U.S. Energy Services expert Beau Griffey answers questions about the American Power Act now in the senate and addresses how it may affect manufacturers if it is enacted.
Q: How was the American Power Act first introduced, and how has it gotten to where it is today?
A: The first iteration of climate legislation came from the House, and that was the Waxman-Markey bill that was passed last June. After it passed the House on a narrow party line vote, it went to the Senate for consideration. The Senate last fall issued the Kerry-Boxer bill, the Senate version of what the House had issued, with some tweaks to it. That piece of legislation quickly died, and Senators Lieberman, Kerry and Graham revised that into the American Power Act, which came out May 13, 2010. It’s kind of in limbo at the moment. The House has passed it. The Senate is trying to capture enough interest to get it through at the 60-vote margin, and that’s been proving very difficult. This version is watered down with a lot of goodies for nuclear power incentives, natural gas incentives, offshore oil and gas drilling, and some other things in order to help push it through, but, really, the structure of it looks very similar to the previous couple of bills.
Q: What provisions of the American Power Act in its current form will likely have the greatest impact for manufacturers?
A: Large manufacturing facilities that consume a lot of energy and/or have a lot of organic anthropic emissions from wastewater treatment facilities or something similar would be required to directly comply. I think in the current bill, the electric generator sector is rolled in during 2013, and 2016 is when industry comes into play. The number one way they would be affected is they would have to directly comply with regulations and hold allowances or allocations to comply with the emissions they have, and they would have to reduce based on historic emissions. The second way they could be impacted is in an indirect manner. When the cap and trade portion for the utility sector rolls in, I would imagine they’ll pass expenses along to their rate base. Your rates are likely to go up in this instance if you get cap and trade in some fashion, similar to a fuel surcharge on your bill, and the price structure within the cap and trade context is about where we have always estimated. The current bill has a collar structure, so the floor price is $12, and the cap price is $25 in the first few years, and then that can ratchet up a certain percentage based on consumer price index numbers every year, but I think we had estimated previously that a likely early compliance price for cap and trade was about $12.50 a ton.
Q: How will the level of carbon allowances be determined, and will different industries be held to different standards?
A: The level of carbon allowances is going to be based on historic emissions, so they’re going to look at historic emissions for a few years up to the initial year the bill goes into effect. They’re going to set a level and a cap, and those are going to be the emissions that will be portioned out to all the participants covered underneath that cap. Basically all utilities initially will have to be covered under cap and trade. Going forward, there are some industries, such as iron and steel refining, that will be treated a bit differently. As far as treatment from an allowance perspective, there are some trade-vulnerable industries—exporters in other words— that will be eligible to receive extra free credits to protect their export business.
Q: The bill reportedly allows for carbon offsets in addition to buying extra carbon allowances when necessary. What are examples of the potential offsets, and how can undertaking offset initiatives benefit manufacturers?
A: Well, the good thing about carbon offsets is a carbon offset takes place outside of a carbon cap and trade scheme, so you have allowances within the cap and trade scheme that are finite. Let’s say the cap’s 100. Between zero and 100 is the amount of allowances you have to comply. You’re not going to have more than that; that’s it. Offsets can be theoretically unlimited because they take place at projects outside the cap and trade scheme at entities not covered or regulated under cap and trade and represent true reductions. A big one in the last couple of bills has been forestry initiatives, both domestic and internationally. Other good initiatives would be sources such as methane capture and destruction at animal waste locations and landfills and other energy efficiency programs that take place in other parts of the world or outside of a regulated U.S. cap and trade scheme. They would generate a validated credit which could be used for a portion of your compliance. The way it typically is set up is an offset theoretically always trades at a discount to an allowance. You could buy an offset credit cheaper than you could an allowance to comply if you needed to buy some extra credits, but you can only use those up to a certain percentage of your overall portfolio, say 50 percent.
Q: The bill will reportedly promote the development of clean energy alternatives. How will the availability of alternative power options affect manufacturers?
A: The way I read the bill right now is the bill promotes the state incentives for renewable portfolio standards, so it’s not really implementing a nationwide federal renewable portfolio standard. It's helping to incent energy efficiency in renewable portfolios or renewable generation on a state-by-state basis. Currently there are about 28 or 29 states that have renewable portfolio standards, so those states and particularly those generating utilities in those states, have to own a certain percent of their generation from renewable sources. Another way it can continue to impact it is with an incentive within the bill for natural gas vehicles and other natural gas use, which is about 50 percent to 75 percent cleaner than a coal burn. It also has a large incentive for new nuclear power generation and clearing of some hurdles for permitting and establishing a new base load in nuclear power generation in the country. On a site-specific basis, it doesn’t really address those issues, although I think it will maybe set out some grants and some other things that could be used for distributed generation or behind-the-meter projects that could be beneficial to manufacturers down the road.
Q: If the legislation is changed in committee, what are some of the most likely changes, and how would they affect the way the bill could impact manufacturers?
A: There are a couple of things I could see changing. One is the current bill design allows no speculation in the carbon markets, so all trading of allowances within the cap and trade scheme are only eligible to be traded amongst regulated parties, so Goldman Sachs or any other liquidity type provider in a market is excluded from the system. To have a normally-functioning market, you have to have those hedge fund type players that are able to add liquidity to the marketplace. I think that’s one area that could be changed, especially in light of everything that’s happening in the financial world. The second area that’s always been the political football of this is the allocations that are given out on a yearly basis. How many allocations are given to what industries — remember, an allocation is a free allowance — versus how much are required to be auctioned or paid for?
Q: What are you thinking for a potential timeline for this bill, especially given the fact that it’s being deemed as an energy and environmental bill and with some of the recent environmental catastrophes surrounding the BP spill?
A: If you would have asked me a month ago, I probably would have been in the minority that thought it would have gotten some action this year before the mid-term election, but I’m increasingly believing a lot of the political capital has been used up on this healthcare fight. They’re fighting for their political lives at the moment, and even despite this issue in the Gulf, I think the earliest you’re likely to see anything considerable is probably next year after the mid-term elections. I do think something will happen, though.
Q: What are the next steps for a manufacturer?
A: I would have a good assessment of where I’m at currently, establish a good baseline for my greenhouse gas emissions and my operations, and have an idea on a direct basis — meaning my direct fossil fuel combustion or other greenhouse gas creation within my operational boundary — where I stand, and do I meet the 25,000 metric tons, which seems to be the popular number, or am I below that? That will tell me right away whether I’m likely to fall under direct regulation or be more of an indirect-impact person.