In today’s issue:
- New taxes in the recently signed Inflation Reduction Act (IRA) could also reduce the reliability and supply of energy, boosting costs.
- The IRA provides lavish subsidies to nuclear power operators, who have complained for years but are consistently generating surpluses.
- The good news is that the IRA takes steps to encourage carbon capture and sequestration, which could become a major contributor to reducing emissions.
- Congress now turns toward reform of energy infrastructure permitting in an attempt to speed projects to completion – part of the deal that Sen. Manchin made with Leader Schumer.
- The comment period recently ended for the SEC’s controversial plan to expand corporate climate-change reporting. Is the SEC exceeding its mission?
- An economist criticizes the SEC proposal for adding costs but providing no benefits.
- Virginia energy commission wants to hold Dominion Energy to its wind-generation promises, but the monopoly utility threatens to scrap the project.
- An oil and gas pipeline project under Lake Michigan advances.
- Dept. of Justice and FTC warn FERC not to reinstate a rule that favors transmission incumbents. The agencies call for beneficial competition.
- Speaking of competition, South Africa wants more of it in electricity generation after years of crisis.
Is the New Inflation Reduction Act Good for Energy Costs and Reliability?
The Inflation Reduction Act (IRA), signed by President Biden on Aug. 16 after Senate Majority Leader Chuck Schumer (D-NY) and Sen. Joe Manchin (D-WVa) reached a deal, provides for $369 billion in spending on climate change and energy security. But how much will it really do to increase reliability and boost supply to drive down energy costs?
Several of the provisions are problematic. For example, the IRA doubles rental fees for onshore leases to drill on U.S. government land, raises royalty rates from 12.5% to 16.7% and imposes a new fee to just to nominate acreage to be leased.
The new law also reinstates and increases a tax on crude oil and imported petroleum products that had lapsed at the end of 1995. The tax, called the Hazardous Superfund Financing Rate, was originally 9.7 cents a barrel. The IRA raises the levy to 16.4 cents and indexes it to inflation. The provision will impose $11.7 billion in taxes on the oil and gas industry. In addition, the IRA adds a new tax on methane, a 15% minimum tax on corporations and a tax when companies buy back stock. All of these measures will serve to reduce or limit energy production by raising costs, and constrained supply means higher prices for consumers.
Despite the bill’s title, its overall ability to reduce inflation is suspect. A study using the Penn Wharton budget model found that “the impact on inflation is statistically indistinguishable from zero” and that “GDP falls slightly” over the next decade as a result of the legislation.
At a time of high energy costs and a growing recognition, due to the war in Ukraine, that energy security is tantamount to national security, it is difficult for some to understand why lawmakers would support policies that would discourage energy production by raising costs.
IRA Provides Lavish Subsidies for Nuclear Plants, Mostly Owned by Monopoly Utilities
In addition, the IRA provides new subsidies to owners of mature, profitable nuclear plants, including tax credits of between 3 and 15 cents per megawatt hour of electricity generated. There’s another credit of at least $25 per megawatt hour for advanced nuclear plants, and an investment tax credit of 30% to 40% for capital poured into new plants.
The vast majority of nuclear plants are owned by large monopoly electricity companies such as Entergy, Exelon, and Duke. Not only are these corporations highly profitable, but, as this newsletter has documented, their nuclear plants are profitable as well and in no danger of closing.
We pointed out at the time that the quarterly Independent Market Monitor Report from PJM, the large regional transmission organization, noted that 16 of the nuclear units in the region were showing a significant surplus for the most recent quarter. “Three units were receiving state subsidies even though they were in surplus, and four others can receive a subsidy if they need it,” we wrote. “All PJM regional nuclear units scored a surplus for the year 2021, and all plants are projected to have budget surpluses in 2022.”
Nevertheless, on April 19, the Energy Department launched the Civil Nuclear Credit Program – part of the bipartisan infrastructure bill that was signed last November. It provides up to $6 billion in grants to keep financially strapped nuclear power plants operating. “But critics,” we wrote, “are questioning whether the program is needed or if it will end up being a windfall to monopoly utilities.”
As if the previous legislation did not give these utilities enough government largesse, the IRA gives the nuclear industry even more.
