July 2007

Snow White Vs. Green Goddess

by Roger Feldman  --   Andrews Kurth, LLP
(originally published by PMA OnLine Magazine: 2008/01/05)
 

Energy mirror on the wall,  who’s the greenest of them all?  For years it seemed to be natural gas:  no SOX, no NOX, no waste disposal problem.  Amidst the hoopla of the titanic conflict between oil and renewable tax incentives (and incidentally Federal RPS in the recent Senate Bill), the potential impact on natural gas of clean/renewable energy legislative developments has received less attention.  A National Environmental Energy Development (NEED) Act was indeed proposed in mid-June in the House at the instance of the natural gas industry.  It would significantly lift restrictions on domestic production on the Outer Continental Shelf and, in return, plow resulting royalties into renewable energy and carbon sequestration research, selected major environmental restoration projects, and even low-income energy and weatherization programs meant to be a green-for-green swap, so to speak. 

This type of proposed tradeoff obscures the larger quandary, however, which clean/renewable development poses over the long term for clean natural gas use in the United States, depending on the form this new “Green Goddess” eventually takes.

First, one of natural gas’s premier markets is, of course, the electric power industry (which, not so long ago, never saw a combined cycle plant it didn’t like).  In this market, natural gas is being pushed, by several forces, somewhat away from its “clean fuel favorite” status.  As a result of the Resource Performance Standards, now spreading to many states (though not yet Congressionally enacted), many electric utilities are required to meet an increasing portion of their power purchase requirements from specified renewable sources, without reference to relative cost competitiveness.  Thus, while many eastern utilities are being pushed by the Clean Air Interstate Requirements and the continuing requirements of the Clean Air Act to lower SOX and NOX emissions, they cannot turn to natural gas as they otherwise might have been inclined to do.  The consequences of the Greenhouse Gas regulations (especially combined with RPS) could further renewables development, rather than catapult natural gas back to preeminence as the clean fuel. 

As entry of renewables into the electric utility fuel mix accelerates, the effect will be to increase the overall price of power.  As that occurs, even without any Federal incentives for energy efficiency or to support demand/response measures, there may be expected to be market-driven conservation, reducing natural gas use at the margin in many jurisdictions. (Some of which marginal price increase will either impact existing gas plants or dampen the incentive to build new ones.)  In significant part, that is what the so-called “Clean Tech” movement is about:  finding processes which either through significantly improved industrial operation, through process waste system utilization, or through quantum improvement energy technology production, anticipate or respond to higher electric costs of production.  (Two other aspects of Clean Tech thinking are to combine improving renewables, like solar, with energy efficiency measures which, for example, reduce the use of energy by commercial and residential establishments or with natural gas use for power firming.)

Second, on a smaller scale, a clear advantage of natural gas has been its use in smaller power engines either used in Clean Air Act Non-Attainment Areas or in certain industrial facilities as part of user reliability strategies.  An emerging contender for this market niche, however, is biodiesel or renewable diesel.  While still in short supply in the United States (particularly as compared with Europe), these fuels seem likely to enjoy an increasing incentive from the Renewable Fuel Standards (“RFS”) which, first, are increasingly-higher requirements for their blending with conventional hydrocaron fuel and, second, provide significantly more favorable weighting of biodiesel’s RFS fulfillment value (2.7) relative to ethanol (1.0).  There are also, of course, significant tax incentives for biodiesel manufacture.  Along similar lines, the extent of use of natural gas in vehicles such as municipal bus fleets is vulnerable to increased biodiesel (and hybrid vehicles) uses.  Monetization of Renewable Energy Credits and possible future GHG reduction credits are not, and likely will not be, available for natural gas use. 

Natural gas use also is subject to its own environmental challenges, although in different ways.  Methane leakage, for example, will be subject to harsh GHG regulation, thus the reduction of pipeline leakage likely will be required. 

Finally, the development playing field has been somewhat tilted towards renewables.  Like tax, R&D loan guarantees and other market incentives, issuance of proposed carbon reduction credits is a province of the Green Goddess, not Snow White. 

So it would appear that there is a natural gas industry NEED for a legislative and regulatory radar that tracks all Green Goddess movements, if current market niches are not to be snatched from Snow White.  All types of clean and renewable energy incentive programs have significance, but Resource Performance Standards, Renewable Fuel Standards, and future Green House Gas Regulations stand out as potential counterbalances to natural gas use’s current cost edge.  When Wall Street appraises gas company corporate governance, sensitivity to these issues, indeed countermeasures to hedge their stake in the green market, may well be factors that will be examined more carefully.  The beauty contest between Snow White and the Green Goddess is just beginning, and Snow White had better check her rear view mirror now.