March 01, 2013

What the energy industry can expect from President Obama’s second term and a new Congress

The general consensus among Beltway insiders is that the 112th Congress, which concluded at the end of 2012, was the least productive Congress in recent history. And the session did not end on a high note. Facing a fiscal cliff that included the expiration of the Bush tax cuts and sequestration (the mandatory cuts in defense and non-defense discretionary programs), as well as the looming debt ceiling and expiration of the continuing resolution, Congress only managed to address the expiring tax cuts. Nevertheless, much of the energy industry fared quite well during the 112th Congress and the first four years of the Obama administration, notwithstanding one of the worst financial crises in modern history. This was due, at least in part, to the passage of the American Recovery and Reinvestment Act of 2009 (ARRA).

ARRA and the energy industry

ARRA was passed at the height of the financial crisis. In terms of renewable energy, ARRA provided a critical safety net for the industry. Section 45 and Section 48 of the Internal Revenue Code (IRC) provide for production tax credits and investment tax credits, respectively, for qualified renewable energy technologies. Even so, the renewables sector lost half of its available tax equity partners during the financial crisis. That lack of available tax equity partners placed in jeopardy the financing for many such renewable projects, since renewable developers—as start-up entities—have little or no ability to use tax benefits themselves. The Treasury Grant Program in ARRA (Section 1603) provided a cash grant equal to 30 percent of the basis of the property to the renewable energy developer, thereby providing substitute financing for commitments lost during the financial crisis. ARRA allocated additional funding for renewable and clean energy technologies, as well as funding for transmission and smart grid technologies. Congress, however, declined to extend Treasury’s Section 1603 grant program beyond 2011.

The renewables industry began to see a decline in new projects in 2012 resulting from a combination of factors, including the loss of Treasury’s cash grant financing, low natural gas prices, and the impending expiration of the Production Tax Credit (PTC) for wind technologies. Congress extended the PTC for wind technologies as part of the American Taxpayer Relief Act of 2012, and changed the PTC availability. Now, developers may use technologies qualifying under IRC Section 45 to claim the PTC as long as the project construction begins prior to December 31, 2013. See D. LevitanWind Power Tax Credit Survives Fiscal Cliff Deal, Forbes, Jan. 2, 2013. These changes should spur some additional renewables projects; but long-term support for these technologies continues to remain in doubt.

In addition to the funding provided through ARRA, the Obama administration was able to take some steps to further support clean energy technologies during the president’s first term. For example, the president issued Executive Orders No. 13514 and No. 13423, directing agencies to take certain actions to improve the environmental, energy, and economic performance of federal facilities and to ramp up support for increased industrial combined heat and power systems. The Department of Defense (DOD) has also been instrumental in providing support both for renewable energy and biofuels. DOD believes that such technologies will help the military to become more secure and reduce its vulnerabilities in combat.

Yet to come

Looking ahead to the 113th Congress and the second Obama term, the big question is whether the past political battles portend further political gridlock. Regardless of the importance of particular issues in the energy field, little will get done in Washington if political gridlock between Republicans and Democrats continues. The extension of the PTC for wind occurred at the 11th hour and likely because the House allowed the Senate to essentially write the bill. The last-minute efforts included a significant number of tax extender provisions. And because Congress addressed only one of the “fiscal cliff” issues, the potential for more gridlock remains. Although the debt ceiling was temporarily raised, sequestration was delayed until the beginning of March, and the current appropriations continuing resolution will expire at the end of March. It is extremely unlikely that Congress will consider any other energy issues while they attempt to resolve the overall budget debate. Moreover, how Congress resolves these issues and what they decide could have a significant impact on whether and what energy issues are addressed.

Congress has signaled that it intends to take up comprehensive tax reform. Beyond the question of whether Congress will actually be able to address such a large and complicated issue is the question of how tax reform would impact both conventional and renewable resources. The wind industry has signaled that it would be willing to phase out the PTC, but would want that phase-out to extend over a number of years. Comprehensive tax reform could include such a phase-out. Tax reform also presents an opportunity for new tax benefits for the renewables industry. One option discussed would permit renewable energy companies to organize as master limited partnerships to attract new investors. On the other hand, tax reform could entirely eliminate both the PTC and the investment tax credit. Tax reform is also of concern to the non-renewable energy sectors. For example, the oil industry will likely be resistant to any changes to its tax benefits.