The IRA Does Boost Carbon Capture, Which Is Critical to Reducing Emissions
Not all provisions in the new bill are so questionable. There is support for clean hydrogen (a tax credit of up to $3 per kilogram) and for carbon capture and sequestration (CCS), the process of capturing carbon dioxide before it gets into the atmosphere and storing it for centuries.
The bill lowers the annual threshold of captured carbon necessary for facilities to qualify for credits, extends the timeline for carbon capture credit eligibility from 2026 to 2033, and gives companies the option of receiving the value of the credits as a direct payment from the government.
According to the Global CCS Institute’s 2021 Status Report, plants in operation or under construction around the world have the current capacity to capture 40 million metric tons of CO2 per year. The U.S. alone emits 5 billion tons a year, Resources for the Future points out. Under the net-zero timeline, about 7.5 billion tons of CO2 must be captured and stored annually by 2050, so it’s quite a hill to climb.
But CCS is becoming a big business, with ExxonMobil estimating that it could be a $4 trillion market within the next 30 years. New facilities are being built and older ones are expanding rapidly, with growing effects on climate-change mitigation, so these IRA provisions are being widely welcomed.
Next Step After the IRA: Energy Infrastructure Permitting Reform
A high priority for Sen. Manchin is passing bipartisan permitting reform legislation – that is, relieving and removing delays on energy infrastructure projects of “strategic national importance.” In return for his support for the IRA, Manchin won a promise from Sen. Schumer (as well as the Speaker of the House and the President) to bring permitting reform to a vote by Sept. 30. Manchin’s office issued a one-pager outlining a framework for the legislation. While a version containing legislative text has been leaked and reported by Bloomberg, it does not contain important provisions that are in the one-pager, such as the Mountain Valley Pipeline.
- The President will designate a list of 25 high-priority infrastructure projects, including critical minerals, nuclear, hydrogen, fossil fuels, electric transmission, renewables, and CCS. Criteria for the selection include: reducing consumer energy costs, improving energy reliability, decarbonization potential, and promoting energy trade with our allies.
- The maximum time for a National Environmental Policy Act (NEPA) review would be two years for major projects and one year for lower-impact projects. According to a study by the White House Council on Environmental Quality, it takes an average of four and a half years to complete an environmental impact statement under NEPA, and 25% of the reviews took more than six years.
- The bill sets a statute of limitations for court challenges with a requirement that, if a court remands a permit, it must set a reasonable schedule, not to exceed 180 days, for the agency to act on the remand.
- It also clarifies the jurisdiction of the Federal Energy Regulatory Commission (FERC) regarding the regulation of pipeline, storage, import and export facilities.
- Finally, the bill would allow the Secretary of Energy to declare transmission facilities to be in the national interest, allowing FERC to issue a construction permit.
In addition, Manchin wants the legislation to require agencies to take action to permit the construction and operation of the Mountain Valley Pipeline, a 303-mile project in West Virginia and Virginia to move natural gas. While the project is nearly complete, it has been subject to years of lawsuits by activists hoping to shut down the project through the courts. The bill would also direct all appeals go to the U.S. Court of Appeals for the District of Columbia rather than the Fourth Circuit in Richmond, which would presumably be less congenial.
Some of Manchin’s colleagues, including Sens. Dan Sullivan (R-AK) and Shelley Moore Capito (R-WV), wanted him to insist on a permitting reform vote before he voted “aye” on the IRA. “I’ve never seen anybody here that can actually guarantee a final vote,” Capito said in a press release. “I mean, let’s get real, especially on something that’s sensitive and so divisive at times as permitting reform.”
The current NEPA-controlled system empowers environmental activists to go to federal court to stop infrastructure projects, causing long, expensive delays. No wonder the U.S. has some of the highest construction costs for such projects in the world. The IRA does nothing to fix the problem. Advocates of reform argue that it is especially needed now, after the federal government, through both the bipartisan infrastructure bill (officially, the Infrastructure Investment and Jobs Act, or IIJA) and the IRA are launching so many infrastructure projects.
