April 2006

Wind in the Weeds

by Roger Feldman  --   Bingham, Dana L.L.P.
(originally published by PMA OnLine Magazine: 2006/05/06)
 

Next to Appropriations, the Law of Unintended Consequences is Washington’s greatest contribution to our nation’s commerce. A significant component of future merchant generation is projected to be from the so-called "renewables" sector. Meanwhile two significant shifts in national energy policy jeopardize the thrust of this initiative. Both of them ironically involve the biofuels sector, not typically identified with the power business.

First, attention is shifting away from "green" power—solar, wind, hydro—as the principal or best source of improved environmental approaches of pollution and greenhouse gases production—and toward larger central station IGCC and nuclear.

Second, the policy rationale for renewables has shifted to the displacement of volatile-priced imported oil and liquefied natural gas. Biofuels (ethanol, diesel and gasified biomass) have become the primary focus of Administration efforts in this regard.

There are some unintended consequences in this for the power sectors, the greatest challenge by biofuels use is emergent hybrid electric technologies for transportation. In principle, this represents a potentially massive new market for utility electricity providers, notably the distribution systems of traditional utilities utilizing traditional field. The role for distributed green power could be more limited to the extent biofuels proponents, either lose the car debate or win it and the real winners are the traditional energy players.

Consequently, biofuels matter for merchant power generators, and it is useful for market strategists focused on the electric sector to look up from their knitting and become aware of the five key issues with which the biofuels industry is wrestling. The zig and zags in these biofuels debates and their ultimate resolution affect what renewable merchant power can and will do as a market force.

First, the debate over the merit of the use of biofuels must be resolved. Recent articles have mocked it as a Trojan Horse for the agricultural lobby; a most ineffective solution of national needs from an energy balance standpoint; trumped up grounds for protection for the American automobile industry and a phony national security issue. In response increasingly, the entire fuel value chain is being analyzed with a view to improvement of net energy balance of the biofuels process, i.e. Supplanting natural gas consumption in ethanol manufacture; reduction in the use of petroleum fuels for the transportation of ethanol; early introduction of cellulosic-based ethanol through production improvement are all merchant activities receiving emphasis.

Second, the assumption that the government can or will be the driver of the bioenergy breakthroughs over the long haul is being obviated. Two different roles government can play are receiving an emphasis which would serve the merchant power industry well. Government can get the different incentives right for the development of different types of bioenergy. It can also jawbone and encourage the three underlying key business sectors—energy, production, agriculture and transportation—to remove the commercial barriers along the fuel value chain which interfere with the bioenergization of the American economy. Like the power sector, there are numerous "national plans" for biofuels development emerging from many quarters. The will to implement them by the parties who really are at risk or stand to benefit, needs to be encouraged by government. The results of shifts in emphasis in government policy could affect the merchant power sector.

Third, the interplay of the energy policies the United States is pursuing with respect to non-bio based energy sources with biofuels must be confronted. How we regulate electric prices; facilitate LNG imports; price markets for improved electric-based transportation, and promote (or do not promote) tax policies which focus on other renewable fuels cannot all impact the bioenergization of America. The placement of biofuels and power in separate bureaucratic situations precludes the necessary energy policy coherence to the possible detriment of merchant power.

Fourth, it is becoming more common than a single, quick, technical fix through biofuels is required and may be expected. One way to do that is to enable private technology to work not only on new fuel production mechanisms, but on the facilitation of fuels transportation; alternate fuels utilization for different engines; conversion of biogases to liquid fuels; and response to environmental issues. That means encouragement, which could extend to the power sector, of entrepreneurial breakthroughs, by both providing a stable market for their deployment, and assisting new inventions by smaller entrepreneurs to reach the marketplace. Government has not been too effective in the power business in these regards, and its success in the biofuels area could collaterally affect the sector as well.

Fifth, there must be strategic alignment with supporters of sustainable, green, non-polluting technologies and the policies they endorse. Because the bioenergy revolution is seeking encouragement as one consonant with "green" objectives—rather than a diversion from a ploy to end run them, emphasis is now being given to the importance of promotion of biomass energy utilization on a distributed basis, whether through digesters, gasification, power generation, or as ancillary to dealing with major bio waste problems plaguing parts of the country. A possible boast for merchant power associated with efforts in the biofuels sector could result.

Thus, resolution of the several key biofuels issues can affect the future profile of renewable merchant power. A wise word to captains of the merchant power ships: heed the winds that through the green weeds below.

ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon Markets Group has practiced law related to the finance of environmental and energy projects and companies for 40 years.  In particular, he has analyzed and executed a wide variety and substantial value of project financings.  He chairs the American Bar Association’s Committee on Carbon Trading and Finance, serves on the Board of the American Council for Renewable Energy, and has been a senior official in the Federal Energy Administration.  He is a graduate of Brown University, Yale Law School and Harvard Business School.