In this edition of Seyfarth Shaw’s Energy Insights Newsletter, our Energy and Clean Technologies team covers important developments in Q4 2015 for the energy industry including 1) collateral tax benefits granted to YieldCos, 2) the finalization of the EPA’s renewable fuel targets, and 3) climate change initiatives in the wake of the Paris Agreement in some unlikely places.
Renewable Energy YieldCos May Have Received a Surprise Boost from Congress
The renewable energy industry is breathing a sigh of relief in the wake of Congress’s surprising broad support and passage of the Consolidated Appropriations Act of 2016 in the final days of 2015, which extended, both prospectively for five years and retroactively for 2015, the production tax credit (PTC) and the investment tax credit (ITC). The PTC provides wind developers with a credit of 0.023/kWh for electricity generated to the power grid, phasing down at 80% of its present value in 2017, 60% in 2018 and 40% in 2019, and the ITC provides solar projects that are under construction by no later than December 2019 to fully qualify for the 30% ITC on costs, falling to 26% for projects starting construction in 2020 and 22% for projects starting construction in 2021. While this is definitely good news for developers of these types of renewable energy projects, who, but for the length and certainty of these credits, would not be able to or find it more difficult to start, plan, finance or complete their projects, the tax extensions also are potentially good news for public companies known as “YieldCos” who purchase, manage and operate projects with predictable cash flows, typically through long-term power purchase agreements, to generate healthy dividends for their investors.
YieldCos are those dividend growth-oriented public companies that were formed to own operational assets to produce predictable cash flows, typically based on long-term power purchase contracts. YieldCos rose in popularity in 2013 as the renewable energy’s answer to the Master Limited Partnership (MLP) for those assets that, for tax reasons, do not qualify for the tax benefits of an MLP. But their public stock prices have been in freefall through 2015. Some have speculated the precipitous price drop is related to commodity oil and gas prices, or the future prices of electricity. It can also be argued that the price drop is a result of project pipeline stagnation due to the uncertainty in passage of the tax credit extensions through 2015. Aside from general market conditions, it will be interesting to follow the long term viability and strength of YieldCos.
At Long Last, the EPA Finalizes and Increases Renewable Fuel Standards
On November 30, 2015, after a two year delay, and a court-ordered mandate, the Environmental Protection Agency (EPA) released new renewable fuel targets for 2015 and 2016 under the federal Renewable Fuel Standard (RFS), including levels retroactive to 2014 and prospectively for biomass-based diesel through 2017. The EPA believes the final requirements will boost renewable fuel production and provide for robust, achievable growth of the biofuels industry. The EPA states that the final 2016 standard for advanced biofuel is nearly 1 billion gallons, or 35 percent higher than the actual 2014 volumes, while the total renewable standard requires growth from 2014 to 2016 of over 1.8 billion gallons of biofuel, or 11% higher than 2014 actual volumes. The RFS targets are welcome news to developers and manufacturers of advanced biofuels who have, like several other regulated industries including wind and solar, found it difficult to plan and finance the development of advanced biofuels and the plants that manufacture them.
The ethanol industry, though, is less enthusiastic about the boost in standards given something called the “blend wall.” The “blend wall”, as it is known, is the maximum quantity of ethanol that can be sold each year given legal or practical constraints on how much can be blended into each gallon of motor fuel. According to the proponents of the ethanol industry, most notably the Renewable Fuels Association, the constraints are driven by the oil industry who has “steadfastly refused to invest in blender pumps, storage tanks, and other infrastructure compatible with E15-and-higher ethanol blends.” Neither industry wants to be left behind in the advancement of renewable fuels. How each survives in the renewable fuel market remains to be seen.
The First Actions under the Historic Paris Agreement on Climate Change Are From Auckland?
On December 12, 2015, 195 countries agreed to combat climate change, the first-ever universal and legally binding agreement of its kind. The agreement’s main aim is to keep a global temperature rise this century well below 2 degrees Celsius and to drive efforts to limit the temperature increase even further to 1.5 degrees Celsius above pre-industrial levels. The achieve this goal, the Paris Agreement addressed the following areas: (1) mitigation – reducing emissions fast enough to achieve the temperature goal, (2) a transparency system and global stock-take – accounting for climate action, (3) adaptation – strengthening ability of countries to deal with climate impacts, (4) loss and damage – strengthening ability to recover from climate impacts, and (5) support – including finance, for nations to build clean, resilient futures.
Much has been written about how the breakthrough agreement was achieved. Reasons range from stellar diplomacy over decades to China’s inability to ignore its economic growth and carbon footprint resulting therefrom. But with this framework in place, which country has taken the first action towards compliance? Yes, you guessed it ……Auckland, New Zealand. While it is true that the United States has extended renewable energy tax credits and boosted renewable fuel standards, and the EPA has reinforced the U.S.’s commitment to the President’s Clean Power Plan, and even China, in an unprecedented move, has halted the approval of any new coal mines for three years (unlike India who still plans to double coal output although, to be fair, seeking to quadruple solar installations), it is the Mayor of Auckland, New Zealand that has stepped up efforts towards meeting its already ambitious pledged goals. In addition to being admitted to the C40 climate group, the Mayor has announced plans to move to a zero waste city, with further announcements to transform its public transport system and cycle and pedestrian walkways, citing a statistic that 35% of its CO2 emissions come from road transport. Many experts have cited local initiatives and private investment will be the ultimate drivers of meeting the Paris Agreement goals, and Auckland is an excellent example thereof.