Zeitgeist of the energy transition and implications for investments | Bracewell LLP
On March 24, the Federal Energy Regulatory Commission (FERC) made an unexpected and bipartisan about-face on its freshly updated guidelines to address the environmental impacts of natural gas infrastructure projects such as pipelines and liquefied natural gas (LNG) export facilities.1 Just a month after releasing the new guidelines — which were issued on partisan lines and warned that natural gas infrastructure projects could be sunk due to their downstream greenhouse gas emissions — FERC rescinded the guidelines, calling them “drafts” and welcoming comment from stakeholders.2 FERC has also broken a deadlock to issuing new permits for natural gas infrastructure projects on a bipartisan basis.
FERC’s abrupt change may have surprised some environmentalists,3 but context is crucial: while FERC is an independent agency, it is not immune to political pressures and is not blind to geopolitics, including the war raging in Ukraine and the resulting global energy pressures. Just a day after the FERC policy reversal, the White House announced a joint initiative with the European Union (the US-EU alliance) in which the US aims to supply the EU with an additional 15 billion cubic meters of LNG by the end of 2022 more than triple by 2030.
The pace of these developments suggests a shift in the energy zeitgeist from a partisan climate struggle to a bipartisan focus on responsible energy security and independence for the US and our allies. Investors in the energy sector would do well to keep an eye on this potential reprioritization to better anticipate headwinds and tailwinds for existing and future investments. We offer three general observations:
Firstrenewed focus on US leadership as an LNG supplier may spur an uptick in natural gas infrastructure development, likely to have knock-on effects for carbon capture, hydrogen and renewable natural gas (RNG).. Additional LNG and natural gas pipelines will soon be needed to meet the US-EU alliance commitment.4 A renewed focus on natural gas investments could, in turn, have positive knock-on effects for certain next-generation clean energy investments – such as carbon capture and sequestration and hydrogen projects – as project sponsors consider opportunities to retrofit and optimize natural gas infrastructure. In this regard, US RNG will likely continue to receive focus and support from programs such as the US Environmental Protection Agency’s Renewable Fuel Standard program, as the expanded reliance on clean fuels is consistent with the policy goal of promoting responsible energy security at home and abroad ( acknowledging that the volume of US RNG is not significant enough to meet European demand). All in all, investors in US infrastructure should keep near-term constraints and risks in mind when assessing the US-EU alliance as a potential driver of opportunities. On the export front, US LNG projects require navigating a year-long permitting process and multi-year construction schedules: a quick practical reality check will show that there will be limited US LNG capacity expansions ahead of 2025 and no quick fix. On the import side, restrictions include current import capacity limitations in Europe and potential geopolitical uncertainties related to some LNG supply agreements.5
Secondthe renewed focus on US independence and protectionism could create new complexity for investments in renewable energy, battery storage or electric vehicles. Investments in wind, solar and battery storage resources, as well as the electrification of the transport sector, are naturally consistent with a focus on responsible energy independence, as they reduce dependence on fossil fuels while providing environmental benefits. However, political trends towards US protectionism and US independence from foreign commodities and equipment, such as solar and nickel and lithium storage modules or electric vehicles, could create new challenges (and opportunities) worth monitoring. Examples of these trends are:
- Solar. The solar sector faces a new potential supply chain setback after the Commerce Department moves ahead with an anti-dumping investigation into solar.6 The measure exacerbates existing supply chain challenges for the solar industry, including recent tariff expansions (albeit with some exceptions). Notably, both the Biden and Trump administrations stood by the tariff extensions, indicating bipartisan support and thus potential longevity for this policy.
- offshore wind. As part of its auction process for awarding offshore leases, the Bureau of Ocean Energy Management incentivizes bidders to commit to investments in the domestic supply chain, as well as manpower and training. And for its part, last week the US House of Representatives passed the Coast Guard Authorization Act of 2022 on a bipartisan basis. The bill gives priority to local workers over foreign seafarers working on offshore wind turbine installation vessels and fueled fears among clean energy advocates that the bill could hamper offshore development if it ever goes into effect.
