Energy Finance Report

U.S. House Committee on Energy and Commerce Hearing on Energy Storage Highlights Need for Further Federal and State Initiatives

Posted by Administrator on 8/7/18 3:42 PM

By Kevin Fink

On July 18, 2018, the U.S. Congress House Committee on Energy and Commerce held a hearing to assess the progress being made by federal and state governments to promote the role of energy storage in the U.S. electrical system. A panel of five witnesses – an executive from the California Independent System Operator (“CAISO”); a partner at an energy and environmental economic consulting firm; and executives from E.ON, Fluence Energy, and Duke Energy – were present to testify and answer questions of the legislators.

The experts were largely favorable in their assessment of the steps taken by the federal government to promote energy storage and reduce existing barriers through opening up wholesale markets. In particular, there was a nearly universal consensus that FERC Order 841 (February 2018) had the desired effect of catalyzing energy storage’s role in the electrical grid by directing Regional Transmission Operators (RTOs) and Independent System Operators (ISOs) to create market rules for energy storage participation in the wholesale energy, capacity, and ancillary services markets. However, the testifying experts also expressed the view that Order 841 was but an initial step to promote energy storage, and that additional measures must be taken to allow energy storage to reach its full potential by clarifying certain provisions of the order, creating of additional policies and roadmap(s), and creating federal tax credits. Moreover, most experts agreed that finalizing Order 841 and 845 (Order revising the definition of generating facility to explicitly include energy storage) and denying requests for a rehearing would speed up the implementation process.

A prominent talking point focused on the need to extend federal tax credits to energy storage projects, particularly those that were not incorporated into larger renewable energy developments and are eligible to receive an investment tax credit (“ITC”). Most notably, the experts concurred that extension of the ITC to include stand alone energy storage projects would both lower the cost of the investment and accelerate its implementation. A continuing theme was that almost everyone in the renewable energy space benefits from tax credits and that energy storage technologies were maturing at such a rate that any targeted tax benefits would only be necessary for a few years. Moreover, one expert noted that application of the ITC to energy storage should be commonplace as Section 48 of the Internal Revenue Code (“IRC”) allows renewable energy paired with energy storage to receive the ITC – raising the question of why should energy storage not be able to receive credit as a stand alone, when it is performing the same function when paired with renewables. The expert suggested that the definition of which technologies qualify for the ITC be broadened to include energy storage. It should be noted that legislation has been introduced in both the Senate (S. 1868) and the House (H.R. 4649), proposing to amend the IRC to allow investment tax credits for energy storage technologies and battery storage technology.  

Federal vs. state initiatives was another hot button topic, and it was noted that a number of states, such as New York and Massachusetts, have begun to adopt their own energy storage policies and roadmap)s. Nonetheless, most believed that a federal energy storage roadmap was imperative in order to reiterate the federal government’s commitment to energy storage, and to serve the critical function of educating stakeholders on the benefits of energy storage.

There is little doubt that energy storage technologies will become integrated in the renewable energy sector by necessity, given the intermittent nature of wind and solar power. However, the House is still grappling with how the federal government can best accelerate the development of the energy storage market and incentivize competition. 

Kevin Fink is a law clerk with Boston-based law firm Sullivan & Worcester LLP.  

Topics: Energy Storage, Renewable Energy, U.S. House of Representatives, Investment Tax Credit

Puerto Rico Update: A Busy Week as House Committee Holds Hearing on PREPA Oversight and Reform, and PREPA Reaches Preliminary Agreement with Bondholders

Posted by Jeffrey Karp on 8/6/18 4:18 PM

By Jeffrey Karp and Kevin Fink

As discussed in our posting covering continuing challenges to rebuild Puerto Rico’s electrical grid, the Puerto Rico Electric Power Authority (“PREPA”) has inhibited the recovery and redevelopment of the Island’s energy system. On July 25, 2018, the U.S. Congress House Committee on Natural Resources held an oversight hearing to discuss the “Management Crisis at the Puerto Rico Electric Power Authority and Implications for Recovery.” A panel of five witnesses – Bruce Walker (U.S. Department of Energy, Assistant Secretary of the Office of Electricity), Eduardo Bhatia (Puerto Rico Senate Minority Leader) and three energy and infrastructure advisors and consultants[1] – were present to testify and answer legislators’ questions. Puerto Rico’s Governor Ricardo Rosselló also was invited, but chose not to attend.

