Columbia University Report: Repurposing Oil and Gas Financing for Renewable Project Development

Columbia University’s Center on Global Energy Policy published a report this week, Financing Solar and Wind Power: Insights from Oil and Gas, considering whether the financial tools used in the oil and gas industries for raising capital could serve as models for wind and solar projects.  The report is premised on the observation that while ample debt capital is available for utility-scale solar and wind with long-term power purchase agreements, raising equity to finance preconstruction development remains a significant challenge.  The report therefore considers whether financing tools used by the oil and gas industries to raise capital could provide insights toward the expansion of solar and wind.

The report explores the potential for solar and wind facilities to sell capacity into markets operated by independent system operators (ISOs).  Capacity markets are run by many ISOs in order to maintain an adequate resource reserve to meet projected demand and to ensure grid reliability.  Generators that expect to be available during a relevant commitment period may bid capacity into the market in return for capacity payments.  The report observes that while solar and wind resources can’t be dispatched on demand, they “may nevertheless qualify for capacity payments in some situations, in part because they are likely to be able to generate electricity during periods of peak demand.”  The report does caveat such capacity payments by noting that capacity may be discounted from nameplate and may require electric storage as well.

The report also suggests allowing developers to borrow against the expected value of wind and solar resources on a given project site to fund the cost of development, just as investors use reserve-based lending toward the exploration of oil and gas reserves by looking to the cash flows from the production and sale of the resource for repayment.  Finally, similar to the volumetric production payments often used in the oil and gas industry, renewable project developers could raise cash by selling to investors an Electricity Production Payment, or the right to receive a portion of the project’s future production, either as a number of kilowatt-hours per time period, or as a dollar value of electricity production.

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Global Energy Sector CO2 Emissions Flat for Third Consecutive Year

The International Energy Agency (IEA) reports that energy-related CO2 emissions in 2016 were the same as those in 2015, marking the third straight year of flat emissions.  Global energy emissions remained at 32.1 gigatons, despite growth in the global economy of over 3%.

Changes in annual energy sector emissions varied by region in 2016.  While emissions remained the same in Europe, emissions fell in the two largest energy consumers and CO2 emitters: the U.S. and China.  The U.S. saw the biggest decrease in CO2 emissions.  As the growth of shale gas and renewable power displaced coal, U.S. emissions fell by 160 million tons or about 3%.  China’s emissions fell by about 1% in 2016.  This too was due in part to the displacement of coal in the power sector.  In 2016, five new nuclear reactors came online in China, and its power sector also saw increasing shares of renewables and natural gas.  The emissions decrease the U.S. and China offset increases in most of the rest of the world.

Although this is not the first multi-year period with flat or declining global emissions, the IEA emphasizes the fact that the current period is occurring at a time of global economic growth.  Historically, the growth rates of the global economy and CO2 emissions have largely risen and fallen together.  However, more recently these growth rates have “decoupled,” and the growth rate of CO2 emissions has dropped to near 0% while the growth rate of the global economy has remained positive.  IEA identifies market forces, technology cost reductions, and concerns about climate change and air pollution as the main forces behind this decoupling.

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Trump Administration’s “Budget Blueprint” Proposes Cuts to DOE, EPA, DOI

The White House Office of Management and Budget released its first budget proposal for fiscal year 2018, outlining the Trump Administration’s proposed discretionary funding and spelling out its intent to reduce federal spending on non-defense programs by $54 million.  The President’s “Budget Blueprint” kicks off the federal government’s budget process by communicating to Congress the White House’s recommendations for federal fiscal policy and laying out its priorities for federal programs.  While the “Budget Blueprint” proposes to make cuts to many programs within DOE, EPA, and the Department of the Interior (DOI)—focusing spending instead on infrastructure and energy security—it’s ultimately up to Congress to appropriate funds for each department and agency program.  The White House plans to release a full budget later this spring.

