Starved for presidential attention, the US energy industry let out a collective gasp when President Barack Obama discussed energy, renewables, and climate change in his inaugural speech. It was a historic moment for the industry. An American president had never before raised such issues in an opening salvo to the nation. Energy, at last, topped the federal agenda.
Now, one year on, Obama is credited with embedding the idea that an energy revolution means economic prosperity and jobs in the American psyche. He has laid the groundwork for transformation with an unprecedented round of federal funding for clean energy, thus infusing optimism into an industry waylaid by the financial credit crunch.
President Obama’s green energy plans have come unstuck as other issues like healthcare have taken priority
But two of his major energy goals continue to elude him: enacting climate change legislation and a national renewable portfolio standard, which will layout a requirement for a percentage of power demand to be met with green energy. With people starting to doubt that Congress will pass an energy bill in 2009, Obama’s gallop into the battlefield appears to have slowed to a trot, leaving power plant developers mulling in confusion. Carbon restrictions are coming, but when? And what will they look like?
“If I want to build a new power plant, and I don’t know the rules, I don’t know what to build,” says Branko Terzic, a former commissioner at the Federal Energy Regulatory Commission (FERC) and current regulatory policy leader in Deloitte’s Energy & Resources group.
Given the slow progress on an energy bill, energy insiders are now hesitant to grade Obama’s performance with top marks for 2009. Many had anticipated coal industry attacks on climate change initiatives, or Republican opposition to the Democratic president’s energy agenda. But instead it was another Obama priority — national health care legislation à‚— which rose up as an enemy to a climate change bill.
Obama was unable to harness the health care controversy, which consumed the American public and drew Congress’ attention away from energy for months, creating doubt that he would have a greenhouse gas reduction law in place, as hoped, by the December United Nations Climate Change Conference in Copenhagen, COP-15.
“He came into office with an ambitious agenda. I think the administration definitely thought they would have climate change legislation by now, and it is something they haven’t accomplished,” says Daniel Brown, an investment banker with the Utilities and Alternative Energy group at KeyBanc Capital Markets.
Stimulus money loosens bottleneck
That is not to say his energy agenda for 2009 was a bust. On the contrary, the promise of $80 billion in stimulus money has re-invigorated a clean energy industry which started to stall a year ago when private financing dried up. The wind power industry, in particular, appears to be on the rebound. “Lending is no longer a bottleneck for relatively large-scale developers who have some experience,” Brown says.
Indeed, the American Wind Energy Association (AWEA) reported that despite the recession, wind development in the third quarter of 2009 exceeded the previous quarter, and was even tracking ahead of the same period in 2008. AWEA attributed the rebound to the federal stimulus bill passed earlier in the year, particularly a provision that allows developers to take tax credit incentives as upfront cash.
A breakdown of the US Department of Energy’s Recovery Act funding , which has invigorated the nation’s power industry Source: DOE
By the autumn, the federal government began allotting serious dollars to projects. In September, 37 wind farms, solar installations and biomass generators were awarded more than $1 billion in grants, which total 30 per cent of a project’s qualifying cost. The bulk of the money went to wind farms à‚— nearly $500 million in an initial round of grants in early September and $464 million in a second round later in the month.
The grant in-lieu of tax credit is just one programme promising to spur energy growth. In recent months, the Department of Energy (DOE) has made $30 billion available in loan guarantees for renewable energy projects and $750 million for projects, which increase transmission reliability, efficiency and security. Another $11 million is going to solar grid integration projects; $24 million to wind energy research; $55 million to advanced carbon capture technology at existing coal fired plants; $87 million to speed commercialization of solar technologies; $1.4 billion for industrial carbon capture and storage; $4 billion for smart grid, $40 million for next generation nuclear and billions more for energy efficiency, battery research, and other energy frontiers.
The USA’s net power generation by major fuel source (August ’08 to July ’09) Source: Energy Information Administration
Much of the stimulus money however, had yet to be delivered by mid-October à‚— the DOE had paid out only around $1 billion of the $18.26 billion it had available at that point in time. Still the promise of the money seemed to be enough to move projects forward. “Even though the dollars haven’t flowed, confidence has flowed,” says Donna Attanasio, a partner in the Infrastructure and Project Finance group of law firm White and Case.
Such funding has invigorated the power industry at a time when history tells us it would otherwise be slow. Demand for electricity is down because of the recession and growing use of energy efficiency. Despite the lack of demand, the US is building more generation as Obama strengthens what the industry describes as the nation’s ‘policy market.’ Market economics alone, are not determining how much power the US builds; public policy goals increasingly drive decisions, in particular the push to integrate more renewable energy into the nation’s energy portfolio.
Aligning federal goals and state action
The increasing acceptance of a policy market on the federal level has emboldened state governors and lawmakers to press for the same at the state level. Governors have pushed for more ambitious renewable energy and energy efficiency targets throughout 2009, and state regulators showed a growing willingness to consider policy market arguments in evaluating costs. For example, in Massachusetts, where Governor Deval Patrick has set a goal to build 2000 MW of wind à‚— much of it offshore à‚— discussion was underway in the second half of 2009 about how to price long-term supply contracts for renewable energy.
Cape Wind, an offshore wind farm under development off New England’s southern coast, argued regulators should not consider the price of power alone, but also must give substantial weight to how well a contract achieves non-price factors including environmental benefits, rate stability and jobs created from the contracts. Under such direction, government policy creates a price signal.
