Alerts and Updates
Energy, Environment and Resources Update
Issue 12 | April 2016
Energy Sources—Following the Money
On April 14, 2016, the United States Senate Appropriations Committee unanimously approved an energy and water funding bill that would appropriate $2 billion for the Department of Energy’s Office of Energy Efficiency & Renewable Energy programs (an amount equal to fiscal year 2016 funding). According to the Appropriations Committee, this funding supports sustainable transportation programs that develop new fuels, lightweight materials and vehicle engines; energy-efficiency programs that develop standards and technologies to reduce energy bills; and renewable energy programs that work to lower the cost of solar, wind, geothermal and water power technologies.
On the same day, MidAmerican Energy Company, owned by Warren Buffett’s Berkshire Hathaway, announced its plan to invest $3.6 billion in the construction of new wind turbines that can generate up to 2,000 megawatts of power. Industry and Iowa state government sources report that this additional wind generation capacity in Iowa would increase the share of wind power, from among all sources of power generation in Iowa, from 31 percent to 40 percent. According to The Wall Street Journal (citing other sources), the average price of wind power in Iowa last year, under long-term contracts between producers and utilities, was about $29 per megawatt-hour, or 2.9 cents per kilowatt-hour. This price compares favorably to the $34.34 per megawatt-hour price for power from Midwest coal and natural-gas fired plants in the Midwest, also reported by the WSJ.
One day prior, Peabody Energy, the world’s largest private sector coal company, filed for protection under chapter 11 of the Bankruptcy Code. In its press release, Peabody spoke to the causes of this filing: "The factors affecting the global coal industry in recent years have been unprecedented. Industry pressures in recent years include a dramatic drop in the price of metallurgical coal, weakness in the Chinese economy, overproduction of domestic shale gas and ongoing regulatory challenges."
These are but a few examples of the significant shifting of capital and R&D investments from fossil fuel generation ventures to large-scale renewable ventures, and coming in bunches such as this, they suggest that the era of disparaging renewables as feasible, major components of domestic energy generation is over.
U.S. Supreme Court Invalidates Maryland Power Generation Incentive Program on Preemption Grounds
On April 19, 2016, the U.S. Supreme Court decided Hughes v. Talen Energy Marketing, LLC. In its opinion, authored by Justice Ginsburg, the Court rejected the attempt by the State of Maryland to incentivize the construction of new power plants through the use of a contract for differences. A contract for differences would guarantee the price paid to a developer for capacity in the PJM capacity market. The Court found that such action by a state is preempted by the Federal Power Act (FPA) and implied preemption. Duane Morris previously referenced the pendency of this case in the February 19, 2016, Alert, “What Does U.S. Supreme Court Decision Upholding FERC’s Authority Over Demand Response Mean for the Future of FERC’s Jurisdiction?”
In so ruling, the Court further supported FERC’s authority to regulate competitive wholesale markets for electricity, including the interstate wholesale rate FERC requires. The effect of a contract for differences is to set a different capacity price for power from the plant than paid by other participants in FERC’s capacity auction. Although Maryland’s intent was to encourage construction of new in-state generation, the Court found that Maryland’s program, by adjusting the interstate wholesale rate for power sold by a plant holding a contract for differences but selling into the FERC auction, contravenes FPA’s division of authority between federal and state regulators.
The Court left open whether there may be other means available to the states to encourage the construction of generation in transmission constrained areas. The Court limited its holding to Maryland’s program because that program disregarded FERC’s required wholesale rate. The Court specifically stated that its opinion does not rule on the permissibility of other measures that a state might employ to encourage the development of generation, such as tax incentives, land grants, direct subsidies, construction of state-owned generation or re-regulation of the energy sector. It remains to be seen how incentives can be crafted by states so that they do not impermissibly affect wholesale market prices.
FERC to Hold Technical Conference on Generator Interconnection Issues
The Federal Energy Regulatory Commission (FERC) has scheduled a technical conference for May 13, 2016, to address potential revisions to its generator interconnection procedures and pro forma generator interconnection agreement. The technical conference presents the first opportunity for a comprehensive review of interconnection issues since Order 2003 and its progeny. Of particular import will be needed revisions to interconnection procedures in light of the ever-expanding role of intermittent renewable generation provided by solar and wind.
FERC’s action stems from a petition filed last year by the trade group American Wind Energy Association (AWEA) and joined or commented on by approximately 70 other interested parties. Among the reforms AWEA asked FERC to consider are changes to the interconnection study and restudy process, including standardized and enforceable study completion dates; requirements that transmission providers attest to the accuracy and finality of the studies; and limiting restudies to once per year. AWEA also proposed modifications that it argues will improve transparency and accountability in the interconnection process. Finally, AWEA looks to limit network upgrade charges paid by project developers by capping costs at previously established accuracy margins, limiting self-funding of network upgrades by transmission providers and providing compensation for developers who bear the costs of network upgrades that benefit other users.
In addition to the proposals put forward by AWEA, FERC stated that it will also seek input on issues related to the current state of the generator interconnection queue process, the effect of project changes or withdrawals on the queues, and whether interconnection rules need to be revised to meet the potential demands of energy storage facilities.
Information about the technical conference, including registration, can be found in the FERC notice.
 Standardization of Generator Interconnection Agreements and Procedures, ("Order No. 2003"), FERC Stats. & Regs. ¶ 31,146 (2003), order on reh’g, ("Order No. 2003-A"), FERC Stats. & Regs. ¶ 31,160, order on reh’g, ("Order No. 2003-B"), FERC Stats. & Regs. ¶ 31,171 (2004), order on reh’g, ("Order No. 2003-C"), FERC Stats. & Regs. ¶ 31,190 (2005), aff’d sub nom. Nat’l Ass’n of Regulatory Util. Comm’rs v. FERC, 475 F.3d 1277 (D.C. Cir. 2007), cert. denied, 552 U.S. 1230, (Feb. 25, 2008).
EPA Completes Cost-Benefit Analysis Required by U.S. Supreme Court
In a 5-4 decision in 2015 (Michigan v. EPA), the U.S. Supreme Court found that EPA should have considered costs when deciding to implement EPA’s Mercury and Air Toxics Standard for power plants (MATS) (Justice Scalia writing for the majority). On April 14, 2016, EPA posted online its "final supplemental finding" that, after considering costs, MATS was still appropriate and necessary. The final supplemental finding will soon be published in the Federal Register.
In its response to the Supreme Court’s directive, EPA presented two separate approaches to estimating costs. In its preferred approach, EPA compared (a) the power generation industry’s annual revenues with the projected cost of compliance, (b) the industry’s overall annual capital expenditures with those required to comply with MATS, (c) the effect on consumer electricity costs and (d) whether and to what extent MATS would cause plant closures and related reliability concerns. EPA found that the costs were "well within the range of historical variability" associated with annual revenues, annual capital expenditures and the retail price of electric power. EPA’s backstop approach was to present a cost-benefit analysis that identified as much as $90 billion in net annual benefits, a level of benefits that significantly outweighed the EPA-projected compliance costs.
Opponents are fully anticipated to challenge EPA’s analyses in court. The arguments are expected to include the contentions that (a) EPA should have conducted an entirely new cost-benefit analysis (EPA relied on information in the existing administrative record regarding risk and harm) and (b) that EPA’s inclusion of so-called "co-benefits" resulting from implementation of MATS (e.g., a reduction in particulate matter emissions) is inappropriate. The only clear conclusion to be reached today is that MATS will remain on the long and winding litigation road for some time to come.
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