Energy Finance Report

Corporate Sustainability Efforts on Upswing

Posted by Leigh Ratino on 8/16/17 5:36 PM

Despite the new administration’s efforts to rollback Obama Era environmental regulations, most businesses in the U.S. are maintaining their commitments to sustainability. According to Lucid’s 2017 Sustainability Outlook Report, only 5% of private companies surveyed expect to decrease their commitment to sustainability programs in 2017, while 74% expect no change and 21% expect an increase in their commitments. Growing concern about climate change have presented companies with the opportunity to lead the way by increasing their sustainability efforts. Major companies are taking the threat of climate change more seriously, and already are developing solutions to reduce their greenhouse gas (GHG) emissions.

Opportunities abound for U.S. businesses to get involved in corporate sustainability. For those businesses that are up to the challenge, the MIT Sloan Management Review’s 2017 Research Report offers eight evidence-based factors to consider. First, articulate a practical sustainability vision and ambition that lays the foundation for new business practices. Second, identify and prioritize material issues to focus resources. For example, following its Environmental Sustainability Plan’s goal "to provide clean, fuel-efficient and dependable power for our customers with the least environmental impact possible,” Cummins Inc. recently decided to expand a wind farm in northern Indiana by adding an additional 75 megawatts of capability.

Third, embed sustainability organizationally through cross-functional teams, clear targets, and key performance indicators. As noted in the Journal of Accountancy, it is important that the chief financial officer (CFO) be part of and buy into the sustainability initiatives in order to facilitate an integrated company perspective. Fourth, innovate on multiple dimensions of your business model. Nestlé, for example, recently began placing “How2Recycle” labels on its half-liter bottles manufactured in North America. This activity is in line with the company’s sustainability target to “find a compelling and simple way to educate and encourage all Americans to recycle the bottle.” Not only does Nestlé’s How2Recycle project encourage recycling plastic bottles, but it also instructs consumers to empty and replace caps on bottles, resulting in fewer caps ending up in our waterways and oceans.

Fifth, develop a clear business case, and sixth, get the board of directors on board. Sustainability, while beneficial to the environment, also can be a business driver. As pointed out by the Journal of Accountancy, sustainability-related risks – extreme weather events, water crises, and climate change – are business risks. Furthermore, corporate sustainability have been proven to result in economic efficiency. For example, Unilever found that its “Sustainable Living” brands have grown 50% faster than the rest of its business because of consumer demand for sustainable products.

Seventh, communicate a sustainability value-creation story to your shareholders. Eighth, collaborate with a variety of stakeholders to drive strategic change. For example, 62 percent of Exxon Mobil Corporation’s shareholders recently voted for a resolution that requires the company to annually disclose how it will be affected by global efforts to mitigate the effects of climate change. Similarly, Occidental Petroleum Corp.’s shareholders recently approved a proposal requiring the company to report on climate change impacts to business.

Although President Trump has denied the impact of human activity on climate change and is actively seeking to resurrect the fossil fuel sector, nonetheless, it appears that U.S. businesses are maintaining their commitments to sustainability.

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

Topics: Climate change, Trump Administration, Corporate Sustainability, Sustainability

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. 

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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.

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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.

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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

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

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

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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

Anaerobic Biodigesters Give Universities Food for Thought

Posted by Merrill Kramer on 12/28/15 3:45 PM

Co-author Morgan M. Gerard

Food waste is a major problem in the US. Studies show that around 40% of all food produced in the US gets wasted at some point in the food chain. According to the EPA, food waste is the second largest category of municipal solid waste sent to landfills, accounting for 18% of their waste stream. Left to decompose in landfills, food waste creates methane gas, a lethal greenhouse gas that contributes to climate change and global warming. EPA has found that, pound for pound, the comparative impact of methane gas on climate change is more than 25 times greater than carbon dioxide.

University_Buffet.jpgUniversities are not immune from contributing to the organic waste problem. University meal programs serve buffet-style food to students and don’t want to run the risk of running out of food. The average college student generates 142 pounds of food waste a year, and campuses as a whole throw out a total of 22 million pounds of uneaten food annually. Universities thus are a major contributor of food waste to landfills. Tackling the food waste problem has become increasingly important to colleges. Food waste is one of the least recovered recyclable materials in the US. College programs such as composting, tray-less dining and the Food Recovery Network, where uneaten food is delivered to feed the needy, only begin to solve the problem. Universities are increasingly considering anaerobic digestion as a solution as they expand their green initiatives.

Anaerobic digester systems provide a means for schools to recycle campus waste while satisfying multiple goals of reducing their carbon footprint, lowering their energy costs, reducing use of fossil fuels, capturing an important source of renewable energy, and creating campus laboratories for educating students on socially responsible behavior.

