Obama’s Clean Power Plan creates controversy
No one can say for certain who the potential winners and losers are relative to President Obama's recently unveiled Clean Power Plan (CPP), but experts agree that it lays a heavier hand on the energy industry than previously anticipated – a situation that may or may not be ameliorated by state governors as they comply with the regulations. Nevertheless, investors can start to identify trends and how to position themselves as the new rule goes into effect.
The CPP was reported on August 3. On August 13, The Hill reported that 15 states and two cities, led by New York, were already trying to block, or delay the rule. In spite of this initial resistance by some states and fanfare from the White House, the sequence of the release of the EPA rulings has set a new tone of seriousness throughout the industry.
The CPP essentially provides a state-by-state, goal-oriented platform that allows states to choose their own metrics for meeting those goals, or targets. The weight takes on additional force with the U.S. Environmental Protection Agency’s (EPA’s) finalization of the plan, which aims to reduce national carbon dioxide (CO2) emissions from the energy industry by 32 percent by 2030 (from 2005 levels). This is 9 percent greater than originally proposed.
It scarcely softens the blow that the rule has been extended two years – compliance measures going into effect in 2022 rather than 2020, as first drafted. States are required to submit their individual plans by September of 2016: extensions of up to two years are possible. The plan – representing the first time federal limits have been imposed on carbon pollution from power plants – has so far generated more than four million public comments.
The U.S. Supreme Court has already ruled confirming the EPA’s authority to establish greenhouse gas (GHG) emissions regulations, notably carbon dioxide, or CO2, under the Clean Air Act, section 111 (d). With the EPA’s finalization of the plan, the federal government is in position to enforce compliance, and EPA Administrator Gina McCarthy has promised the agency will release a “model” that states can use to develop their own plans.
So far, industry seems modestly in favor of the plan. On July 31, 365 companies and investors sent letters to their respective governors urging “timely” implementation. The Edison Electric Institute has already given its cautious approval, citing only the plan’s reduced timeline and potentially uncompromising regulations as possible pitfalls. Coal industry opponents cite costs - $366 billion through 2031, and a 12 percent or more increase cost to ratepayers. The EPA counters with a top estimate of $8.8 billion (or $8.4 billion in 2011 dollars, according to the draft final rule, under a rate-based approach, versus $5.1 billion under the mass-based model).
Historically, the U.S. energy industry spends about $100 billion a year in capital improvements. Energy efficiency, as a relatively new line item, almost quadrupled from 2006 to 2013, to $6.3 billion.
In addition to model plans, and both interim and final goals, states have been given three options for measuring compliance:
- Reduced pounds per megawatt-hour (lb/MWh), based on utility rates
- Reduced total short tons of CO2 per state
- Reduced total short tons of CO2 eliminated via new energy sources
The CPP incorporates states’ ability to engage with other states in an emissions credit trading market (carbon credits, carbon trading); to use demand-side management, or DSM, (which pays users to reduce consumption or to shift demand from peak hours to off-peak hours); and to use energy efficiency technologies.
After participating states submit their final plans, renewable power projects will receive direct credits. This may be the final incentive renewable technologies need to end the dominance of fossil fuels – a race that Bloomberg says has already been decided in their favor. Ethical investors will be equally delighted, since most coal operations (mining and power plants) seem to be located “in low-income communities and communities of color”.
According to Moody’s, the primary impact of the CPP will not reveal itself before the implementation mandate in 2022, however expect profit-taking in renewable energy businesses operating outside the FERC’s (Federal Energy Regulatory Commission’s) regulatory framework.
Expect slower gains in public electric utilities (city- and municipal-owned power companies), generation and transmission entities, and merchant coal generators. However, given the current record low natural gas prices, and gas peaking’s subtraction from the coal-fired generation profile, the off-the-cliff scenario once predicted for utilities heavily vested in coal is unlikely to happen.
Investor-owned utilities are expected to benefit via compliance and the regulated costs associated with it. That regulation is also expected to prevent catastrophic consumer electricity bills while still allowing utilities to benefit marginally in the long run.
Regulations also require states to evaluate grid reliability and institute a “reliability safety valve” – presumably more of a metric to evaluate said reliability across the board than to penalize individual power plants. We shall see.
Some pundits are calling the CPP “…a rule meant to be broken”. The single most widespread point of contention appears to be the EPA’s use of Section 111 of the 1970 Clean Air Act to give itself legal authority to enforce the plan. Upending this plan would likely require Congressional action with the support of whoever is sitting in the White House.
The success of the CPP will therefore be similar to washing a new blanket. We won’t know if it “holds together” until the incoming administration in 2017 has had a chance to pick at the loose threads. Depending upon the outcome of the presidential election, the plan may be history before anyone can fully digest its ramifications. If a Democrat (Hillary Clinton has expressed her support), the executive branch may insist on a federal (rather than state-based) plan to bring wayward coal/energy states like West Virginia, Kentucky, and Wyoming into the fold. The fate of the ruling is much more uncertain based upon current commentary from leading Republican candidates. The scale may tip depending upon the energy industry’s willingness to support the plan, preferring certainty over uncertainty.
