At a time when many new energy projects have been slowed down or cancelled due to the falling oil prices, rising construction costs, and burdensome legal obstacles, the trend against such projects appears to be turning.  The State of Ohio recently granted Baard Energy the last of its required construction permits for a new coal-to-liquid (CTL) facility with an estimated price tag of $5 billion dollars.  The proposed Ohio River Clean Fuels (ORCF) facility, located in Wellsville, Ohio, would produce 53,000 barrels of liquid fuel per day, using coal and biomass as feedstock, and would come on-line in 2012. 

Supporters argued that the facility would generate thousands of new jobs for Ohioans during the construction process and hundreds more high quality jobs during its operation.  Opponents argued that the facility would release between 14 and 18 million tons of carbon dioxide annually, and that issuing a permit would be unlawful without imposing a binding obligation on the company to capture or sequester such emissions.  In the end, the state agreed with supporters of the facility, both granting the permit and providing a $500,000 grant to support acquisition of property under a “Job Ready Sites” program through the Ohio Department of Development.  

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In a memorandum dated December 18, 2008, EPA Administrator Stephen Johnson instructed all EPA Regional Administrators of “EPA’s definitive interpretation of 40 C.F.R. 52.2 1 (b)(50) . . . [that a] ‘regulated NSR pollutant . . . exclude[s] pollutants for which EPA regulations only require monitoring or reporting but . . . include[s] each pollutant subject to either a provision in the Clean Air Act or regulation adopted by EPA under the Clean Air Act that requires actual control of emissions of that pollutant.”

Leaving aside for the moment the substance of Administrator Johnson’s analysis of the prior Agency interpretations, the scope of EPA’s authority under the Clean Air Act and even issues related to whether this decisions represents sound public policy, the form of the interpretive memorandum appears to be an effort to tie the Obama Administrations hands on the issue.

On page 2 of the memorandum, Administrator Johnson states: “This memorandum is intended to reduce ambiguity by setting forth an initial interpretation of EPA’s regulation at 40 C.F.R. §  52.21(b)(50).”  Sixteen pages later, in the context of discussing “public participation concerns,” Mr. Johnson refers to a passage in the EAB Deseret Power decision in which the EAB questions whether EPA may alter an interpretation from 1978 without going through notice and comment rulemaking.

The memorandum addresses cases cited by the EAB and concludes that “these court decisions have also recognized that an Agency has the flexibility to establish an initial interpretation of a regulation without engaging in a notice and comment process.”  (Emphasis added.)  Assuming Administrator Johnson’s analysis of the court decisions is correct, he has not only laid the groundwork for defense of his memorandum as one not requiring notice and comment rulemaking, but also set the framework for requiring any change of interpretation by the Obama Administration to be achieved only through full-fledged notice and comment rulemaking.

For now at least, EPA has settled the issue of whether permitting authorities must perform BACT analyses for carbon dioxide emissions.  Whether and for how long the Obama Administration allows that interpretation to stand is another in a growing line of “top priority” issues that lay waiting on the new EPA Administrator’s desk.

For further information about this topic, please contact Akin Gump.

As recently discussed on ClimateIntel, the current financial crisis and freezing of capital for investment and lending pose significant obstacles for renewable energy developers to attract financing and implement projects. A Renewable Energy Private Investment Corporation (REPIC) would boost the renewable energy industry quickly and efficiently by unfreezing lending for projects that, under normal economic conditions, would receive financing.  More importantly, REPIC can be structured to not only provide lending or government guarantees, but also to insure projects utilizing new technologies.  

President-Elect Obama’s national energy priorities to reduce greenhouse gas emissions, establish a federal renewable portfolio standard and create five million green collar jobs will require rapid and sustainable growth in the renewable energy sector.  President-Elect Obama has supported an economic stimulus plan that includes significant climate-friendly incentives.  With over half the states having enacted renewable portfolio standards, and a growing number of states constraining carbon emissions, there would seem to be no shortage of demand for renewable energy.  The current financial crisis, however, impedes the implementation of new projects.  Measures to assist developers and entrepreneurs create new projects and technologies are critical to the success of the Obama plans.