So, even while the federal government may lag in taking action, individual states continue to move forward with a sense that at least federal goals are beginning to align with state action. More than half of states already have their own renewable portfolio standards and ten states have a mandatory carbon cap and trade programme, called the Regional Greenhouse Gas Initiative.
Obama’s bully stick
While doubt is high that Congress will pass a federal climate change bill soon, some believe it still has a chance. “I think this year is absolutely a possibility,” says Scott Watson, an attorney who specializes in environmental and energy law at Warner Norcross & Judd. “I think with legislation like this everybody is going to say it is not going to happen, and everybody is going to be right up until they are wrong. One day we will wake up, and it will pass.”
What would drive quick passage of the law? Fear that the Environmental Protection Agency (EPA) will regulate greenhouse gases under more onerous command-and-control terms, he claims. Obama’s largest ally in winning climate change legislation may be the legal system. The US Supreme Court in April 2007 found greenhouse gases to be air pollutants as covered by the federal Clean Air Act in the case Massachusetts vs. EPA. Lisa Jackson, EPA administrator, called the court finding, “Perhaps the most important decision ever handed down in the annals of environmental law,” in a speech at the 2nd Annual Governors’ Global Climate Summit in late September 2009.
Wind development in the third quarter of 2009 exceeding the previous quarter is thought to be due to the federal stimulus bill Source: AWEA’s Third Quarter 2009 Market Report
The court decision paved the way for the EPA to take action in restricting greenhouse gas emissions, giving Obama a bully stick to use against Congress. If Congress does not legislate, the EPA will regulate.
To that end, the EPA took a major step in spring 2009 towards regulating greenhouse gases in issuing what is commonly referred to as an endangerment finding à‚— a ruling that greenhouse gases endanger the public health and must be regulated by the agency. As a next step, the EPA has been drafting climate change rules, which are expected to apply to sources that emit over 22 600 tonnes of greenhouse gases.
In addition, the EPA announced that the nation’s largest sources of greenhouse gases will be required to report their emissions. The new rule allows the agency to track 85 per cent of US emissions from around10 000 sources. Another rule proposed by the agency will require large facilities to adopt the best available control technologies when they build or upgrade.
The energy industry is not uniformly against EPA regulation. Some anti-cap and trade companies argue it will be easier to delay and litigate carbon restrictions under the Clean Air Act. At the same time, many in the power industry acknowledge that EPA regulation will be devoid of economic goodies likely to come with cap and trade. “It is an easier political sell if you can package cap and trade with other investment mechanisms,” says Jonathan Dettmann, a climate change attorney with Faegre & Benson. “The concern is that they might see less market-based type regulation out of EPA than through congressional legislation. Also congressional legislation is likely to include more in terms of funding opportunities, investment opportunities, and transitional mechanisms.”
With each step the EPA takes toward regulating greenhouse gases, the administration makes clear it would prefer cap and trade. “Market-based incentives are key for stimulating growth,” Heather Zichal, Obama’s deputy assistant for energy and climate change, told the Business Council for Sustainable Energy in an 15 October speech.
Two major climate change bills were on the table by late September. In a slim vote (219 to 212), the House in June passed the American Clean Energy and Security Act of 2009, better known as the Waxman-Markey bill. Through cap and trade, the bill attempts to reduce US carbon emissions by 17 per cent by 2020, by 42 per cent by 2030, and 83 per cent by 2050, as compared to 2005 levels.
The House bill includes a renewable portfolio standard, which requires that six per cent of power come from renewables by 2012, increasing to 9.5 per cent in 2014, 13 per cent in 2016, 16.5 per cent in 2018 and 20 per cent in 2021. The Senate in late September released a draft climate bill for discussion with slightly tougher carbon restrictions: a 20 per cent drop from 1990 levels in 2020.
A signal of possible compromise between Democrats and Republicans came in mid-October when John Kerry a Democrat from Massachusetts and Lindsey Graham, a Republican from South Carolina together published an op-ed piece in the New York Times calling for bipartisan support. The article showed a willingness to incorporate nuclear power and domestic oil interests in the final legislation, compromises to give a final bill better chance of passage.
Whether a climate change bill passes this year, next year, in 2011, or not at all, the industry is grappling with other big issues requiring federal direction. The nation needs to rebuild, smarten and expand its transmission system, which is necessary to integrate wind into the system. Still unresolved is how the nation will pay for the plan, or even what the plan will look like.
State governors in the Northeast and Mid Atlantic have already broken ranks with the rest of the nation by saying they do not want to be part of large grid, which feeds Midwestern power into their cities; instead they want to build an offshore spine of wind farms along the East Coast. The US also continues to grapple with a ‘Not in my backyard’ sentiment, which blocks transmission construction. The industry waits to see whether or not FERC will take a stronger hand in over-ruling local transmission sitting decisions which will have repercussions beyond state borders.
As the transmission gets built, a new problem facing the nation will be lack of trained workers to take on the job because so many experienced utility employees are retiring. The shortage will become more apparent as the economy improves and more energy infrastructure is needed.
So while Obama is now trying to create jobs, in the not too distant future, he may be searching for workers if his plans play out to create a new energy economy. He may not have delivered yet on his promise of cap and trade and renewable portfolio standards, but he has kept the dollars flowing to clean energy projects, and maintained the tenor of his inaugural address. Legislation may be moving slowly, health care debate may be drowning out other issues, but energy remains on the nation’s mind.
Elisa Wood is based in Virginia, USA, and specializes in writing on energy-related issues.