity. Renewable sources of power accounted for almost two-thirds of the new electrical generation placed in service during 2015 in the United States according to the Federal Energy Regulatory Commission (FERC). The continuing rise of wind generation was a particular highlight of this past year with the FERC’s December 2015 Energy Infrastructure Update showing that 69 new units of wind power accounted for 7,977 MW of new generating capacity (the American Wind Energy Association’s (AWEA) estimate was 8.6 gigawatts) – nearly a third more than the 50 new units of natural gas providing 5,942 MW of added capacity. Other renewable sources also scored well in 2015, with solar adding 2,042 MW of capacity, biomass adding 305 MW, hydropower adding 153 MW, and geothermal steam adding 48 MW. On the other hand, concerning conventional resources, FERC reported no new capacity at all for the year from nuclear power, 15 MW from oil and one new coal unit producing 3 MW.

Though it is early, the trend of new capacity being comprised mostly of energy from clean sources seems to be continuing into 2016. In January Invenergy reported that it signed a 225 MW wind power purchase agreement (PPA) with Google to provide the latter’s facilities with renewable energy to help support its data center operations. Other tech giants have also been focused on going solar in 2015, with Apple announcing that it will buy $848 million worth of solar energy from a First Solar-owned 130MW power plant.

Despite cost declines and national trends, there are still some states where adoption of renewables has lagged significantly. The ‘stasis trend’ is most predominant in the Southeast and the gulf region. It is also true that some states which had recently favored renewables have implemented regressive policies, typically at the behest of large utilities. Nevada provides a recent example as the state’s public utilities commission (NPUC) cut net metering payments by half while simultaneously raising the fixed fees for solar customers to around 40% by 2020. Because of these negative local approaches to solar, a permanent stay of the CPP, with the loss of a national mandate as a result, will certainly be a negative development in the short term for renewable progress. That said, and given both the price declines that have made renewables competitive with other generation sources and 2015 development trends, renewable energy appears positioned to make equally great strides in 2016. Even without the underlying certainty that would be provided by an unchallenged CPP, consumers, financiers, and regulators have received the message that renewables are an efficient, financeable and profitable proposition.

Topics: Solar Energy, Renewable Energy, clean power plan, Renewable Energy 2016, Wind Energy

Stay of Clean Power Plan Hampers Innovative Strategies to Reduce Carbon Emissions & Obscures Policy Signals for Investment

Posted by Hayden S. Baker on 2/10/16 9:18 PM

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

Clean_Power_Plan_Legal_Challenge.jpg

On February 9, 2016, in a 5-4 decision, the U.S. Supreme Court stayed the Clean Power Plan (CPP), effectively halting the rule’s implementation until the D.C. Circuit and, in all likelihood, the high court itself reach a decision on the merits. The CPP is the principal climate change initiative put forward by the Obama administration, and the primary mechanism meant to achieve the goals agreed to in Paris at COP 21. Whatever else may be said of the CPP, it serves as a default national energy policy that would gradually transition the U.S. power sector to lower-carbon electricity generation. Although not a decision on the merits, yesterday’s ruling nonetheless obscures the clarity of that policy, making it more challenging to evaluate energy infrastructure development and investment opportunities in the near term. Thus, the stay not only has stopped implementation of the CPP, it also may halt the momentum and innovation that was starting to build among policy makers and industry.

Although the Supreme Court’s stay is unprecedented, so too is the magnitude of the CPP litigation before the Court. 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 D.C. Circuit Court. Eighteen other states, including New York and California, have joined in the consolidated lawsuits in support of the CPP.  

The stay does not impact the hearing on the merits; indeed, the case is already scheduled for argument before the D.C. Circuit in June and the losing side will certainly petition the Supreme Court for review. Yesterday’s ruling does not affect that timeline or the underlying arguments to be advanced. (It is worth remembering that many were surprised that the CPP was not stayed at the Circuit Court level.) However, it does mean that the CPP’s deadlines are in limbo and states are no longer required to submit their state implementation plans (SIPs) in September of this year (or at least request an extension by that time). 

Even though the SIPs would not require any emission reductions until 2022, the process of preparing the SIPs already has sparked innovation among industry and regulators alike as they begin to think creatively about how to transition to a lower-carbon power sector. The CPP brought together federal and state environmental and energy regulators in a way that quite simply had never before happened. The question now is whether these incremental steps toward more innovative energy policy will continue or whether momentum will be lost without the September 2016 SIP deadline on the horizon.

