About The Author:
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.
Still Energy Policy Still
by Roger Feldman -- Bingham, Dana L.L.P.
(originally published by PMA OnLine
The effect of the Energy Policy Act of 2005 (“Act”) on the electric power
industry necessarily will come down to four basic questions:
1. Who will be the entities selling the power?
2. What will be the primary sources of fuel for the power they are selling?
3. Will the resulting shape of the market place allow sponsors of new
technologies to achieve breakthroughs?
4. What does the future hold for the heirs to the merchant power tradition?
Here is one possible set of conclusions with respect to these questions and
some principal items in the Act which prompt them.
1. The effects of the Electricity Title VII of the Act will be to provide
favored positions in the industry to existing utilities and to large
non-industry players, financial and otherwise, that are willing to accept
the possibilities of growth in a regulated industry achieved through
efficiency. Smaller firms dependent on statutory support through reliance on
regulatory market openings and ability to capture utility financial credit
through structured arrangements will be at a marked disadvantage. Public
power and cooperatives should continue to thrive, although their interaction
into the generally transmission
regulatory stream has been increased.
* The Public Utility Holding Company Act (PUHCA) has been repealed,
although provisions for FERC and state regulatory access to books and
records for ratemaking purposes and affiliate transactions and FERC
assumption of certain holding company oversight responsibilities have been
retained. Anticipated consequences are an increase in utility consolidation
and equally importantly, entry of non-utility and foreign equity into the
marketplace. (This activity still will be subject to FERC, DOJ and FTC
review. The FPA merger acquisition review is confined and somewhat
* The amendment of the Public Utilities Regulatory Policy Act (PURPA)
effectively limits future significance of this Act as a driver of future
cogeneration outside the industrial sector. It also significantly limits the
power purchase and backup power supply obligations of utilities except in
“unhealthy competitive” markets — notably not where RTCs or ISOs are in
place. Utility ownership limitations on QFs are lifted. Small power
production is allowed to continue. That seems to be where the opportunity
(bolstered by State RPS—there is no comparable Federal provision)— appears
* The Act refocuses market creation on the liberalization of rights to own
transmission (PUHCA repeal); creation of common reliability standards and
the legal prospects — possibly wishful thinking , when the fine print is
read — for the mandatory forging of new transmissions corridors by FERC.
2. The fuels of choice in the future will be driven not only by inherent
cost of production economics (as handicapped by the applicable capital and
operational requirements imposed by environmental law) but also by
exploitation of the Act’s special incentives provided for two essentially
competing complexes of technologies: “clean” coal and nuclear power on the
one hand, and distributed “clean” technologies (generally of smaller scale)
on the other. While the former bears greater near term technical challenges,
reflected in the special targeted subsidies proposed, the latter frequently
face the difficulties of achieving the scale via application of ongoing
statutory subsidies to offset the fragmentary capital
* Loan guarantees and investment tax credits are afforded to clean coal and
nuclear facilities. Certainly the first few clean coal/coal projects will be
in a strong position to be realized because of the direct grant, as well as
the loan guarantee provisions: DOE may make grants of $200 million a year
over the period 2006-2014 — generally up to 50% of the cost of projects.
There are also a 20% tax credit for IGCC; a 15% tax credit for other
projects that use advanced technologies for coal utilization and a
separate ITC for certain specified industrial gasification projects. Under
Title II of the Act, coal project development utilization is clearly the big
* Most important of the incentives for renewables (particularly wind) is the
extension of the production tax
“PTC” credits — as much as 1.9 cents/ kilowatts per hour through 2007. The
much sought after investment certainty for relying on these subsidies is
thus provided. As a result of technical provisions, these benefits are,
however, harder to monetize or otherwise utilize for foreign investors,
smaller companies without tax bases and private equity funds than they are
for large utilities and other integrated companies.
* The scope of PTC availability extends now to seven categories of
renewables including wind and “closed loop ,” biomass i.e., energy farms. It
runs for ten years (for certain of those resources). While solar, however,
must be put in service by 2005 to receive the PTC it does received a one
time 30% investment tax credit with respect to equipment put in service in
2006 and 2007. Overall it is estimated that 19% of the tax benefits will go
to renewables, i.e., a smaller piece of the economic pie, spread over a
larger number of projects.
3. In the resulting market environment created, while there are incentives
for forecast longer term breakthroughs by newer technologies, e.g., fuel
cells, hydrogen, biocellulose ethanol, the traditional gatekeepers
(utilities and oil company/ refiners)will continue to occupy a central
position in determining the outcome. Federally sponsored R&D contemplated by
the Act, while potentially importantly in individual cases, seems unlikely
to be the source of these breakthrough technology bets.
* With incentives programs heavily weighted toward coal-based technologies,
the residuum of incentives available for breakthroughs technological
innovation is limited.
* In the grab bag category for eligible loan guarantees, in addition to a
variety of gasification projects are these available under Title XVII as a
sop to those concerned with innovations in climate control, e.g.,
“sequestration” of pollutant gases from power plants, use of hydrogen fuel
cell technologies and efficient electrical and end use energy technologies.
The Federal Government will guarantee up to 80% of project costs — loans
cannot exceed the lesser of 30 years or 90% of the physical useful life of
4. As the insignificance of the Act‘s impact on actual fuel prices becomes
deafeningly evident and the marginal economic value of its boost for
electric power industry consolidation, rationalization and innovation
becomes more evident, attention will shift to national fuel displacement
strategies (other than coal or LNG)— or unfortunately, to geopolitical
solutions. In the interim, as in the last Oil Crisis, attention to energy
efficiency solutions, lightly alluded to notably in Title I of the Act, will
receive greater emphasis.
* As the other “home grown” (besides coal) fuel, ethanol is the initial
beneficiary of this emerging recognition though receipt of major excise tax
and minimum refiner blending purchase requirements written into the Act.
* Longer term and more directed towards large volume displacements of
foreign oil; loan guarantees for cellulosic biomass plants and for DOE
finance of four demonstration projects will become of greater importance.
* Operating subsidies are also provided for cellulosic biofuels, starting
with a cents per gallon formulation which then shifts to a reverse auction
system in 2008.
What strategies does this suggest for merchant power men? Leave combined
cycle gas plants behind; find enterprising coal processors and venture with
them; hook up with smart structurers of tax deals which utilize renewable
credits or start focusing on liquid fuels development opportunities. What do
we call it: still energy.
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.