Nevertheless, the CPP is a win/win for renewable energy technologies like wind, solar, hydro, and utility-grade geothermal as well as natural gas, a lower carbon emitting fuel. It might even be a win for nuclear power, in spite of the costs of building and decommissioning plants, since nuclear is one of only two existing technologies that can be dropped anywhere and take up the slack left by coal.
That, combined with its massive energy output (six times that of combined-cycle natural gas plants), makes nuclear a favorite of EPA head Gina McCarthy. In addition, because nuclear is such a heavyweight in the production department, it makes the integration of intermittent renewables like wind and solar that much easier.
Keep in mind that most of America’s nuclear plants are old, predating or concurrent with the Three Mile Island incident. Subsequent public outcry brought any new plans to a standstill, and Fukushima has not improved nuclear’s profile, though Japan last year approved the restart of Sendai, run by Kyushu Electric Power (TYO:9508). The jury is still out on nuclear, leaving renewables and natural gas positioned to benefit the most, at least in the short term.
In fact, natural gas has been taking up the slack ever since utilities began to switch from coal in 2001. Industry followed suit, and with increasingly affordable gas, the trend is likely to continue. The Energy Information Administration (EIA) forecasts an output of 1,600 million megawatt hours (MWh) of natural-gas fired electricity generation by 2040 – a projection based on increasing natural gas supplies in currently coal-dominated generation regions of an estimated 56 percent, also by 2040, based on new recovery technologies like shale gas, tight gas and offshore natural gas.
In Texas, natural gas now supplies all the fuel for new electricity generation, and is predicted to rise by 81 million MWh, while renewables and nuclear remain relatively flat. Among industries nationwide, telecoms are the biggest users of "green" power, with Amazon, Facebook, and HP recently signing on for more than 400 MWh. Two hundred MW of that will come from a Texas wind farm.
Natural gas emits up to 60 percent less CO2 than coal when burned. Other GHGs include sulfur, mercury, particulates – in small amounts – and nitrogen oxides, or ozone precursors, which are still fewer than those emitted by the nation’s cars and trucks. The greatest danger from natural gas extraction is still water pollution, typically via fracking fluids.
However, extraction and transportation (via pipelines) produces methane, a GHG. These “fugitive” emissions can account for up to 9 percent of total life cycle emissions, based on a 20-year projection. Experts suggest that such emissions must remain under 3.2 percent for natural gas to stay more environmentally friendly than coal.
In order to achieve that, greater investment in emissions technology, coupled with improved transportation technologies (better pipe seals and monitors, as well as groundwater and atmospheric monitors) will be essential. Liquid natural gas, or LNG, is a market which even the EIA finds difficult to predict, though Carl Icahn’s 8.2 percent stake in Cheniere Energy, Inc. may be a clue.
However, if shale gas meets no further opposition vis-à-vis fracking and seismic events, investors can expect “clean” coal (carbon capture and sequestration, or CCS) to remain largely unattainable, simply because the technology is expensive and largely untested, at least in North America where natural gas continues to reign supreme.
As of July this year, natural gas trumped coal as America’s biggest electricity resource. Without knowing how, or if, a new Administration will approach the energy issue, investors who know a good bet when they see it may continue to look toward gas production and transportation monitoring technology, which straddles the aisle by protecting the environment and Americans’ pocketbooks for a reliable, continuous fuel supply
Included in this transportation-monitoring sector would be onsite monitoring, remote monitoring, and aerial monitoring (via drones). At the top, expect major companies providing “cloud” networks to energy companies to win. A case in point is IBM’s (NYSE: IBM) QRadar Security Intelligence Platform, a system that integrates natural gas operations with operational surveillance, including hazard detection.
Another company to watch is Drone Aviation Holding Corp. (OTCQB: DRNE), which recently acquired rights to unmanned navigation technology from Georgia Tech.
Drones are an emerging technology, and most companies are small, private, ARPA-type holdings. Exceptions would be AeroVironment (NASDAQ:AVAV), and Insitu, a Boeing (NYSE:BA) subsidiary, which makes the ScanEagle®. The Federal Aviation Administration, or FAA, has already permitted the ScanEagle, which ConocoPhillips (NYSE: COP) plans to use in offshore drilling operations in Alaska.
Investors might be interested to know that two unmanned aircraft systems companies, Colorado-based Unmanned Experts (UMEX), and Scottish firm Cyberhawk Innovations, have partnered to deliver critical infrastructure inspections (CII) throughout the U.S. This partnership effectively establishes CII for routine and emergency utility/power company transmission and distribution systems surveillance.
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.