Jan 3, 2017

Utilities feeling pain from environmental policy volatility

Bryan Esterly (CFA), SASB
6 min
These are confusing times for those involved in capital planning at utilities. Core to utility capital planning is forecasting investments in energy...

These are confusing times for those involved in capital planning at utilities. Core to utility capital planning is forecasting investments in energy generation, transmission and distribution infrastructure. This energy resource planning is arguably more challenging now than it ever has been, due to regulatory uncertainty. Federal authority and willingness, or lack thereof, to regulate greenhouse gas (GHG) emissions in the power sector is driving this uncertainty. Volatility at the state regulatory and policy level on topics such as distributed energy resources (DER) further exacerbate uncertainty.

However, avoiding falling victim to regulatory and public policy uncertainty can be achieved through a disciplined focus on the long term environment and other value drivers outside of public policy, as opposed to responding to whichever way the regulatory winds are blowing at the moment.

The Clean Power Plan: what would take its place

The Obama administration EPA’s Clean Power Plan was cast into legal limbo in early 2016 when the U.S. Supreme Court granted a stay – effectively halting the implementation of the regulations – in a move that took many observers by surprise. While technically speaking, the fate of the regulations will be determined by the pending decision in the U.S. Court of Appeals for the District of Columbia Circuit, and the likely appeal to the U.S. Supreme Court, it should be no surprise that the incoming administration of President-Elect Trump will play an outsized role in determining the future of federal GHG emissions regulations.

At first glance, a fair question may be, “what federal GHG emissions regulations?” – as the President-Elect has made his desires to cut environmental regulations, including the Clean Power Plan, well known. However, Section 111(d) of the Clean Air Act creates a significant obstacle to eliminating the EPA’s role in GHG regulations.

Here again, a U.S. Supreme Court decision is paramount. This time it revolves around the classification of greenhouse gases as a threat to public health or welfare. In 2012 the court upheld the EPA’s endangerment finding. This determination laid the groundwork for the EPA’s Clean Power Plan, as Section 111(d) then created an obligation for the EPA to establish greenhouse gas emissions regulations for the power sector.

Thus, whether the court’s ruling is adverse to the Clean Power Plan or the Trump administration’s EPA seeks to withdraw the regulations, the EPA must still comply with its Section 111(d) obligations to regulate emissions – given that greenhouse gas emissions have been federally recognized to endanger public health and welfare. Eliminating this underlying obligation, or the endangerment finding, would not be an easy task and would almost certainly lead to years of legal gridlock.

Beyond the Clean Power Plan

The Clean Power Plan is only one example of the countless sources of confusion in the utilities sector, at the federal level alone. Add in the uncertainty around the EPA’s New Source Performance Standards and even the Mercury and Air Toxics Standards (currently in force), and the future of federal environmental regulations for utilities and power generators becomes more opaque than it perhaps has ever been.

The above examples of uncertainty reside at the federal level. The rapid changes in regulations at the state level can be even more challenging. Whether it’s the implementation of state renewable portfolio standards (which 29 states plus the District of Columbia have adopted) or policies surrounding distributed energy resources, state regulations are constantly in flux. For example, in the third quarter of 2016 alone, state regulators in 42 states plus the District of Columbia undertook 117 actions related to solar policies in utility rate design.

Utilities stakeholders disregard policy volatility

Capital investments in power generation, transmission, and distribution are long term investments. Companies, and their investors, will have to live with decisions surrounding where to deploy capital for the foreseeable future, and these decisions will help shape the long term success or failures of business.

While the extreme degree of regulatory uncertainty, especially at the federal level, is unquestionably making capital allocation decisions more difficult, utilities would be wise to escalate the importance of other drivers outside of public policy rather than attempting to predict, or being consumed with influencing, policy over the next two, five, or twenty years. This primarily includes heeding to other drivers related to environmental performance such as customer and investor priorities.

Regulations generally serve as minimum standards for compliance. Customers and investors expect such compliance, but do not define environmental performance based on whether or not a company is simply complying with regulations. Instead, customers have high expectations on the power sector’s environmental performance. Whether that’s 82 percent of the Californians that support the state’s RPS of 50 percent by 2030, or 73 percent of Americans that support alternative energy over fossil fuels, or the only eight percent of Americans that classify coal as an important source of energy for America’s future.