If Manchin’s permitting bill does make it to the floor, it will face opposition from the left wing of the Democratic Party and, according to a Roll Call article on Aug. 17, “would be difficult to get through the House.” Raul Grijalva (D-AZ), chairman of the House Natural Resources Committee, has said that “environmental justice communities know all too well that permitting reform is nothing more than industry code for the systematic gutting of our most foundational environmental and public health protections, like the National Environmental Policy Act.”
Manchin, for one, is not worried: “There’s been bipartisan support for permitting reform for a long, long time, and we finally brought it to fruition. This is something the United States of America should be able to do without getting bogged down with litigation after litigation after litigation and be able to move the things that are necessary for us to defend ourselves as a nation.”
A Bloomberg piece on July 27 quoted Alex Herrgott, who led the Federal Permitting Improvement Steering Council (FPISC) under President Trump, as saying that the statutory changes under the proposed permitting reform legislation “won’t be earth-shattering,” but they will be offered as law, not an executive order, so they will have more teeth and be more enduring.
SEC Moves Ahead on Controversial Climate Disclosure ‘Enhancement’
For years, environmental activists have been trying to force energy companies to make highly detailed public disclosures of the possible risks to their businesses from climate change. The activists have an ulterior motive, but they argue that the beneficiaries of such disclosures would be investors, who would be better able to assess the company’s prospects.
The Securities & Exchange Commission (SEC) under the Biden Administration welcomed this approach and in March issued a proposed rule termed, “The Enhancement and Standardization of Climate-Related Disclosures for Investors.” The comment period for the rule ended June 17; the SEC will digest and report on the comments and eventually take a vote of the Commissioners.
The SEC already requires companies to disclose climate-related information that has a material impact on a firm’s business, but the Commission believes that “enhancement and standardization” are necessary “to promote efficiency, competition, and capital formation,” according to the proposed rule, which runs to 279 pages with 1,067 footnotes in the Federal Register. The new rule requires not just extensive reporting of the climate-change and severe-weather risks (that may, in fact, not be material) to the registered company itself but a carbon accounting of the company’s suppliers and customers.
Critics argue that the rule turns the SEC into a climate regulator, acting far beyond its jurisdiction and mission. The Taxpayers Protection Alliance even launched a website titled, “SEC Mission Creep.” The proposed rule is especially jarring after the Supreme Court’s June 30 decision in West Virginia vs. Environmental Protection Agency. A July 13 letter to the SEC from 24 state attorneys general pointed out that, in its decision, “the Court confirmed that Congress—not a federal administrative agency—has the power to decide major issues of the day.” The SEC’s proposed rule, wrote the AGs, “offends that doctrine.” The AGs continued:
Indeed, all the factors present in West Virginia are present here. SEC has never applied its authority to require disclosures in this way. It has rarely, if ever, required disclosures focused on non-material, non-financial matters like those found in the Proposed Rule. Environmental regulation is outside the Commission’s area of expertise; if anything, the Commission is even less equipped to regulate in areas concerning climate change than EPA.
In a July 12 op-ed in the Wall Street Journal, former SEC Commissioner Paul Atkins and Paul Ray, former administrator of the White House’s Office of Information and Regulatory Affairs, wrote:
The similarities between the Clean Power Plan and the SEC’s proposed disclosure rule are striking and speak to why both violate the law. Both regulations would impose changes on massive swathes of the American economy…. The SEC’s proposal would tee up shifts of capital from fossil-fuel-based industries, such as oil production and heavy manufacturing, toward industries that are supposedly greener. Both of these monumental economic shifts would affect countless businesses large and small, as well as potentially every American consumer and worker.
The SEC Rule Adds Severe Costs But No Benefits to Investors, Economist State
Dr. Wayne Winegarden, economist and senior fellow at the Pacific Research Institute (publisher of this newsletter), has taken a lead role in the opposition to the rule. His opinion piece for Forbes on June 16 concluded that “there is little doubt that investors will be harmed” by its implementation.
Winegarden pointed out that “to the extent that emissions create potential risks for investors, companies are already legally liable for reporting” information about climate change, so the rule adds no benefits – only severe costs in “additional human and financial resources.” By requiring a company to consider a supplier’s emissions, the SEC is forcing firms to deemphasize “fundamental business considerations — such as choosing the supplier that produces the right inputs, at the right price, that meet the necessary delivery schedule.”
