Can Obama's CPP be pushed aside?
On August 2, 2015, the U.S. Environmental Protection Agency, under the auspices of President Barack Obama’s Administration, released new standards under the title EPA Regulation of Greenhouse Gas Emissions from Existing Power Plants. The standards have since come to be called the Clean Power Plan, or CPP for short. The plan was published on the Federal Registry on Oct. 23.
The CPP has faced serious challenges since day one, with 23 states vowing to ignore, subvert or legally overturn the plan, even though U.S. EPA head Gina McCarthy insisted as recently as Dec. 7 that the CPP was "going to be the law of the land and it's going to last."
How should investors interpret all the fuss? Congress, via the acts that created the EPA (and, by extension, the Clean Air Act and Clean Water Act, etc.), has already set out general principles for the EPA to follow. It has also delegated the details of implementation to the combined power of the Executive Branch and EPA – a move that is completely within the guidelines of the U.S. Constitution. In fact, the U.S. Supreme Court has already ruled in favor of the EPA’s authority to regulate carbon dioxide emissions (under rules made by Congress in the Clean Air Act). Therefore, it is completely constitutional to delegate rule making such as this, and if Congress wants to change things, they must pass a new Act to “disapprove” the rule – one that a sitting president will not veto.
In November, fully 27 states challenged the rules – a move that came as no surprise, since about 30 states had already pledged to join the energy industry in suing over the regulations before the plan’s introduction. Post-introduction, on Nov. 17, a Republican-dominated Senate also led a vote to block the plan by a majority of 52-46.
This vote, largely symbolic (since Obama holds veto power), sent a strong message of opposition at a time when Obama expressed his climate and environmental commitment by rejecting the Keystone XL Pipeline.
This occurred mere weeks before the 2015 Paris Climate Summit, formally known as COP21, and Obama has continued to demonstrate his commitment to halting global warming via cuts to national greenhouse gas (GHG) emissions.
The question that emerges for investors is, can the CPP survive a new president and a change of administration? Presidential candidate Hillary Clinton, a Democrat, has already expressed her support of the Plan.
McCarthy, Energy Secretary Ernest Moniz, and other administration officials are not intimidated. Federal carbon regulations are, they insist, legally enforceable, even if Congress opposes them and a Republican candidate wins the 2016 election. A new Republican president would have to go through a new rule making process that would take years of public vetting.
Travis Miller, director of Morningstar’s utilities equity research, agrees – in part. Writing in a Sept. 30 article, Miller notes: “The Clean Power Plan, finalized in August, will be the primary target for lawyers and politicians. The CPP requires states to submit carbon dioxide-reduction plans by September 2016 and implement them by 2022. We expect the CPP to survive mostly intact, but the opposition is likely to win modifications and implementation delays.”
This means that electric utilities will likely announce specific plans to fulfill the CPP when they update their investment plans in spite of party opposition or state based litigation. And, while there may be no major surprises, expect many utilities to up investment in renewable energy and gas-fired generation, with an equal likelihood of continuing to retire some coal-fired plants.
Fast forward to Dec. 1, one day after the Paris Climate Summit convened, and the U.S. House of Representatives (the “other” side of Congress from the Senate, under the U.S. Constitution) votes to overturn the CPP by a margin of 242-180, with Republicans leading the field.
Again, the vote – which also expressed disapproval of Obama’s climate commitments in Paris – was largely symbolic, but it sets the stage for an ongoing legal conflict, with equity analysts predicting some compromises but a general win for the Plan.
Richard Stavros, Investing Daily, agrees, saying that – in spite of legal challenges – most industry insiders are convinced the CPP will survive “largely intact” (the emphasis is mine). However, it will do so at the expense of the electric utility’s “historical value proposition”.
Just what is that proposition? Energy firm NRG’s (NYSE: NRG) former CEO David Crane writes that it is epitomized by former energy company Enron, a shining light that became the “root of all evil”. Gregory Aliff, writing for Deloitte University Press, says it is, “the provision of safe, reliable, and affordable electricity to customers in exchange for steady, predictable returns”.
However (adds Aliff), when affordability and reliability become uncertain, so does the usefulness of the electric sector value proposition. This drives a new business model, and the CPP may well be the catalyst. Electric companies like NRG that have nurtured alternative business models in the past might find their original ideas back in favor.
Bloomberg recently published an article by Jennifer A. Dlouhy, energy policy and congressional affairs analyst for the Houston Chronicle, who agrees with the “just-for-show” assessment vis à vis legal opposition to the CPP. To make her point, she quotes Brian Potts, a Foley & Lardner LLP attorney specializing in Clean Air Act cases:
“The Republicans might get some political talking points by saying this, but realistically, there’s no way they are going to repeal these rules if the courts uphold them.”
More recently, Moody’s Investors Service (Moody’s Analytics) issued a report which oil and gas reporter Rigzone interprets as a “profound credit hazard in 2016”. Using phrases like “staggering in breadth and severity”, exceptionally adverse conditions”, and “deteriorating credit quality”, Moody’s suggests that next year’s oil and gas market might be the equivalent of an Iraqi minefield. (The report is available here for a price, with membership). No wonder, considering the fact that Environmental Defense Fund study finds that methane emissions in Texas' Barnett Shale are 90 percent higher than EPA estimates.
