United States: Energy Industry November 2008 Updates

President-Elect Barack H. Obama's Green New Deal

President-elect Obama's energy program will be all about jobs — green jobs. Energy will be the cornerstone of the new administration's plan for economic recovery. Durability, sustainability, efficiency, infrastructure, and technology development will shape energy and environmental policy. All are aimed at the common themes of economic recovery, job creation, homeland security, and national security. In short, our new president envisions nothing short of a national transformation in energy.

As a candidate, President-elect Obama frequently touted the economic and job creation potential of renewable energy. Rather than one big, national Manhattan Project for energy, President-elect Obama touted a policy of thousands of entrepreneurs across the nation — 10,000 "Bill Gates-like" entrepreneurs, with each coming up with the technologies today that will produce the jobs and the society of tomorrow. His organizing energy themes are built around four pillars: eliminating imported oil from the Middle East and Venezuela within 10 years, creating a green-jobs economy, reducing greenhouse-gas emissions, and providing relief to America's families. Based upon these priorities, the larger, more activist, and emboldened Democratic majorities in the 111th Congress appear poised to consider energy and global climate change legislation that will:

1. Deploy clean energy through a national renewable portfolio standard that narrowly failed in the U.S. Senate last year, through an extension of the production tax credits (PTC) for solar and wind energy, and by reconfiguring the PTC, to enact new tax incentives and extend existing tax incentives for renewables
2. Improve energy efficiency by boosting the efficiency of alternative-fuel vehicles and infrastructure through tax credits; tighten building codes, promote residential, commercial, and industrial conservation measures; and improve the efficiency of household appliances
3. Secure the supply of conventional fuels through environmentally acceptable offshore oil and gas development and outer continental shelf (OCS) mapping to enable an orderly transition to renewable fuels
4. Bolster innovation through increased research and development for new breakthrough energy technology and the establishment of a more aggressive research approach at the U.S. Department of Energy (DOE) similar to the U.S. Department of Defense's (DOD) Defense Advanced Research Projects Agency (DARPA) program
5. Foster transparency of energy markets to achieve stricter oversight of energy markets
6. Cap greenhouse-gas emissions through passage of a major climate change initiative.

Some of the specific initiatives that we expect to see are:

There will be several major legislative vehicles in 2009 to stimulate these programs, including a stand-alone energy package, global warming legislation, economic stimulus, and the authorization and appropriations bills for DOE, the U.S. Department of Transportation (DOT), DOD, the U.S. Environmental Protection Agency (EPA), U.S. Small Business Administration, and numerous other departments and agencies with energy and environment jurisdiction.

Although the emphasis will be more on renewables and energy efficiency than on fossil fuels, traditional sources of energy will not be ignored entirely when the U.S. House of Representatives and the U.S. Senate gets down to serious business. Rep. Henry A. Waxman's election as Chairman of the House Committee on Energy and Commerce may tilt the energy and environment agenda toward even more stringent climate-change emissions targets and renewable energy. However, the Senate almost always plays the role of legislative leveler, ensuring that oil and gas will not be excluded from the debate.

President-elect Obama's energy agenda will surely evolve until it is submitted formally to Congress early next year. For example, President-elect Obama's rumored choice for his National Security Advisor, retired Marine General James L. Jones, has outlined a significant national security program based upon energy independence and centered on alternative energy development and deployment. General Jones would have a major role in the development of that program, the details of which remain unknown at this point.

A detailed briefing sheet on President-elect Obama's proposed energy policies can be found at: http://www.foley.com/files/EnergyEnvironmental.pdf.

Key Energy Tax Provisions of the Emergency Economic Stabilization Act of 2008

Although the key feature of the Emergency Economic Stabilization Act of 2008 (Act) is the establishment of the Troubled Assets Relief Program (TARP) to restore liquidity and stability to the financial system, the Act as signed into law also contains many important tax provisions.

A package of energy-tax incentives was added to the Act at the last moment to win the support of several members of Congress. The incentives include key extensions of expiring credits for renewable energy investments, provisions that have had broad bipartisan support but have been in political limbo for many months as they were attached and then removed from several bills over the past year. The PTC and the Energy Investment Tax Credit (ITC) have been key to the development of green power in the United States in recent years. Their expiration at the end of 2008 would have resulted in a loss or postponement of billions of dollars of new investment in renewable energy resources. The latest iteration of the energy tax incentives extension was in the proposed Energy Improvement and Extension Act of 2008. A variation of this bill became Title B of the Act.

Renewable Energy Incentives

One-Year Extension and Modification of the PTC
The key and most costly provision of the bill was an extension of the deadline for placing in service property eligible for the PTC to December 31, 2009 for wind and refined coal and to December 31, 2010 for all other qualifying sources (including open- and closed-loop biomass, hydropower, geothermal, small irrigation, solar, and municipal solid waste from landfill-gas facilities). The PTC also was expanded to include new biomass facilities and marine renewables (waves and tides) placed in service after October 3, 2008.