Also, he writes, “there are fundamental problems with carbon accounting that undermine its value. It is an imprecise and inaccurate exercise plagued with verifiability issues and accuracy problems.” Carbon accounting thus “fails to improve investors’ understanding of the potential risk their companies face.”
In addition, Winegarden warns that the reports may “enable outside public interest groups to micromanage corporations’ emission reduction programs” – which, of course, is the reason that activists have pushed for these disclosures for so long in the first place. “These programs,” he writes, “often lead to corporate actions that harm investors’ interests. Winegarden cites the 2022 investment stewardship report of BlackRock, the world’s largest private asset manager and a high-visibility supporter of corporate Environmental, Social, and Governance (ESG) initiatives. The report acknowledges the potentially negative impact of climate-related disclosure proposals (similar to what the SEC is prescribing) from outside interest groups on investor returns:
Having supported 47% of environmental and social shareholder proposals in 2021 (81 of 172), BIS (BlackRock Investment Stewardship) notes that many of the climate-related shareholder proposals coming to a vote in 2022 are more prescriptive or constraining on companies and may not promote long-term shareholder value.
In a comment letter to the SEC, Winegarden explained why the SEC rule is harmful to the provision of inexpensive and reliable energy in America and is counter-productive in reducing emissions. “The rule,” he wrote, “is compromising the financial wellbeing of many companies. These financial costs reduce companies’ resources and ability to invest in the innovations necessary to efficiently address the problems of global climate change.”
After Regulatory Commission Requires Performance Guarantee, Dominion Threatens to Scrap Giant Wind Project
Virginia’s State Corporation Commission (SCC) on Aug. 5 approved a rate rider to recover the costs of Dominion Energy’s 2.6-gigawatt $9.8 billion offshore wind project if it fails to perform as advertised. The company on Aug. 22 petitioned regulators to reconsider, threatening that it would scrap the entire project with its 176 turbines.
Dominion’s appeal stated that the:
unprecedented imposition of an involuntary performance guarantee condition on its approvals, however, is untenable. As ordered, it will prevent the Project from moving forward, and the Company will be forced to terminate all development and construction activities.
The Wall Street Journal weighed in with an editorial on Aug. 21 that pointed out that the SCC originally agreed to a rate increase for the wind farm off the coast of Virginia. But risks are high. For example, says the SCC order, “Even if the Project is abandoned at the end of 2023,” the order says, “Dominion still estimates it would have prudently incurred approximately $3.7 billion of costs to be recovered from customers.” What the SCC wants is a simple assurance. Dominion forecasts that the turbines will generate electricity at 42% of its maximum capacity. “It wants consumers on the hook if that target proves optimistic,” writes the Journal. Instead, the commission ordered that “customers shall be held harmless for any shortfall in energy production below an annual net capacity factor of 42%.” That seems logical. The editorial concludes:
Is this how the energy transition is going to run everywhere, with the cost overruns and financial exposure borne by an inattentive public? In any other industry, if a billion-dollar company were pushing risks on consumers like this, the screams from Democrats in Washington would move enough air to power a wind turbine or two off Virginia Beach. Maybe they’re hypnotized by the spinning blades, but bill payers won’t be.
The danger to those bill payers is amplified by the history of mismanagement by monopoly utilities like Dominion. In Issue No. 7 of this newsletter, we reported on the tongue-in-cheek proposal of Tom Shepstone, an energy analyst who runs a planning and research consulting firm in Honesdale, Pa. He proposed on NaturalGasNow.org that monopoly electric utilities are so “rife with stunning examples of cronyism, mismanagement and corporatism at the expense of ratepayers [that] they deserve an award.”
Shepstone called it the “Vogtle Award for ‘Operational Excellence.’” That’s a reference to the fiasco involving Georgia Power’s nuclear project, the Alvin W. Vogtle Electric Generating Plant, which was originally expected to cost $14 billion when Georgia regulators approved it in 2009 and is now up to $30 billion and counting — and more than six years late coming online. Dominion was one of Shepstone’s five nominees for the Vogtle Award for maximizing expenditures in Virginia. Dominion should win the Vogtle Aware in 2022.
