Navigating Choppy Waters: Federal Regulatory Risk

Navigating Choppy Waters: Federal Regulatory Risk

2017 |
By Ben Margolis

This article was co-written by Ben Margolis and Lauren Miller

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This is an excerpt from the October 2017 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar financing space. To receive future editions of the journal, please subscribe.

For anyone following solar industry news recently, there seems to be a few dark clouds forming out on the horizon. We've seen Suniva and Solar World's Section 201 filing, Environmental Protection Agency Administrator Scott Pruitt propose repealing the Clean Power Plan, and Energy Secretary Rick Perry file a Notice of Proposed Rulemaking (NOPR) aimed at compensating coal and nuclear plants.

None of these storms have fully hit quite yet, some have certainly started raining on the industry. Will they become full-fledged storms and if so, what will the aftermath be?

Section 201

Perhaps the fiercest of the storms on the horizon is Suniva and Solar World's Section 201 filing. In September, the International Trade Commission (ITC) unanimously ruled in favor of the petitioners and found injury from imports. This ruling was not an unexpected outcome, especially considering that any commissioners that voted against injury would not have a say in remedy proceedings.

The question now is: what will the remedy be? Initially, the petitioners asked for a $0.40 per watt tariff on imported cells and a price floor of $0.78 per watt on imported modules. The remedy sought has since become more nuanced. They are now requesting declining tariffs starting at $0.25 per watt for cells and $0.32 per watt for modules that decline to $0.235 per watt and $0.29 per watt respectively over four years. They are also incorporating quotas per Solar World's recommendation and sticking with Suniva's price floor concept, though slightly less at $0.74 per watt.

Despite the slightly eased, yet still aggressive remedy proposals from the petitioners, the rest of the solar industry has high hopes that the ITC will be milder in its remedy recommendation and has recommended such through the Solar Energy Industry Association (SEIA) filings with the ITC. As such, the solar industry is powering on (metaphor intended), with the hope of clearer skies.

The ITC is set to vote on remedy on October 31 with the remedy report sent to President Trump on November 13. The President then has 60 days to make a decision. Perhaps, the solar industry's newest advocates like the American Legislative Exchange Council, the Heritage Foundation, and Sean Hannity may help the president in his decision.

The Clean Power Plan

Another hit to the clean energy industry as a whole is Administrator Pruitt's recent announcement on repealing President Obama's 2015 Clean Power Plan (CPP). Under the CPP, each state is required to craft individualized plans to reduce carbon dioxide emissions with an overarching, national reduction goal of 32 percent by 2030.

Under these goals, renewable energy was expected to flourish, and a cornerstone of the plan was working to phase out coal-burning plants and transition to generation units with less emissions. Now with a potential repeal, what will the impact be? In a recent study from the Rhodium group, they found that even without the CPP market factors and continuously declining renewable costs will still cause renewables to grow, with a commensurate 27-35 percent reduction in carbon dioxide emission in the power sector by 2030. Generally speaking, the CPP may have pushed more non-traditional states towards cleaner forms of power production, whereas without the CPP, you will have states already leading the clean energy charge like California, New Jersey, Massachusetts etc. carrying the nation towards overall reductions and renewable energy adoption.  However, there are examples of non-traditional states taking lead like Ohio AEP’s recent 400MW solar request for proposal.

Overall, a repeal of the CPP will be far from the end of the solar industry. Even when the CPP was stayed by judicial review in 2016, solar experienced its strongest year yet, more than doubling 2015's installations with more than 14.7GW installed. So, a repeal of the CPP will certainly be a hit to the U.S.'s climate goals, but the solar industry will certainly weather on, and a repeal will not be swift. The Administrator will still have to follow the traditional rulemaking steps to repeal the CPP, and with the Supreme Court's 2007 finding in Massachusetts v. EPA, some form of protections from greenhouse gases will likely still need to be put in place. This has several states –Minnesota, New York, and New Mexico- moving forward with reduction plans.

DOE's Grid Resiliency Pricing Rule

In yet another attempt to prop up the coal industry against other fuel sources, the Trump Administration's Department of Energy Secretary, Rick Perry, has issued a Notice of Proposed Rulemaking (NOPR) that attempts to strengthen the "resiliency" of the grid. The rule directs FERC to subsidize power plants that have "Fuel-Secure Power", defined as plants that can maintain a fuel supply of 90 days – basically just coal & nuclear.

This NOPR was unusual in many ways. First, the DOE rarely utilizes its authority to create a NOPR on behalf of FERC and instead typically lets FERC stand on its own.  Secondly, the timeline for comments that was proposed by DOE is dramatically shorter than the traditional FERC process. Many stakeholders have complained about the haste this process seems to be going through.  DOE requested a response in 60 days, whereas typical FERC stakeholder process lasts from 90-180 days.  FERC General Counsel James Danly has recently said that FERC will stand by the timing.

Furthermore, the rule itself has many flaws including: no definition for the word "resiliency", no justification for the 90-day fuel supply requirement, no estimates of cost impacts that a new rule would have.  In fact, when asked about it, Rick Perry said, "I think you take costs into account, but what's the cost of freedom?" We think he captured this himself 43 seconds into this clip.

Bottom line, this rule is unlikely to move forward as originally proposed, and is unlikely to withstand legal challenge. If implemented as originally proposed, a collection of former FERC heads say that the rule would fundamentally distort markets.  We will find out mid-November whether or not any action will be ultimately taken by FERC.

It’s difficult to say what the impact of this proposed rule will be since we don’t know what the rule will look like or, perhaps more importantly, how it will get implemented by each RTO.  Once that is clear, then we will understand the impact it will have.  If FERC acts on this, it will increase electricity rates which wouldn't be such a bad thing for project developers – it just may require some additional attention and focus on long-term storage or other technical solutions.

Other storms on the horizon

In addition to the federal government and the Trump administration’s obvious attempts to move the country away from renewables and toward fossil fuels, there are other storms potentially brewing out at sea that could impact solar.  Tax reform is kicking up in Congress now. SEIA has been assured through multiple parties that the investment tax  credit will not be reduced (or removed), tax reform itself will likely impact the solar industry.

Our understanding is that we’ll likely see a stepped down tax rate for corporations from 35 percent to something more like 25-30 percent. This will have two impacts on the solar industry, neither of them catastrophic. First, reducing the tax rate for corporations will reduce the overall pool of taxable income for corporations. This will mean a smaller pool of tax equity for the industry because corporations will have less taxable income to offset, and fewer corporations will invest.  Second, a lower tax rate reduces the value of depreciation for investors because depreciation directly offsets taxable income - not taxes. As a tax asset, depreciation will be worth less.

For the most part, all these attempts to hinder the development of renewables likely won't have a tremendous long-term impact on the industry and likely won't increase coal generation (at least according to a recent analysis by The Brattle Group). So, even with all these storms brewing, there is room to navigate through choppy waters for the solar industry.

ABOUT SOL SYSTEMS

Sol Systems, a national solar finance and development firm, delivers sophisticated, customized services for institutional, corporate, and municipal customers. Sol is employee-owned, and has been profitable since inception in 2008. Sol is backed by Sempra Energy, a $25+ billion energy company.

Over the last eight years, Sol Systems has delivered 650MW of solar projects for Fortune 100 companies, municipalities, universities, churches, and small businesses. Sol now manages over $650 million in solar energy assets for utilities, banks, and Fortune 500 companies.

Inc. 5000 recognized Sol Systems in its annual list of the nation’s fastest-growing private companies for four consecutive years. For more information, please visit www.solsystems.com.


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