Utilities feeling pain from environmental policy volatility
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.