As so often happens with federal environmental regulations – especially the so-called technology-forcing programs – initial complaints about unreasonable costs and unattainable timelines are followed by constructive policymaking and industry creativity. Prior to yesterday’s ruling we saw progress across the country, as even the states most outspoken against the CPP had started to plot paths toward a lower carbon future. 

Some such initiatives were taken independent of the CPP and will no doubt continue, driven primarily by market forces rather than regulatory programs. Take Xcel Energy as an example. In October they announced an accelerated transition from coal-fired generation to renewables, including 60 percent carbon reductions by 2030 – and this is before the submission of any SIP. However, other novel strategies now may stall out. Take West Virginia, one of the lead challengers in yesterday’s ruling.  Just last month, the governor himself was touting a novel strategy for reducing carbon emissions in his state through reforesting idled coal mines. Without the pressure of the 2016 SIP deadline, little political will may exist to advance that initiative.

Nevertheless, as the White House alluded to today, the bigger driver of clean energy investment in the next few years was expected to be the extended Investment Tax Credit and Production Tax Credit, not the CPP. Previously, those incentives have proven very effective at funneling investment into wind and solar. With the extended tax incentives, a backstop is now in place that may buoy financial and technical innovation in renewables while the CPP works its way through its remaining litigation. Still, the difficulty now for investors will be to deploy the capital enabled by those incentives, given the uncertainty created by the Court’s stay and without the benefit of a clear national policy framework to help guide where infrastructure is most needed.   

Topics: Renewable Energy, United States Supreme Court, Investment Tax Credit, clean power plan, renewable energy investment, clean power plan delay, united states energy policy, Climate change, Clean Air Act, scotus, clean power plan stay

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

2015 Year in Review - Renewable Energy in the U.S.

Posted by Joshua L. Sturtevant on 12/23/15 3:33 PM

2015-_Green.jpgCo-author Morgan M. Gerard

Despite the low price of oil throughout the year, 2015 may have been an inflection point for renewable energy as a competitive generation source in the U.S. Deutsche Bank has noted that renewable sources, like solar, have reached, or will soon reach, grid parity with fossil fuel sources in many states. As non-fossil energy has become more economically viable, the industry has responded by standardizing and streamlining project processes, and by accessing financing vehicles like yieldcos and public bonds. Despite growth, the past year has also been a tumultuous one full of unexpected developments and policy shifts including the COP 21 agreement and the Clean Power Plan (CPP), and the formation of intriguing grassroots coalitions, like the green tea party. All of these developments were, of course, set against the specter of a potential step-down of the Investment Tax Credit (ITC), and its surprising last-minute revival. The following is a breakdown of some of the major developments impacting renewables in 2015.

COP 21

On the world stage, nearly 200 leaders, including representatives from key nations such as the United States, China, Russia and India, adopted an agreement that seeks to reduce global emissions. Expectations were tempered going into the much-anticipated conference with France calling for a binding treaty, and the U.S. balking at an arrangement that would almost certainly be struck down by a Republican-led Congress. In the end, the agreement established a long-term goal of maintaining a temperature rise “well below 2 degrees Celsius.” To achieve this objective, each country must submit emissions targets by 2020 with an ongoing reporting requirement. This victory for climate change advocates may serve as a leading indicator for a growing market for renewables.

The Clean Power Plan

The Clean Power Plan serves as the unofficial, yet primary domestic implementation framework for the COP 21 agreement. The CPP was promulgated by the Environmental Protection Agency (EPA) under its Clean Air Act (CAA) authority to regulate ambient emissions from stationary sources. The final Plan sets a target of a 32 percent decline in carbon dioxide emissions from 2005 levels by 2030, and contemplates a much larger role for renewables in the nation’s energy mix. Under the CPP each state will submit a compliance plan to achieve the emissions targets by retiring coal fired facilities, increasing natural gas as a fuel source and incorporating more renewables.

However, as the year draws to a close, the final disposition of the plan is far from certain. Hours after the regulation was published in the Federal Register, twenty-seven states filed more than 15 separate cases against the EPA, which have been consolidated before the U.S. Court of Appeals for the District of Columbia Circuit. In support of the CPP, 18 states, including New York and California, have sought to defend the EPA.