The Budget Blueprint requests that Congress appropriate $28 billion to DOE, a $1.7 billion or 5.6% decrease from the 2017 continuing resolution (CR) level.  The budget proposes to increase spending on the National Nuclear Security Administration (responsible for maintaining the U.S. nuclear weapons stockpile) by $1.4 billion and to focus DOE’s funds on licensing activities for the Yucca Mountain nuclear waste repository and cleanup of contamination resulting from nuclear weapons production.  The budget proposal also:

  • “Focuses funding for the Office of Energy Efficiency and Renewable Energy, the Office of Nuclear Energy, the Office of Electricity Delivery and Energy Reliability, and the Fossil Energy Research and Development program on limited, early-stage applied energy research and development activities where the Federal role is stronger … [and] eliminates the Weatherization Assistance Program and the State Energy Program to reduce Federal intervention in State-level energy policy and implementation. Collectively, these changes achieve a savings of approximately $2 billion from the 2017 annualized CR level.”
  • “Supports the Office of Electricity Delivery and Energy Reliability’s capacity to carry out cybersecurity and grid resiliency activities that would help harden and evolve critical grid infrastructure that the American people and the economy rely upon.”
  • Eliminates, among other things, the Advanced Research Projects Agency-Energy and the Title 17 Innovative Technology Loan Guarantee Program “because the private sector is better positioned to finance disruptive energy research and development and to commercialize innovative technologies.”

As part of cuts to the Department of Health and Human Services, the Budget Blueprint proposes to eliminate discretionary programs including the Low Income Home Energy Assistance Program (LIHEAP).  LIHEAP provides states with federal dollars to help low-income households pay their utility bills.  The budget proposal explains, “[c]ompared to other income support programs that serve similar populations, LIHEAP is a lower-impact program and is unable to demonstrate strong performance outcomes.”

For EPA, the 2018 budget proposes a $5.7 billion appropriation, focusing largely on funding for drinking and wastewater infrastructure.  This is a $2.6 billion or 31% decrease from its 2017 budget.

The Budget Blueprint discontinues funding for the Clean Power Plan, international climate change programs, and climate change research and partnership programs, reducing EPA’s spending on these and related efforts by $100 million for the stated purpose of “protect[ing] the air we breathe without unduly burdening the American economy.”  The proposal also reduces EPA’s Compliance Assurance budget to $419 million, a $129 million decrease from 2017, and concentrates the agency’s enforcement “on programs that are not delegated to the States.”  It also proposes a budget for EPA’s Office of Research and Development (ORD) of $250 million, a decrease of $233 million from 2017.  “ORD would prioritize activities that support decision-making related to core environmental statutory requirements, as opposed to extramural activities, such as providing STAR grants,” the proposal explains.*

In addition, the Budget Blueprint:

  • Reduces Categorical Grant funding by $482 million from 2017 annualized CR levels in order to “eliminate[] or substantially reduce[] Federal investment in State environmental activities that go beyond EPA’s statutory requirements.”
  • “Eliminates funding for specific regional efforts such as the Great Lakes Restoration Initiative, the Chesapeake Bay, and other geographic programs to “return[] the responsibility for funding local environmental efforts and programs to State and local entities, allowing EPA to focus on its highest national priorities.”

The $11.6 billion proposed appropriation for the DOI, a reduction of $1.5 billion or 12% from its 2017 CR level, includes funding for programs supporting energy development on public lands and offshore waters to “allow DOI to streamline permitting processes and provide industry with access to the energy resources America needs.”

 

 

* EPA’s Science to Achieve Results (STAR) program funds research grants, Small Business Innovation Research contracts, and graduate fellowships in environmental science and engineering disciplines.

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GAO Reports on Residential Generation and Storage

The Government Accountability Office (GAO) recently released its report, Status of Residential Deployment of Solar and Other Technologies and Potential Benefits and ChallengesThe report considers innovations that have allowed the new and increased availability of such technologies, as deployed by customers, electricity suppliers, or third-parties.  These technologies include distributed generation, such as rooftop solar; distributed storage systems, such as batteries in homes; meters and associated infrastructure that provide data to grid operators; and electricity management devices, such as smart appliances.  The report reviews federal and state policies that have been implemented to encourage the deployment of these technologies.

The report finds that certain, but not all, of these technologies have experienced increased deployment.  While residential solar systems have increased in some states, they still represent a small portion of generation nationwide.  The use of advanced meters has increased, with Maine, Georgia, Nevada, California, Oklahoma, and Vermont having the highest percentages of advanced meters deployed in 2015.  Residential electricity storage and management technologies are less prevalent.  The report also covers potential benefits and challenges of increased deployment of these technologies, including challenges for grid management.