What is Biodigestion?

A biodigester is basically a large, fully enclosed tank into which you collect organic waste. Anaerobic means the absence of oxygen. If you lock anaerobic microbial organisms in a sealed environment without oxygen, but with plenty of food and other organic waste, the microbes produce methane-rich gas through their digestive process. Essentially, it’s the natural process of decomposition technologically revved up to optimal speed and efficiency. The trapped methane gas is then cleaned and used to generate electricity and steam for heating and cooling via a combined heating and power (CHP) or cogeneration system. The biogas also can be directly used to produce steam in boilers for hot water and heating. Leftover organic solid waste can be used as fertilizer, a soil enhancer or be further composted.

Anaerobic digestion is seen as a holistic, albeit more technically complex solution to food waste than University recycling and composting programs. When properly structured, installing a biodigester can also be a money-maker for the University by reducing electric, heating, waste disposal and operating expenses.

Food for Thought

Food_Waste-1.jpgBiodigestion is not entirely new to campuses. A number of Universities have been at the vanguard of installing biodigestion systems as part of their sustainability missions.   In 2011, the University of Wisconsin Oshkosh built the first commercial anaerobic biogas system in the United States. The 370 KW facility converts 10,000 tons of organic waste per year to generate approximately 8 percent of the University’s electricity needs. Michigan State University has developed a $5.1 million biodigester that converts around 10,000 tons annually of organic waste through an approximately 350 KW system that powers ten campus buildings. University of California Davis entered into a third party off balance sheet project finance arrangement to build an $8.6 million biodigester that converts 18,000 tons of organic trash annually into 5.6 million kilowatt-hours to satisfy 4% of the campus’ electricity needs.

Project Financing for Biodigester Projects

Deciding to construct a biodigestion facility involves undertaking a variety of risks, including construction cost overruns, delays, performance risk, technology problems and operating cost overruns. Financial risk is a major consideration. Construction of infrastructure projects requires review and consideration of balance sheet and credit issues. Undertaking large capital expenditures can run afoul of bond indentures and also affect a University’s credit rating. Sustainability programs often find their proposed projects competing with other capital projects. This is frequently an uphill fight as, unlike student housing, library and classroom buildings, owning and operating energy projects is not a core business of the University.

One structuring option that can minimize risks and overcome these political issues is to develop the project through a third party owned, off balance sheet project financing arrangement. Under a project finance structure, the University signs a long term power purchase and waste disposal agreement, or enters into a lease arrangement, with a third party developer that will guarantee the university savings off its energy and waste disposal costs. In exchange, the project sponsor agrees to take on project risks including construction cost overruns, delay damages, under-performance of the facility, and operating and maintenance costs. These risks are not inconsiderable, as biodigester performance depends upon a consistent, stable quality of organic waste and bio-gas production. Importantly, a project finance structure allows a biodigester project to be built and financed off-balance sheet to the University. This allows the University to avoid incurring new debt obligations, using up its balance sheet, violating bond coverage ratios and otherwise running afoul of its bond indentures. It also allows the University to allocate project risks to a third party while guaranteeing savings to the University of energy, waste disposal, operating and maintenance expenses.

An additional benefit of a project finance structure is that it allows a private party to use depreciation and other tax benefits not available to not-for-profit Universities, thereby reducing the overall capital costs of the projects. The resulting savings can be used to fund other sustainability projects, provide scholarships, hire additional professors, or for other worthy undertakings.

Best Practices for Implementing a Biodigester Project

As discussed, a biodigester project can be a complex, risky and costly undertaking. To maximize the value of the project while minimizing its costs and risks, a University first should undertake a preliminary economic, design and engineering study to understand the financial and environmental feasibility of the project, and to ensure it is designed and built to optimize its value to the school. Consideration next should be given to funding and financing issues to understand the project’s budgetary and balance sheet impact on the school, and to justify not just its environmental value, but its economic value to the Administration. Grants and state and federal governmental funding are often available for sustainability and renewable energy projects. Where funding options are limited, or to ensure a project’s long-term benefits to the school, third party project financing structures should be considered either separately or in conjunction with grant money, that can limit both financial and project risks and utilize available tax benefits. Project financing often is the optimal vehicle for allocating risks to parties that are best able to manage those risks. In short, if properly structured to optimize its value and minimize its risks, a biodigester project can be both an economic and environmental proposition for a University.

Topics: Biomass, university renewable energy, university sustainability, Methane, biogas, waste disposal, Energy Project Finance, Green Energy, biodigestor, food waste, waste to energy, Green house gas, Project finance, College campus, Trayless Dining, Composting, energy, Energy Project, biodigester, university energy, clean energy, Climate change, College

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

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