An Oil and Gas Pipeline Project Under Lake Michigan Advances
At a time when many energy infrastructure projects are mired in delays, there’s good news in Michigan. The U.S. Army Corps of Engineers on Aug. 15 formally published a notice of intent for an environmental impact review of the Line 5 tunnel project, and is taking public comment on the matter through Oct. 14.
The $500 million Great Lakes Tunnel Project, as it’s called, will create a 30-inch pipeline deep under the Straits of Mackinac in Lake Michigan. The pipeline will carry light crude oil, light sweet crude oil, light synthetic crude oil and natural gas liquids. “It would replace the 69-year-old dual pipes that currently run along the lakebed,” according to a report by Interlochen Public Radio. The project is meant to reduce chances for an oil spill in the straits.
The Notice of Intent “starts the scoping process, the 60-day period in which the Corps of Engineers solicits Tribal Nation, agency and public input to help define the range of issues and potential alternatives the EIS [Environmental Impact Statement] should address,” said Lt. Col. Brett Boyle, the Corps Detroit District Commander. “The Corps of Engineers will ensure all voices are heard in an open, transparent and public EIS process,” open through Oct. 14.
Dept of Justice and FTC Back Competition for Electricity Transmission Facilities
The Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued an official comment on FERC’s notice of a proposed rule-making titled, “Building for the Future Through Electric Regional Transmission Planning and Cost Allocation and Generator Interconnection.” The gist of the comment was to urge FERC “not to restore a right of first refusal that would enable incumbent electricity transmission owners to block competitors from bidding to design, construct, and own certain new interstate transmission facilities.”
In other words, DOJ and the FTC are standing up for competition.
In its proposal on April 21, FERC stated it is considering the reinstatement of the right of first refusal, which was eliminated in certain cases in 2011. If reinstatement happens, said a joint DOJ-FTC press release, “This could mean that the design and construction of certain transmission facilities is less competitive, resulting in higher prices or lower quality.” DOJ and the FTC also oppose the idea of a right of first refusal that imposes a joint venture involving the incumbent. Such an approach, they write, “will eliminate or distort the benefits of competition.”
The press release added:
The joint comment addresses the benefits and importance of competition and new entry for the design and construction of interstate electric transmission facilities…. The comment urges FERC not to abandon competition, and it cites examples of where competition…has resulted in lower costs and innovation
In their comment, DOJ and the FTC remind FERC that it recognized that “vertically integrated utilities do not have an incentive to expand the grid to accommodate new entries or to facilitate the dispatch of more efficient competitors.” The comment argues that there is an important role for regional and national planning from “entities with grid-wise perspectives,” and it cites regional transmission organizations (RTOs) like the Midcontinent Independent System Operator as the right places for this planning. This DOJ and FTC joint comment is a much needed step forward by federal officials to recognize the importance electricity competition.
After a 14-Year Crisis, South Africa Turning to a Competitive Model for Electricity
Meanwhile, South Africa is embracing competition in electricity generation. According to a report by Bloomberg on July 25, the nation is moving to “try and resolve its chronic power shortage by making it easier for private companies to build plants.” South Africa has suffered from a “14-year electricity crisis [that] has been laid bare by five weeks of power outages” that ended, at least temporarily, in mid-July.
Now, according to the office of President Cyril Ramphosa, “We need to open the floodgates for private investment in new generation capacity. Our overriding priority is to add as much new capacity to the grid as possible, as quickly as possible.” The plan calls for capacity to almost double in just 18 months.
Among other steps, South Africa will remove a cap of 100 megawatt hours on private electricity generation, pay businesses and individuals for excess rooftop solar power they generate for the grid, and relax local content and red tape on licensing an environmental requirements.
The result is to bring real competition to bear on Eskom, the troubled government-owned power company. And we know from research that competitive markets are more effective at reducing emissions, providing affordable electricity, and ensuring reliability compared than the monopoly utility model.
A Pacific Research Institute study last September found that customers in monopoly states in the U.S. are paying higher energy prices, seeing less effective infrastructure investment, gaining fewer emission reductions, and enduring less reliable power systems. That pattern prevails abroad as well, and it is refreshing and reassuring to see South Africa addressing a dire situation with competition.