Federal support to renewable energy largely has been in the form of tax credits, but those incentives benefit only investors with capital gains to offset.  In the current economic climate, financial institutions and insurers that have been the typical recipients of the preferential tax treatment have little or no tax liability to offset.  As a result, renewable energy trade groups, as well as investment fund managers, are asking Congress to modify renewable energy tax credits, so they deliver a benefit to investors that have no gains to offset.  Moreover, this proposal does not offer meaningful incentive to providers of tax equity on renewable deals, which have abandoned that business line or are out of business entirely.  Tax incentives that are inaccessible until energy is produced or capital is expended in the project do little to stabilize today the renewable industry or support its long term growth.  In fact, many electric utilities express privately great skepticism of the long-term value of the tax credits in that such credits create balance sheet uncertainty.

Private investors have been hesitant to lend to certain renewable energy developers even in good economic times due to a lack of technology insurance.  REPIC, however, could provide an immediate source of risk insurance related to the financing for emerging technologies. It is widely expected that once lending resumes, there will be a “flight to quality” favoring low-risk renewable technologies with established revenue streams. To proceed in lending for necessary emerging technologies, private investors may insist on unfavorable interest rates or collateral requirements.  REPIC could stimulate development of nascent renewable technologies that cannot receive funding for technology-risk reasons by favoring lending to the research and deployment of less-developed, but more promising, renewable energy sources.

REPIC can provide a stable source of financing support for complex renewable technologies that the financial sector finds risky, uncertain or difficult to evaluate.  Financial assistance can be in the form of direct loans, loan guarantees or technology insurance.  Such support will decrease investment costs for project developers, spread risk, stimulate American jobs and increase investor confidence generally.

Our next blog entry will examine the benefits that REPIC will provide from an administrative perspective.

For further information about this topic, please contact Akin Gump.

 As part of its commitment to implement its Carbon Pollution Reduction Scheme (CPRS) by 2010, the Australian government yesterday released its eagerly awaited White Paper on the national emissions trading scheme.  The key platform of the paper is the government’s commitment to reduce greenhouse gas emissions by at least 5% from 2000 levels by 2020, with the potential for a 15% cut if a global agreement is reached.  The government also restated its commitment to a long-term cut of 60% from 2000 levels by 2050, with the ultimate goal of stabilizing greenhouse gas concentrations at 450 parts per million.

Coverage and liability

The CPRS is the broadest emissions trading scheme outside of the EU ETS and is scheduled to start on July 1, 2010.  It comprises an extremely broad-based cap-and-trade scheme, which will cover at least three-quarters of Australia’s emissions, including stationary energy, transport, fugitive emissions, industrial processes, waste and forestry and all six Kyoto Protocol gases.  Excluded from the scheme are agriculture (until at least 2015), deforestation (with future possibilities for inclusion) and biofuels and biomass combustion for energy.  In general terms, liability is placed on large emitters (those who annually emit 25,000tCo2-e or more) for their own direct emissions, and obligations on upstream fuel suppliers for emissions resulting from the combustion of fuel. 

Auctioning

At least a quarter of the allowances will be given away to compensate vulnerable industries, with the remainder to be auctioned.  Banking will be unlimited while borrowing will be limited to 5%.  The allowances will be treated as personal property and assignable, and will also be classified as financial products with Australian Securities Investment Commission oversight.