Before the merits of the case are even addressed, 2016 will see a three-judge panel address a “stay” of the rule, which halts the CPP’s implementation until the litigation is finalized. The parties seeking the stay, including West Virginia, feel that by meeting their prescribed standard they will be irreparably harmed. Renewable energy advocates argue that the granting of the stay could greatly damage the efficacy of the rule and its ability to be implemented in accordance with CPP (and unofficially COP 21) targets.

Solar_Panels_and_Wind_Farm.jpgThe Production and Investment Tax Credits

While the U.S. government has sought to assist the nascent renewables industry through tax credits in recent years, through most of 2015 the long-term status of the Production Tax Credit (PTC) and Investment Tax Credit (ITC) appeared grim. The PTC has been the great driver of the wind industry as it provides 2.3 cents per kilowatt-hour generated by a wind facility. Its expiration in 2014 led to a noticeable drop off in new wind projects. The ITC, which has been the driver of solar and also serves as a potential alternative credit for wind, provides a credit for 30% of the development cost of a renewable project, and 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.

Congress had been considering a PTC extension, which passed the Senate earlier this year. However, many thought an ITC extension was “off the table,” despite the fact that the reduction in credit value would render solar as unviable in many areas of the country. Thus, the industry was swept by uncertainty throughout the year. After solar businesses spent the past year reconsidering their business models to ease the pain of the step-down and speeding along projects to clear the credit requirements, Congress, to the surprise of industry, authorized the extension of both the PTC and ITC. The ITC will now be in place for an additional five years, including three years at the current value, followed by three years of more graduated step-downs. The impact of the ITC extension is 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.

Yieldcos

In addition to using tax equity, larger solar companies have been able to raise public funds through the “yieldco” approach. Yieldcos are dividend growth-oriented companies, typically created by a parent company that bundles renewable and/or conventional long-term contracted operating assets in order to generate predictable cash flows. With about one dozen YieldCos now trading on North American exchanges, the vehicle has seen explosive growth in the last year.

The cost of capital required for energy projects has been reduced via the YieldCo model due to access to cheap corporate debt and as their use of standardized project structures and documents have lowered transaction “soft” costs. YieldCos have created efficient homes for the assets that large companies formerly kept on their balance sheets and have additionally allowed nascent entities to raise relatively cheap capital for acquisitions. They have also facilitated diversification of the renewable energy investor base as typical dividend-focused individual investors have been able to "go green" as an alternative to low yield bonds in a way that has been difficult in a tax credit-driven environment. Arguably, this has lowered return expectations, and therefore the cost of capital, further.

However, despite significant growth in 2015, the future of the YieldCo model is less than certain as the fourth quarter of 2015 saw great variability in YieldCo share prices. The reasons are myriad with theories addressing MLP values, rising interest rates, negative public statements from management teams, a slowing Chinese economy, lower oil prices, capital constraints and YieldCo disassociation from parents entities all being floated as potential reasons for recent losses in shareholder value. While it is important to decouple share price from the ability of a YieldCo to remain in business, lower share prices paired with rising interest rates could hinder the ability of many entities to continue to grow portfolios and dividends at current rates.

Distributed Energy Resources—Grid of the Future Proceedings

ThinkstockPhotos-178976522_1.jpgIn the wake of super-storm Sandy and the ensuing power outage to downtown Manhattan, the New York Public Service Commission (NYPSC) is proactively exploring revamping incumbent utilities to better incorporate Distributed Energy Resources (DERs) to ease the transition toward a more dynamic and robust energy generation and distribution system. DERs present a challenge to the tradition grid system, which only envisions energy flowing in one direction, typically from one large source located far from the end user. The proliferation of DER has caused a grid issue in that energy now flows bi-directionally—from the utility customer’s generating system into the utility.

NYPSC’s Reforming the Energy Vision (REV) docket envisions many user-sited DERs that will sell capacity into the system or to other energy consumers. Utilities will act in a new capacity, Distributed System Platforms (DSPs), as “gatekeepers” to a multi-sided platform market with the utility functioning as the platform provider. The utility will facilitate the transaction between the DER owner/operator and the consumer.

