June 2005

Stampede

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2005/07/04)
 

A stampede is a man-made herd instinct Its ultimate results are frequently not good. The proposed energy bill under consideration is surely not the final form that the Energy Act of 2005 will assume. But in key respects it is indicative of the eroding, not only in the Congress, of confidence in green and distributed energy as major drivers in the effort to obtain national energy security. The direction is the badlands.

First, in its relative treatment of nuclear power vs. renewable green alternatives, the herd is headed is toward the former. At the very least, the great taboo which has existed since Three Mile Island, seems to be disappearing. Environmentalists, now focused on “global warming” and perhaps distressed with the success of renewable fixes to date (frequently touted and subsidized before their time) seem to be joining in. Some have come around to the views of the International Atomic Energy Agency (“IAEA”) that:

“No form of energy-coal solar, nuclear, wind or any other [energy form], is good or bad in itself and each is valuable in as far as it can deliver [energy] to this end…By definition, if an energy source is not renewable, any use of it is in exorable, but this does not mean it should never be used. “It does emphasize: “the importance of not using renewable resources at a rate faster than natural replenishment rates” and would consign renewables to (support of) “economic activities in renewable areas.” (by which primitive “emerging markets” seem to be intended)

H.R. 6 would slash renewable fuels incentives from 72%. to 6%. of the President’s original budget request and would pour from $1.3 billion over the next 10 years into advanced reactor development. Cogeneration, the old bellweather of independent power appears in a very different form: H.R. 6 would authorize $1.1 billion for planning and construction of a “cogeneration” nuclear reactor that would produce hydrogen to power fuel cells for motor vehicles.

As for old-style energy efficiency oriented cogeneration, buried, almost literally in Section 1253 of Title XII, is Section 1253 “Cogeneration and Small Power Production Purchase and Sale Requirements” is a small headstone.

The thinking behind it reflects the end of an era; the virtual disconnection of life support systems for third party competition. Far from just being the surgical removal of an unnecessary appendix to an already realized national system of deregulation and/or fair competition, as it is meant to appear, the provision jeopardizes the ability of projects focused on achieving energy conservation in a cost effective financeable manner from succeeding - including newly promoted applications, such as those purported to be supported in the provisions of other sections of the electricity title, related to matters such as “demand response”. It’s worth walking through the Section, but as a trail map of the mindset of those stimulating the stampede.

Subsection (a) of proposed section 1253 terminates mandatory obligations to purchase energy from an existing Qualified Facility (“QF”), when that QF has “non-discriminatory access” to one of three different possible markets (all presumably paradigms of perfection achieved in the electric power world or susceptible to the argument that they will soon be achieved):

• An independently administered auction for both day ahead/real time sales for energy and long term capacity and energy markets; or
   
• transmission and interconnection administered by an RTO pursuant to a non-discriminatory open access tariff and a “meaningful opportunity” to sell competitive capacity markets and energy markets to buyers other than the utility to which the QF is interconnected (i.e. considering “evidence of transactions” within the “relevant market”; or
   
• wholesale capacity and energy markets of “comparative competitive quality”
   

In addition, utilities may file for relief even from these obligations with Commission approval on a service territory-wide basis, based on demonstrated compliance with any of the competitive market evaluation tests set forth above. This finding can only be reversed through a notice and comment based procedure.

Furthermore, the obligation of utilities to sell to QFs would not be required if either there were “competing” retail electric suppliers willing and able to sell in a territory, and the host utility was not required to do so.

As for new cogeneration or small power facilities, they would have no right to avail themselves of PURPA benefits December unless they qualify under a new rulemaking which is provided for under the statute.

That proposed statutory rulemaking would significantly circumscribe QF use. In addition to requiring that thermal energy output be used in a productive and beneficial manner i.e. no PURPA machines, all facility outputs must be used “fundamentally for industrial, commercial or institutional purposes - not for sales to a utility, and to ensure “continuing progress in the development of efficient electric energy generate technology. These new QFs may be owned 100% by regulated utilities.

This trivialization of the importance of private power has significance beyond serving as a corresponding bookend to the repeal of PURPA. In recent years, concepts of relieving congestion through introduction of third party owned DG; the use of DG as a backstop for weaknesses in system transmission reliability; the incorporation of DG as a major Demand Response resource provider; and the use of DG as a potential source of supplemental generation reliability to deal with critical power and national security needs have all been introduced.

Various renewables have been posited as serving similar purposes, as well as benefiting from shifts in QF procurement and interconnection regulations.

It is, however, difficult to imagine commercial facilities being developed by third parties to serve such niche purposes without the full panoply of requirements for utilities to provide non-discriminatory support for QFs.

The proposed statute's blend of disingenuous ambiguity and draconian technological confinement make cogeneration, refinancing, as well as new facility developments daunting propositions. Or, as the New York Daily News might headline the story “QF Backup Fuggedabout It; Green Power-Yucca”.

Any legislative stampede in support of any technology is questionable. Any major evisceration of the possibility of developing another technology is equally so.
 
Hopefully, the Senate will take a swig of non-denatured ethanol, mount up, and rein in the stampede to problematic new supply fixes along with the squandering of the potential of as yet un-deployed distributed generation possibilities.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.