International linking

The government has indicated it expects an initial permit price of A$25 per tonne.  However, to protect against price hikes, it has introduced a price cap (initially A$40 per tonne, then indexed annually at 5%) and unlike the EU ETS, there will be no make-good provision.  There will also be transitional cuts to fuel excise to lessen the burden on consumers.  The existence of a price cap could have important implications for linking with other schemes.  Possibly to counter this and avoid overseas players shoring up Australian allowances, there will be a transitional ban on the export of Australian permits.  However, the CPRS allows unlimited linking of Kyoto credits but will not allow Joint Implementation projects to be hosted in Australia’s covered sectors.

Compensation

The emissions intensive trade exposed industries (e.g. steel, cement, primary aluminum, pulp and paper, chemical and refinery industries, including LNG) will be protected under the scheme, based on the level of emissions intensity.  Lesser assistance will be provided to coal-fired power stations.

Renewable technologies

The government reiterated the importance of CCS.  Like the EU ETS, the CPRS will treat CCS as “net emissions” (i.e. the emissions will not form part of the originating entity’s emissions), and the CCS facility will be responsible for any leakage.  The government also reaffirmed its commitment to its existing suite of renewable technologies such as the Renewable Energy Target of 20% by 2020.

The government plans to publish draft legislation in February 2009, with an aim to pass the legislation later in 2009.  It also plans to establish an interim carbon regulator in early 2009, and a national permit registry early the following year.  How the scheme framework will grow and adapt as it moves through Parliament will provide important lessons for the US, given the similarities between the US and Australian economies, as it grapples with the concept of introducing its own emissions trading scheme.  In addition, and despite the price cap, the emergence of Australia as a likely net importer of credits creates important opportunities for international trade. 

For further information about this topic, please contact Akin Gump.

In the second post of our series examining the incoming Obama administration and its push for a national climate change policy, we turn to the current political environment; firstly examining the domestic climate, at both the state and national level, and then toward  to international negotiations to replace the 1997 Kyoto Protocol, which continued last week in Poznan Poland.

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President-elect Obama inherits a dysfunctional domestic climate change policy: while the federal government has either stalled, or actively opposed, greenhouse gas (GHG) control, state governments have established their own control programs. While recent efforts to enact federal legislation have exposed many challenges to a national climate policy, opportunities for strong national leadership exist. Three significant areas of action in domestic climate policy are outlined below.

National Climate Change Legislation

The current Congress has made progress on energy efficiency and renewable energy—most notably, the extension of the Investment Tax Credit (ITC) and the Production Tax Credit (PTC), and the increased stringency of auto mileage standards in the 2007 Energy Independence and Security Act.  While, a comprehensive statute to control GHG emissions advanced further than ever before, there remain substantial roadblocks to passage. The two most significant efforts of the last year are the Lieberman-Warner Climate Security Act (Lieberman-Warner) and Dingell-Boucher bills. Lieberman-Warner failed on a vote to end debate in early June, despite significant support from industry. The Dingell-Boucher bill was released only as a discussion draft, and with Congressman Waxman taking over as chairman of the House Committee on Energy and Commerce, its future seems bleak.

President-elect Obama’s campaign platform contained a cap and trade system similar to those in the failed legislation, but also included both more aggressive reduction targets and a 100% auction of carbon credits. As the fight over the Lieberman-Warner bill and the Waxman/Dingell face-off show, divisions within the Democratic caucus will remain a significant obstacle.

A side note: because of the perceived mishandling of the Lieberman-Warner bill before the Senate, Akin Gump lawyers suspect that Majority Leader Sen. Harry Reid will turn to Sen. Jeff Bingaman of New Mexico to help shepherd any climate legislation through the Senate. While Sen. Bingaman has been an advocate of GHG control, his previously introduced legislation on climate change has included much more modest emissions control targets and limited carbon auctions; the Senator’s leadership may provide a significant moderating influence on any potential legislation.

Executive Agency Action

The Environmental Protection Agency (EPA) has largely opposed efforts to regulate carbon under exiting statutes, primarily the Clean Air Act.  For example, it opposed state efforts to have carbon dioxide ruled a “pollutant” for purposes of the Clean Air Act, a position rejected by the Supreme Court in Massachusetts v. EPA.  The Agency also denied the state of California’s petition to regulate emissions from automobiles. President-elect Obama has criticized the EPA’s recent actions and it seems likely that he would act quickly to reverse course in a number of areas.