Similarly, California is also experimenting with incorporating and leveraging DER formally within their grid framework. The California Public Utility Commission is in the process of facilitating the utilities to develop distribution resource plans (DRPs) that incorporate DER into utility grid-planning and investment regimes. Currently, the Commissions’ mandate is for the utilities to determine the value of DER to their systems, specify where on their systems DER should be incorporated, and propose demonstration projects.

Solar in the Southeast

Developments in several Southeastern states, such as North Carolina, Georgia, Florida and South Carolina are highlighting changing shifts in attitudes toward solar in previously unfriendly jurisdictions. Policymakers in the Southeast are enabling both increased utility scale solar and the introduction of rooftop generation. For example, the Georgia legislature, thanks in part to a coalition comprised of environmentalists and conservative Republicans known as the green tea party, passed the Solar Power Free-Market Financing Act of 2015. The new law opens up third-party ownership of leased rooftop solar projects up to a maximum of 10 kW generation capacity.

Similarly, in South Carolina, utilities were required to submit their plans to implement the Distributed Energy Resource Program Act (DERPA), which mandates programs to achieve at least 2% renewable energy adoption by 2021, including plans to invest in or procure distributed resources. Earlier this year, Southern Carolina Electric & Gas (SCE&G) and Duke Energy reached separate agreements with state regulators, ratepayers and environmental advocates on programs for meeting this objective. SCE&G committed to invest $37 million to install approximately 84 MW of solar on the state’s electric grid by 2021, including 42 MW of utility-scale solar and 42 MW of residential, commercial-industrial, and community solar. Duke Energy agreed to a $69 million program to place in service 53 MW of utility-scale solar and 53 MW of residential and commercial solar.

Net Metering Debates

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 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 maintained that costs are shifted to non-net metering customers. The utility recommended 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.

Regulators and legislators from Nevada and California are considering whether NEM has run its course as a method to encourage solar adoption, or if the policy is a fair method of compensating rooftop generators. Utilities argue, not without merit in some cases, that they are purchasing electricity at a dollar rate greater than what it would take them to generate an equivalent amount of electrons. Moreover, electrons are only part of the story, as utilities still need to provide solar customers with standby power and voltage support to turn on their appliances and open their garage doors. Thus, NEM is heavily tied into the “grid-of-the-future” discussions as utility’s role evolves from vertical integration to DER network operators.

Offshore Wind

One of the drawbacks to renewables increasing their percentage share of the domestic energy mix is that these sources are intermittent with solar PV only generating electrons when the sun shines and wind turbines only turning when the wind blows. However consistent power - base-load - is still required, usually in the form of a fossil-fueled plant, or a nuclear facility. Offshore wind has long been touted as the next big addition to the U.S. energy mix since the wind blows harder and more consistently offshore, which would potentially allow this renewable energy source to replace some portion of base-load. Offshore wind had a rocky start in the United States as these large infrastructure projects face difficult regulatory obstacles, including a maze of permitting and environmental laws and requirements as well as classic NIMBY issues. One prominent example is the first proposed off-the-coast wind farm, Cape Wind, which has faced 14 years of litigation surrounding its development process. However, many are hoping that the start of construction of the Block Island Wind Farm off the coast of Rhode Island will trigger a gale force of offshore wind energy

Looking Ahead to 2016

The year ahead shows promise for the U.S. renewable industry—the COP 21 agreement and CPP set the stage for policies to drive and incentivize renewables, new states are opening as potential markets for both utility scale and residential rooftop solar and grid systems across the country are adapting to incentivize greater DER deployment. The stabilizing extension of the ITC and PTC ensures that these energy sources remain financeable in the New Year, and new financers may feel comfortable entering the market as the industry matures. With these policies in place, the U.S. has the opportunity to deploy more renewable infrastructure to meet stated targets, and those working in the renewable energy industry have cause for cheer this holiday season.

Topics: NY REV, Energy Policy, Energy Finance, Distributed Energy, YieldCo, Solar Energy, Renewable Energy, Wind, COP21, Renewable Energy 2015, Distributed Energy Resources, CPP, Green Tea Party, Net Metering, Net Energy Metering, NEM, DG, Energy Project Finance, Renewable 2015, Green Energy, Green Energy 2015, Solar Energy 2015, DER, Offshore Wind, Clean Power, clean power plan, Georgia Solar, 2015, energy, Wind Energy, Energy Project, Green 2015, California DRP

Sullivan & Worcester logo

About the Blog


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

Subscribe to Blog

Posts by Topic

see all