GAO used data from the Energy Information Administration to prepare this report and lists a number of government agencies and stakeholders that it interviewed (including the American Public Power Association, the National Rural Electric Cooperative Association, and the Edison Electric Institute, as well as several independent system operators and state commissions).  GAO notes that DOE and FERC provided technical comments on a draft copy of the report, which GAO incorporated as appropriate.  GAO has also posted a highlights page and a short podcast covering this report.

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FERC to Hold Technical Conference on State Policies and Eastern RTO Markets

The Federal Energy Regulatory Commission (FERC) has issued a notice that its staff will convene a two-day technical conference to discuss mechanisms to “reconcile” the operation of wholesale energy and capacity markets in eastern Regional Transmission Organizations (RTOs), which are explicitly fuel- and technology-neutral, with state policies that prioritize particular generation resources.  Scheduled for May 1–2, 2017, the conference in Docket No. AD17-11 will look for solutions that provide for development of “resources of interest to state policy makers while preserving the benefits of regional markets and economic resource selection.”

As the notice recognizes, “wholesale competitive markets, as currently designed, select resources based on principles of operational or economic efficiency without specific regard to resource type.”  But there are a host of reasons why states—who have Federal Power Act authority over generation facilities and the distribution side of the electric industry, and ultimately are held responsible for keeping the lights on—may prefer particular resources.  For example, a state may want to maintain a diverse fuel mix to ensure its power supply is not hostage to the availability of one or a few particular fuels.  Or a state may be interested in controlling power plant emissions, and, therefore, in promoting low-carbon power or sources that smooth out the variability of wind or solar energy and facilitate integration of such facilities.

Under the classic vertically integrated model, a state could direct its electric utilities to build generation to meet its policy goals.  In a restructured environment, however, where distribution utilities have divested their generation operations, states may need other approaches.  As is evidenced by the growing body of litigation before FERC and the courts, the question of whether a state has the authority to support these other approaches is complex.  In particular, some are questioning whether state policies supporting particular resources distort market prices and/or intrude upon FERC’s authority over wholesale markets.  To date, at least three federal appellate courts (the D.C., Third, and Fourth Circuits) and the Supreme Court have addressed aspects of this issue, and at least two federal district court cases are pending (in the Northern District of Illinois and Southern District of New York).*

The FERC technical conference is aimed at “foster[ing] further discussion regarding the development of regional solutions in the Eastern RTOs/ISOs that reconcile the competitive market framework with the increasing interest by states to support particular resources or resource attributes.”  The notice states that:

Commission staff seeks to discuss long-term expectations regarding the relative roles of wholesale markets and state policies in the Eastern RTOs/ISOs in shaping the quantity and composition of resources needed to cost-effectively meet future reliability and operational needs. At one end of the spectrum, state policies would be satisfied through the wholesale energy and capacity markets. At the other end of the spectrum, state policies would be achieved outside of the wholesale markets, and the wholesale markets would be designed to avoid conflict with those state policies. There are numerous alternatives between these two ends of the spectrum. . . . In the end, Commission staff seeks to understand the potential for sustainable wholesale market designs that both preserve the benefits of regional markets and respect state policies.

Commissioner Honorable issued her own statement on the conference. While “[s]ome [state] approaches have worked,” she said, “others have encroached upon or interfered with the operation of wholesale markets.  The Commission’s whack-a-mole response to such state action is inefficient and prolongs uncertainty.”  Through this “broader effort,” Commissioner Honorable “hope[s] to work with stakeholders to find ways to advance various policy goals—fuel security, environmental, or otherwise—while preserving valuable price signals and consumer benefits provided by regional electricity markets.” In Commissioner Honorable’s view, “all options are on the table” and “[t]here will likely not be a one-size-fits-all solution.”

Those wishing to speak at the conference should submit a nomination form by March 17, 2017.  Registration is encouraged.  Attendance may be in-person or by webcast.

*Spiegel & McDiarmid LLP has represented state or state ratepayer advocate interests in a number of these cases.

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