Important changes are coming to the EPA’s regulation of GHG’s even before the accession of the Obama administration. In recent weeks, EPA issued a landmark decision on power plant construction. In a case about a power plant on American Indian land in Utah, the agency’s own appeals board ruled that EPA erred in refusing to consider requiring best available control technology (BACT) for GHG emissions control. For the short term, this essentially the freezes the permitting and construction of new power plants; the decision places the burden on the incoming administration to determine what will meet BACT standards and how power plants will be permitted going forward.

State Action

In stark contrast to the federal government, state governments have pushed ahead aggressively with GHG control pacts, both as individual states and as part of regional compacts. In the northeast, ten states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, and Vermont) created the Regional Greenhouse Gas Initiative (RGGI), the first mandatory, market-based emissions control program in the United States. RGGI’s goals are modest—a 10% reduction in GHG emissions by 2018—but it provides an important guidepost for future programs.

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 On Thursday, the California Air Resources Board (CARB) unanimously approved a scoping plan for its ambitious initiative to reduce greenhouse gas emissions in the state.  The scoping plan, mandated by the Global Warming Solutions Act of 2006 (AB 32), aims to reduce statewide emissions to 1990 levels by 2020.  The scoping plan includes both an extensive cap-and-trade program as well as sector-specific emission reduction targets. 

While the plan is in many ways similar to an earlier draft released in June, it does strengthen California’s commitment to significant - transitioning eventually to full - auctioning of carbon credits.  By comparison, the Western Climate Initiative (WCI), a partnership of seven western states, including California, and four Canadian provinces, has only committed to auctioning 25% of its carbon credits by 2020.

The proposed cap-and-trade program covers 85% of the state’s emissions and will be linked to the WCI.  The cap-and-trade program will begin in 2012 and phase in particular sectors of the state’s economy.  In the first compliance period, the electricity sector and large industrial facilities will be covered by the program.  Additional sectors will be phased in to the cap-and-trade by 2015.

The scoping plan is a starting point by which CARB will begin a formal rulemaking process implementing the scoping plan’s recommended measures.  The rulemaking will develop key elements of the cap-and-trade, including determining the method used for distributing emissions allowances, appropriating revenues raised through auctions, and establishing the rules for the use of emissions offsets.

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On Wednesday morning, the House of Representatives released a bill which would supply a package of loans to the American auto industry totaling $15 billion. The loans, which are supposed to provide funding to the industry through March 31^st of next year, come with significant strings attached—most importantly the creation of a “car czar” who would have oversight of the industry, and who would have veto authority over any business transaction of $100 million or more. Congressional Democrats also released a discussion draft of the bill, which could be voted on as early as this afternoon.

While much of the discussion surrounding the bill will focus on the authority given to the government in overseeing the auto industry, the bill also contains a number of important provisions dealing with automobile fuel efficiency, public transport and greenhouse gas emissions. Significantly, Section 10 (g) of the bill prevents the industry “from participating in, pursuing, funding, or supporting in any way, any legal challenge (existing or contemplated) to State laws concerning greenhouse gas emission standards.”

Beyond this blanket provision on participating in lawsuits—likely aimed at protecting the state of California’s emissions standards, Section 13 of the bill requires the industry to study the feasibility of construction of vehicles for sale to public transit agencies. The bill also requires automakers to submit long term restructuring plans which must include provisions which will allow them to “comply with any and all Federal and State fuel efficiency requirements and the commencement of domestic advanced technology vehicle manufacturing, as required in the Energy Independence and Security Act of 2007.”