Long-Term Extension of the ITC
The other key provision for the renewable energy industry was an eight-year extension of the 30-percent ITC for solar energy property and qualified fuel-cell property and the 10-percent ITC for microturbines and geothermal facilities, through December 31, 2016. The Act increases the ITC cap for qualified fuel cell capacity from $500 per one-half kilowatt hour to $1,500. The Act also expands the 10-percent ITC to include combined heat and power systems, qualified small wind property (capped at $4,000 per taxpayer), and geothermal heat pump systems. The energy ITC can now be claimed by public utilities under the Act, and the energy ITC will be allowed to offset the alternative minimum tax (AMT).

Long-Term Extension and Modification of the Residential Energy-Efficient Property Credit
The Act extended through 2016 the 30-percent income-tax credit for residential solar property and eliminated the current $2,000 cap on the credit, effective for solar-electric energy property placed in service after December 31, 2008. It also expanded the credit to cover small wind systems and qualified geothermal heat-pump property. The residential credit will be available for offset against the AMT for tax years beginning after 2007.

Midwestern Greenhouse Gas Reduction Accord

In anticipation of drafting of the model rules that will implement the Midwestern Greenhouse Gas Reduction Accord (Accord) in participating states, the Midwestern Governors Association (MGA) Greenhouse Gas Reduction Accord Advisory Group (Advisory Group) continues to refine the Accord's design principles and the Midwest cap-and-trade program. The final decision on critical features of the proposed program is slated to occur in December 2008, just prior to an MGA joint press release in early December.

The governors will face many key decisions involving the scope of the program, the use of allowances, and offset approvals. All of these components raise significant legal and political issues as well as economic concerns for businesses in the region.

Scope

The scoping issue addresses which businesses will be included under a declining greenhouse-gas emission regional cap. In general, an expansive view of "scope" is advocated by the Advisory Group to include businesses such as electric generation facilities, industrial boilers, and larger industrial processes. In addition, providers of transportation fuels also may be subject to the cap-and-trade program.

Recognizing the regional nature of the program, the Advisory Group's "point of regulation" for businesses covered by the scope of the program is the facility (if it is located in a participating state) or the point of "first entry into the MGA." Thus, for transportation fuels, the point of first entry into the MGA and, hence, regulation would be at the terminal, while for electricity generated in a non-MGA state, it would be at the first distribution center.

Under the current Advisory Group approach, the scope of the MGA regulatory program includes many diverse business sectors, which makes the program much more complex than the Regional Greenhouse Gas Initiative (RGGI) of several Northeastern and Mid-Atlantic states. In addition, if the governors agree with the Advisory Group's recommendation, subjecting a large number of business facilities to the greenhouse gas cap-and-trade system may lead to further economic erosion and greenhouse gas "leakage" in the Midwest as businesses relocate to avoid the likely increase in energy prices.

Allowances

In a cap-and-trade system, allowances are the "emission currency" permitting the holder to emit greenhouse gas. Allowances can be allocated to businesses by auction, by the government, or by a combination of both.

At this time, the allowance provisions of the MGA program need to be refined, but the Advisory Group recommends several key concepts. For example, unlike the European Union approach, allowances would not be directly allocated by the MGA to facilities "under the cap." All allowances would be auctioned and money raised from the auction would be used to promote either emerging "green businesses" or directly aid existing industries coping with the competitive disadvantages associated with the cap-and-trade program. The mechanisms for redistributing the money between these competing goals (and potentially others) remain an open issue.

Offsets

A critical component for the success of the MGA greenhouse-gas program is the development of a robust offset program. With no commercially viable means of capturing and sequestering carbon dioxide, offsets will be the primary method for achieving significant greenhouse gas reductions (assuming no leakage due to plant closures), especially in the early years of the program.

The proposed MGA offset program attempts to streamline the approval process through the development of regional "protocols." Following these protocols should provide offset-project developers greater assurance that the proposal will be approved than if an individual case-by-case review process were used. At the same time, environmental non-government organizations (ENGOs) advocate strongly for strict adherence to real, permanent, verifiable, enforceable, and sustainable approval criteria. In order to ensure these criteria are met, ENGOs want independent verification and periodic third-party auditing of each offset project.

Legal Issues

Noticeably absent from the Advisory Group process is any legal review or analysis of the recommended program. Without an understanding of the constitutional and sovereignty constraints of a regional program, many of the key concepts, especially in the proposed scope and offset program, may be legally suspect. While some members of the Advisory Group are requesting a legal review, the Advisory Group process currently lacks a defined mechanism for addressing these concerns, other than through the recently formed model rule committee.

Conclusion

Decisions made by the participating states over the next month are likely to be key to the success of the MGA greenhouse-gas program. Clear direction from the governors, as reflected in the anticipated December 2008 press release and the work product of the model rule committee, will determine whether a legally workable and politically acceptable regional cap-and-trade program will emerge from the process.

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