- storage and electric vehicle batteries. President Biden has announced plans to invoke the Defense Production Act to boost domestic extraction of rare-earth minerals needed to manufacture battery materials to power electric vehicles, which should help spur growth in the U.S. mining sector .
The protectionist trend could intensify if parts of the Build Back Better (BBB) legislative proposal – which was debated for most of 2021 before abruptly stalling in December – reemerge as expected.7 The BBB included domestic production stimulus that accompanies virtually all of its proposed renewable energy tax credits and rebates, and such stimulus may now have bipartisan tailwinds.
In this policy environment, investors in renewable energy, battery storage and electric vehicles would do well to examine supply chain costs and labor availability as part of their deal diligence and explore opportunities to leverage new federal policies to support domestic mining and Production.
looking aheadDemands for responsible energy security and the rise of cyber threats from abroad could give policymakers new reasons to band together around investments in power grids. Every pathway to clean energy security in the US is through the power grid, which requires not only significant investment in new infrastructure to connect clean generation sources to load centers, but also modernization of legacy infrastructure – all in the face of new cyber and other grid threats. So far, the Biden administration’s efforts to encourage investment in transmission lack ambition. The Infrastructure Investment and Employment Act includes measures to support advances and investments in both cybersecurity and transmission, but with only relatively modest project funding and many new implementation issues.8th For its part, the FERC last year initiated a process to reform interstate broadcast scheduling rules, but any resulting new rules may not be fully implemented in the coming years.9 These measures fall far short of the transformative measures required to modernize the grid and build long-distance transmission lines. Time will tell, but the current bipartisan focus on energy security and independence – punctuated by headlines warning of new threats to the power grid – may create new urgency in promoting grid investment, with a particular focus on cybersecurity and grid reliability and resilience (key cross-party priorities) .
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The debate on energy policy in the USA is changing, accelerated by the shattering war in Ukraine. Investors may not be facing a full one today New A challenge in itself, but a bigger one: generating returns in a policy environment that maintains new weight in energy independence and security while maintaining a focus on climate concerns.
1. Certification of new interstate natural gas facilities178 FERC ¶ 61.107 (2022); Consideration of greenhouse gas emissions when reviewing natural gas infrastructure projects178 FERC ¶ 61.108 (2022).
2. Ordering draft policy statements178 FERC ¶ 61.197 (2022).
3. FERC pursued the new guidelines in light of a number of DC District court decisions that challenged FERC’s environmental assessment and consideration of greenhouse gas emissions. Eg, Food & Water Watch against FERCNo. 20-1132, 2022 WL 727037 (DC Cir. March 11, 2022).
4. The development of the required infrastructure could be further accelerated if FERC corrects course and offers more regulatory certainty.
5. For example, immediately after the announcement of the US-EU alliance, China’s ENN Natural Gas signed a 20-year LNG purchase agreement for a total of 2.7 million tonnes of LNG per year from Energy Transfer’s Lake Charles LNG project. Whether that means China supporting efforts to divert US natural gas from Europe — and if so, whether the US would respond — is an open question.
6. A petition by California-based solar panel maker Auxin Solar calling for a review of solar panel imports from Chinese companies operating in Cambodia, Malaysia, Thailand and Vietnam sparked the investigation.
7. The Biden administration’s budget proposal, presented to Congress last week, includes a deficit-neutral reserve fund to accommodate a potential future agreement with Congress on certain provisions of the BBB.
8. The Department of Energy has issued a notice detailing, among other programs, the proposed implementation of a $2.5 billion fund to facilitate the construction or upgrade of transmission lines; a $3 billion smart grid grant program; and a $5 billion grid reliability and resiliency innovation program.
9. FERC only has one so far progressive Notice of proposed rulemaking. Each subsequent notification of proposed rule creation will be commented upon, with each resulting final rule subject to an implementation timetable.