Regardless of whether Congress has the appetite or the ability to pass energy legislation, the Senate Energy and Natural Resources Committee will likely be busy because of a change in leadership. Senator Ron Wyden (D-OR) is the committee’s new chairman and he has committed to working on a bipartisan basis with Ranking Member Lisa Murkowski (R-AK). Among the issues the committee may consider are energy innovation, energy efficiency, coal and natural gas exports, cybersecurity, nuclear waste storage, and the transmission grid. While Senator Wyden signed onto Senator Jeff Bingaman’s Clean Energy Standard (CES) last year, the prospects for a CES in 2013 are low. Regardless, the question of the appropriate role for government in renewable energy will likely be an important issue for the committee.

Hydraulic fracturing (or fracking) could be an area that gains attention this year, both on the Hill and with the administration. Fracking has grown significantly over the last decade, with shale gas now accounting for nearly 30 percent of total U.S. natural gas production in 2010, according to the Energy Information Administration. This significant increase in production has also been matched with reductions in the price of natural gas, which has made it more difficult for coal and renewable generation to compete with gas generation. At the same time, fracking has been a boon for the economy. In 2010, the production of shale gas sustained 600,000 jobs. Domestic job growth from fracking is expected to grow over 30 percent by 2015. The economic benefit is estimated to be approximately $120 billion to the overall economy.

Both Congress and the administration have been struggling with whether and how to address fracking, and that will likely continue. In the Energy Policy Act of 2005, Congress exempted fracking from the Safe Drinking Water Act’s Underground Injection Control (UIC) rules, except where diesel fuel is used. Since 2009, members of both the House and Senate have tried to revoke the exemption from UIC regulation, and such efforts will likely persist in the coming years. The administration has also been engaged in fracking issues, while recognizing the limitations on federal authority and the need to tread lightly on state regulation of fracking. Given the impact cheap natural gas has had and will continue to have on other generation technologies and the national economy, any actions taken on fracking will likely be vigorously debated.

In addition to fracking, policy issues regarding liquefied natural gas (LNG) imports will be debated. The Department of Energy (DOE), which has authority to approve natural gas export permits, has numerous applications pending. DOE has also recently asked for public comments on two key studies addressing LNG exports. How DOE addresses this issue and how Congress responds to such actions could have a huge impact on power suppliers and natural gas producers seeking additional revenues and end users worried about increased prices.

While fracking is often thought of as a natural gas play, most recent fracking activity has involved obtaining oil, so that any actions taken by Congress or the administration will also have an impact on the oil industry. A recent report from the International Energy Agency suggests that the United States could become “energy independent” by 2035 if current oil production levels from fracking continue. But likely the most visible oil issue in 2013 relates to the Keystone Pipeline, which proved politically divisive in the last few years. Many insiders believe the project could be quietly approved this year using an alternative route through Nebraska.

Finally, issues relating to climate change continue to percolate in Congress and within the administration. The financial crisis pushed climate change proposals off the agendas of the relevant House and Senate committees over the last few years, but recent weather events (including Hurricane Sandy) have again raised congressional interest in the subject. In addition, the idea of a carbon tax has resurfaced and will likely be included, at least in the discussion phase, in the comprehensive tax reform debate.

The 113th Congress and the Obama administration’s second term could prove critical to the renewables industry, as tax credits and the long-term continuation of other government incentives are considered. Low natural gas prices are expected to remain for the next few years as a result of the shale gas boom, which could negatively impact both renewable generation and coal-fired generation. How Congress and the administration address fracking issues, as well as renewable generation and coal, could have a significant impact on the generation portfolio of electric energy companies for years to come. New national policies on energy innovation, in terms of enhanced generation and transmission efficiency, as well as storage and transportation technologies, could make the United States a less energy intensive and more energy independent country. The challenge for both Congress and the administration during the 113th Congress will be when and how to engage on these issues—provided that engagement is possible in this stormy political climate.