Investors on the other hand are increasingly incorporating corporate sustainability performance into investment decisions. One out of every six dollars under professional management in the U.S. incorporate environmental, social, and governance (ESG) issues into investment strategies, while 73 percent of institutional investors take ESG issues into account in their investment analysis and decisions.

Specifically, within the electric utilities industry, investors are keenly aware of the risks – both short and long term – associated with GHG emissions, among other environmental issues. There is widespread acknowledgement that a slashing of federal environmental regulations in the near term does not alter long term risks and opportunities – and potentially not even short term risks, depending on the local regulatory regime and customer base. A consortium of institutional investors labelled “decarbonisation strategy” as the second most important investor expectation regarding electric utilities companies.

A recent Credit Suisse research report (“Key ESG risks and megatrends: What keeps our utilities analyst awake at night?”) even highlighted views on analogous public policy volatility in Australia: “What keeps our utilities analyst awake at night? Policy flip-flop and inconsistency…our utilities analyst is most concerned about the serial inconsistency and ever-changing nature of ‘Green’ policy in Australia which has led to a collapse in policy confidence.” The report continues on to describe opportunities arising from decarbonisation and risks driven by carbon emissions – despite policy volatility.

Additionally, the Sustainability Accounting Standards Board’s (SASB) standard for Electric Utilities industry recognizes GHG Emissions & Energy Resource Planning as a sustainability issue with financially material impacts for companies in the industry. The industry working group participants, which participated in the development of the standard, ranked it as the highest priority issue in the industry, with 98 percent of individuals describing it as a material.

How utilities confront uncertainty matters

Utilities would be wise to discount the importance of short term changes in regulatory policy when contemplating capital planning and energy resource planning – especially those changes that are counter to long term trends. The likely failure of the Clean Power Plan serves as a prime example of such policy volatility, while the uncertainty surrounding future regulations required by the Clean Air Act further exacerbates this example.

Instead, utilities would be prudent to recognize that public policy often establishes only minimum compliance and is only one of many drivers of risk and opportunity. The lowering of regulatory-mandated standards does not indicate other key drivers (in this case, customers and investors) will also lower their standards or disregard associated risks and opportunities. It may very well be the case that customer and investor pressure on utilities ramps up to counter volatility in federal policy – prudent utilities would then benefit for not capitalizing on policy reversions but instead striving for a long term, sustainable vision.

Read the January 2017 issue of Energy Digital magazine. 

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Apr 16, 2021

Hydrostor receives $4m funding for A-CAES facility in Canada

Dominic Ellis
2 min
The funding will be used to complete essential engineering and planning, and enable Hydrostor to take critical steps toward construction
The funding will be used to complete essential engineering and planning, and enable Hydrostor to take critical steps toward construction...

Hydrostor has received $4m funding to develop a 300-500MW Advanced Compressed Air Energy Storage (A-CAES) facility in Canada.

The funding will be used to complete essential engineering and planning, and enable Hydrostor to plan construction. 

The project will be modeled on Hydrostor’s commercially operating Goderich storage facility, providing up to 12 hours of energy storage.

The project has support from Natural Resources Canada’s Energy Innovation Program and Sustainable Development Technology Canada.

Hydrostor’s A-CAES system supports Canada’s green economic transition by designing, building, and operating emissions-free energy storage facilities, and employing people, suppliers, and technologies from the oil and gas sector.

The Honorable Seamus O’Regan, Jr. Minister of Natural Resources, said: “Investing in clean technology will lower emissions and increase our competitiveness. This is how we get to net zero by 2050.”

A-CAES has the potential to lower greenhouse gas emissions by enabling the transition to a cleaner and more flexible electricity grid. Specifically, the low-impact and cost-effective technology will reduce the use of fossil fuels and will provide reliable and bankable energy storage solutions for utilities and regulators, while integrating renewable energy for sustainable growth. 

Curtis VanWalleghem, Hydrostor’s Chief Executive Officer, said: “We are grateful for the federal government’s support of our long duration energy storage solution that is critical to enabling the clean energy transition. This made-in-Canada solution, with the support of NRCan and Sustainable Development Technology Canada, is ready to be widely deployed within Canada and globally to lower electricity rates and decarbonize the electricity sector."

The Rosamond A-CAES 500MW Project is under advanced development and targeting a 2024 launch. It is designed to turn California’s growing solar and wind resources into on-demand peak capacity while allowing for closure of fossil fuel generating stations.

Hydrostor closed US$37 million (C$49 million) in growth financing in September 2019. 

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