The hearing largely served to identify problems the Commonwealth of Puerto Rico currently is facing in seeking to rebuild its electrical grid, and provide perspectives regarding potential management, financial, and technical solutions. An issue repeatedly addressed was PREPA’s mismanagement of the power system, and its appropriate role in future decision-making regarding the system. Senator Bhatia emphasized PREPA’s mismanagement over the past 70 years. While he did not suggest eliminating PREPA entirely, he stressed the need for demonopolization, depoliticization, and the creation of an open energy market in which consumers could obtain energy through the deployment of microgrids. Microgrids allow for renewable energy to be generated and distributed close to the consumer, and may prove a more feasible option compared to traditional fossil fuel energy distribution, which requires transmission lines to cover many miles. If Puerto Rico’s electric grid were rebuilt, it would require construction, maintenance, and repair of transmission lines across the mountainous terrain in the populous northern portion of the island – including the capital San Juan – across to the southern portion of the Island, where most of the power generation occurs. Support for microgrid implementation, as is discussed in our prior posting, was echoed by the panel’s other witnesses.

Puerto Rico

Although absent from the hearing, Governor Rosselló did submit written testimony. On June 20, 2018, the Governor signed legislation, House Bill 1481, that provides a path forward for private sector involvement in energy generation and distribution. Regarding generation, the intent of the legislation is to either fully privatize PREPA’s assets or develop public-private partnerships. The legislation also provides that the electrical assets belong to the Commonwealth, but a consortium of companies would oversee energy distribution. The new law grants a period of 180 days for a special commission composed of the members of the Puerto Rican Senate, House of Representatives, and the Executive Branch to design a public policy and regulatory framework that will be used as a guide to award contracts and govern private sector transactions.

In his written testimony, the Governor stated that private sector involvement in the Island’s electric grid will assure a “modern, reliable, resilient, sustainable, and affordable electric system…catalyz[ing] sustained and long-term economic growth and job creation.” Several witnesses also favored privatization, which they opined may partially resolve concerns about PREPA’s history of mismanagement. The Governor further stated that, while support from the federal government is welcome, “additional legislation vastly expanding the role of the federal government… is simply not warranted.” Senator Bhatia, DOE Secretary Walker, and various House committee members agreed with the Governor’s comments that federalization of PREPA is not – and should not be – a goal of the U.S. government.

Nonetheless, the witnesses and many representatives agreed that some type of additional oversight of PREPA is necessary due to its insolvency, low credit rating, political entanglements, and history of mismanagement. One witness, Thomas Emmons of Pegasus Capital Advisors – who oversees his company’s renewable energy infrastructure investments – stated that PREPA must eliminate its debt and improve its credit to encourage private sector investment to help repower the Island. Following the hearing, on July 31, 2018, PREPA took a much needed step to improve its crippling financial condition; it reached a preliminary agreement with bondholders to restructure $9 billion of its debt. Notably, when asked at the hearing whether debt elimination and improved credit were the solution to the utility’s problems, Mr. Emmons responded that these steps are only a star; depoliticization and oversight of PREPA also are necessary.

Politics has long infiltrated PREPA’s decision-making and contributed to its organizational dysfunction. As recently as July 2018, the then current CEO of PREPA resigned stating it was “very clear [that] politics related to [his] compensation made it impossible for [his] contract to be fulfilled.” The PREPA Board then named a replacement, offering a higher base salary. Governor Rosselló took exception to the deal, publicly tweeting that the PREPA Board members must reduce the offered salary or resign – further illuminating the infusion of politics into the utility’s operation. The Board members offered their resignation, and Governor Rosselló appointed a new CEO who previously had worked at PREPA and was viewed as contributing to the agency’s mismanagement.

While the recent legislation seeks to partially privatize the Island’s electrical system, changes to PREPA’s management regime were not addressed. Episodes such as described above raise concerns that the utility’s institutional problems will continue to inhibit effective management practices.

The Committee hearing provided an opportunity for knowledgeable witnesses, federal government officials, and legislators to discuss the factors inhibiting the restoration and redevelopment of Puerto Rico’s electrical grid. While the extent of any further federal government involvement remains to be seen, there was a general consensus that oversight of PREPA’s management – removed from political influence – is a necessary starting point. Also potentially helpful is the preliminary agreement reached by PREPA with its bondholders, and approved last week by the Island’s Oversight Board, to restructure $9 billion of debt. If finalized, the agreement would serve as an important first step for PREPA to overcome its insolvency. And, if adequate oversight and management best practices finally are implemented at PREPA, the private sector may find Puerto Rico’s energy sector a more attractive investment opportunity.

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

[1] Thomas Emmons, Partner, Pegasus Capital Advisors; James Spiotto, Managing Director, Chapman Strategic Advisors LLC; David Svanda, Principal, Svanda Consulting.

Topics: Microgrid, U.S. House of Representatives, Puerto Rico, privatization

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