Of course, this bill has yet to be voted on by either chamber of Congress—and some Senate Republicans, including Richard Shelby, ranking member of the Senate Banking Committee, have expressed considerable concerns. The provisions mentioned above, however, show that policymakers are interested in using the opportunities created by the financial crisis to create incentives for further “greening” of American industries.

For further information about this topic, please contact Akin Gump.

 As the biofuels industry tries to meet the 36 billion gallons per year (BGY) production goal mandated by the Energy Independence and Security Act (EISA) of 2007, its efforts are increasingly aimed at developing economically competitive methods of producing cellulosic ethanol.  Cellulose is the most common form of carbon in the world and is found in non-edible plant parts such as grass, wood, leaves, stalks and husks. 

Conversion of cellulose to ethanol is scientifically more complex than conversion of sugar and corn, but its utilization is called for in the Renewable Fuels Standard program enacted by Congress in EISA and which is being implemented by the Environmental Protection Agency, and has the potential to widen and diversify dramatically the pool of convertible biomass.  From a broad perspective, there are the two types of conversion methods used - thermochemical and biochemical.

The thermochemical method is called gasification.  Through this process, the biomass feedstock is broken down into the synthesis gases (syngas) hydrogen (H₂), carbon monoxide (CO) and Carbon Dioxide (CO₂).   These gases are then converted to ethanol through fermentation, a process utilizing a microorganism, or run through a catalytic reactor, which converts the gases using heat, pressure and a catalyst.  The ethanol product is then distilled to remove excess water.

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The Obama Administration is actively working to develop an economic stimulus package that will contain significant efforts to jump-start the “clean technology” sector, including renewable energy technologies.  The current financial crisis has made it difficult, if not impossible, to obtain debt financing for renewable energy projects, bringing development of these projects to a screeching halt. 

Nevertheless, renewable portfolio standards (RPS) in more than 50% of the states across the country are legally effective, imposing on electric utilities the requirement that they provide a fixed percentage of their energy from renewable sources.  Also on the horizon are the prospects of a federal RPS and an economy-wide cap and trade greenhouse gas (GHG) regulatory system. 

These and other competing obligations have project developers and the financial community wondering how the new Administration can accomplish the twin goals of reducing GHG emissions and stimulating the economy.  ClimateIntel will be exploring the creation of a quasi-government agency - the Renewable Energy Private Investment Corporation (REPIC).  The REPIC, modeled after the Overseas Private Investment Corporation (OPIC), may provide a market-based mechanism to achieve the Obama team’s dual goals. 

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 What follows is the first post in our series on the Obama administration and its likely policy on climate change. In this piece, we focus on the challenges presented by the global economic slowdown.

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One of the major symptoms of the current economic crisis has been the dire state of global credit markets. These frozen credit markets have made it very difficult to finance renewable energy projects.  These projects require significant amounts of capital up front and provide returns over long periods. With debt financing so scarce, and alternative energy stocks mirroring the general decline of world markets, the necessary capital has become increasingly difficult to obtain.

Investment in clean energy technology achieved record highs in 2006 and 2007.  Public investment in clean energy cratered in 2008; the WilderHill New Energy Index, which tracks leading alternative energy companies, has fallen over 60% since December 2007. Financing concerns led even T. Boone Pickens, who recently became one of the most publicly visible advocates of alternative energy, to drop-at least for the time being-his plans for a multi-billion dollar wind farm in west Texas.

The stock market meltdown has caused significant collateral damage for many sectors.  For renewables, the damage has been the drying up of “tax-equity” funding; trading investment dollars for the tax credits available to alternative energy sources (specifically the production and investment tax credits available to wind energy producers). The tax equity market is constrained because the major players in that market (for example, GE and Wachovia) are no longer in a position to benefit from tax equity investments-others, such as Lehman Brothers, no longer exist. Even where profitable companies are operating, the complexity of tax equity deals and the uncertainty of the markets create hesitation, even where a tax equity deal would lower the company’s effective tax rate.

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