If oil and gas are risky strategies, where does one invest? A Goldman Sachs report predicts energy from new wind and solar worldwide in the next five years will exceed the new energy from U.S. shale over the previous five. Moreover, a Michigan Tech study finds that adopting renewable energy could shield companies from climate-related lawsuits – a vital consideration as investors focus on environmentally friendly, “risk-averse” investing. Other insiders agree the CPP could be a boon simply for its promotion of (and forced spending on) clean energy markets.
Jonathan Keim of DreamTeamNetwork explained that “COP21 should give rise to sweeping new supranational incentivization for further sector growth,” and added that he “…anticipates sweeping policy changes at the federal and national levels, as well as further innovation at the industry’s core.” Most notably, Keim see electric vehicles as a huge factor in the cleantech industry, with 2016 (and the CPP, by extension) foreshadowing a speeded-up industry focus on that particular cleantech market.
Even energy companies formerly perceived as climate change deniers have seen the upside of CPP-type plans, both in the U.S. and abroad. For example, ExxonMobil(NYSE: XOM) has said that it “strongly supports” the Paris Climate Summit efforts, and that putting a price tag on GHGs may be the best option to meet Paris’ goals. In fact, some companies – Virgin (Nasdaq: VA) and Unilever (NYSE: UN) – have not only supported meeting the 2-degree (increase in global temperature) climate goal, but reducing it to 1.5 degrees. Neal Dikeman, founder of cleantech.org, says:
“It is very hard to risk the likelihood on a repeal of the CPP, let alone the timing.
In general, it’s hard to imagine going all the way back, and rarely has that happened with major environmental policies, treaties, or laws, but also hard to imagine that no changes happen, or that the outcome from Paris and the election cycle does not have an impact.
If we use California as a model, one might expect it rolls out slowly and with industry compromises amid the challenges, but it does roll out.”
Some industry experts argue that the CPP goals are unreachable without nuclear power. Nuclear opponents, including one former chairperson of the Nuclear Regulatory Commission, Gregory B. Jaczko, disagree. In 2012, Jaczko voted to deny relicensing to one nuclear power plant, and later resigned when he was outvoted. Jaczko’s dissension reflected the fact that most U.S. nuclear power plants were built between 1967 and 1990. Until 2013, there had been no new construction starts since 1977. This means that many plants will, in one year, push past their 50-year (or second) relicensure and require licensing yet again.
Turmoil continues. On December 2, the Dow Jones Industrial Average dropped more than 150 points on weak energy numbers. On the same day, UK newspaper The Guardian reported – on behalf of British charity Oxfam – that the world’s richest 10 percent produce half of global carbon emissions. In addition, on Dec. 8, online publication Fortune noted that the oil-price drop had caused investors to lose $703 billion since June 2014 – handwriting on the wall, for those who are watching.
For interested investors and energy industry operatives, the Center for Resource Solutions has released a two-part synopsis to help energy generators and renewable energy marketers evaluate the CPP and Emission Rate Credits in respect to emissions allowances with renewable energy certificates, state-level renewable portfolio standards, and the voluntary renewable energy market.
Companies to watch:
First Solar (NASDAQ: FSLR)
FSLR is one of the survivors of the solar energy shakeout of 2012, when China flooded the market with cheap solar photovoltaic (PV) panels. Once a leader in polycrystalline solar panels, the dominant technology, of the period before 2013, First Solar has since branched out into thin films, striving for greater efficiency and better cost-per-watt. InvestorPlace is currently calling the stock “very hot” (and it doesn’t even wear a bikini).
Brookfield Renewable Energy Partners, (NYSE: BEP)
A global specialist in hydro and wind power, BEP owns and manages 7.4 gigawatts of power in both the Americas and Europe. This is reportedly as much solar power as was added globally in 2013. The best part? Brookfield holds most of this production under long-term contracts adjusted for inflation with fixed returns.
BRK has built the largest wind fleet in the country as of today. Given the opportunities presented by the CPP in terms of renewable energy, Microsoft CEO Bill Gates said (back in March) that Warren Buffett’s annual investor letter was the “best ever”. This, from one of the founders of a new clean energy investment fund called the Breakthrough Energy Coalition.
Jeanne Roberts is an award winning freelance writer covering the environment, sustainability, social justice, health, politics, and the natural world. She has roots in the corporate world as a California reporter and a communications specialist at a large public utility and has spent the past 10 years working as an editor for a small-cap stock site, and as an environmental/political/social justice blogger for The Panelist, Celsias,Cooler Planet, DeSmogBlog, Energy Boom, SolveClimate.com, the Clean Tech Blog,EarthTechling, and various other online publications. Ms. Roberts has written a book on alternative energy sources, sustainable home building, and environmental initiatives for homeowners available on Amazon.