On February 27, 2020, Senator Lisa Murkowski (R-AK), chairman of the Senate Committee on Energy and Natural Resources, and ranking member Senator Joe Manchin (D-WV) introduced a bipartisan energy bill, the American Energy Innovation Act of 2020 (the “Proposed AEI Act” or “Bill”). The Proposed AEI Act is a compilation of various energy initiatives set forth in more than 50 standalone bills reported out of the Senate Committee on Energy and Natural Resources in 2019. The committee also released a section-by-section summary, which provides a helpful breakdown of the 555-page proposed legislation. The Senate voted to proceed to the Bill on March 4, and Senators Murkowski and Manchin filed a modified substitute amendment to the Bill on March 6. The modified substitute amendment contains the text of 18 individual amendments, nine each proposed by Republican and Democrat Senators, and represents the next step in the Senate’s ongoing debate on the Bill.
The Bill is divided into two main titles: Innovation and Supply Chain Security. This Alert will focus on some of the Bill’s provisions that have the most potential to impact energy and infrastructure interests.
There is also a third title, Code Maintenance, which proposes to repeal about 40 outdated studies, reports and other current requirements.
Title I — Innovation
Title I, Innovation, addresses a broad range of topics including: renewable energy; energy storage; carbon capture, utilization, and storage; nuclear energy; LNG exports; natural gas liquids infrastructure; and reauthorization of the Advanced Research Projects Agency - Energy (“ARPA-E”).
Title I, Subtitle B, Renewable Energy
Subtitle B aims to promote research and development of marine, wind and solar renewable energy technologies and extends incentives for certain hydroelectric facilities. In addition, Subtitle B supports expansion of geothermal energy systems by, among other things, directing the Departments of Interior, Energy and Agriculture to establish national goals for geothermal development.
Subtitle B is divided into the following sections by energy type:
- Hydroelectric. Section 1201 extends incentives for qualified hydroelectric facilities that make capital improvements to increase efficiency through fiscal year 2036. In addition, the Bill expands the availability of incentive payments to hydroelectric facilities with a generating capacity of 20 MW or less if the facility is built pursuant to a Federal Energy Regulatory Commission (“FERC”) construction authorization.
- Marine. Section 1202 seeks to modernize the Department of Energy’s (“DOE”) research and development work for marine and hydrokinetic renewable energy, including authorizing the Secretary of Energy to establish National Marine Energy Centers at institutions of higher education. The Bill also tasks the Secretary with carrying out a program to accelerate the introduction of marine energy production and fostering accelerated research and development, with a particular emphasis on technologies most likely to lead to commercial utilization.
- Geothermal. Section 1203 seeks to expand geothermal energy systems through various initiatives, including the establishment of a program to adapt oil and gas technologies for geothermal development and the creation of a prize competition for the production of critical minerals from geothermal brines. In addition, it reauthorizes DOE’s geothermal research and development program and the geothermal energy grant program for high-cost development regions.
- Wind and Solar. Sections 1204 and 1205 authorize the Secretary of Energy to establish wind and solar energy technology programs, each through fiscal year 2025. Each section also explicitly includes the following purposes: (i) improving energy efficiency, cost effectiveness, reliability and resilience, security, integration, manufacturability and recyclability; and (ii) optimizing performance, operation, design and adaptability. In addition, they task the Secretary of Energy with establishing targets relating to near-term (up to two years), mid-term (up to seven years) and long-term (up to 15 years) challenges to the advancement of wind and solar energy technologies respectively.
The Bill establishes or reauthorizes various programs that could facilitate technological breakthroughs ultimately resulting in renewable technologies accounting for a larger amount of the nation’s electric generation mix. Conversely, the Bill does not include tax incentives for renewable generation development that could spur further renewable technology development and deployment in the near-term. Consequently, the Bill has generated criticism from some for failing to do enough to facilitate the adoption of renewable energy technologies. However, the relatively moderate approach was important to the legislation being voted out of the Senate Committee on Energy and Natural Resources on a bipartisan basis.
Title I, Subtitle C, Energy Storage
Section 1301: Better energy storage technology
Section 1301 of the Bill, which focuses on energy storage, has a DOE component and a FERC component. The DOE-related provisions of Section 1301 require DOE to establish a program to advance the research, development and deployment of certain types of energy storage systems. That program, by itself, likely would not have a significant or direct impact on the deployment of energy storage systems in the near-term. However, the program has the potential to accelerate the development of the energy storage industry over the medium- to long-term, particularly with respect to longer duration energy storage systems (e.g., 10–100 hour discharge capability).
Although there has been a significant increase in recent years in the amount of energy storage resources under development and deployed, the overwhelming majority of those systems are battery-based and have short discharge durations (typically four hours or less). Their short discharge duration generally has made such systems more valuable for providing short-term products like wholesale energy and ancillary services than for providing longer-term products like capacity. Those types of energy storage resources stand in contrast to pumped storage hydropower resources, which generally have longer discharge durations and are a mature technology. The DOE-related provisions of Section 1301 of the Bill define “energy storage system” in a way that appears to exclude pumped storage hydropower systems. As a result, the Bill could speed the development of longer-term energy storage systems that use technologies other than pumped storage hydropower resources.
By contrast, the FERC-related provisions of Section 1301 have the potential to result in a direct, near-term impact on the deployment of energy storage systems. The Bill requires FERC to issue a regulation setting forth the eligibility requirements and process for electric storage resources to: (1) receive cost recovery for the transmission of electric energy in interstate commerce; and (2) also receive compensation for other services, including the sale of energy, capacity or ancillary services. Although it is possible for an electric storage system to receive both types of revenue under existing FERC policy, this aspect of the Bill represents a potentially significant change in the regulatory framework for electric storage resources.
Most of the FERC-jurisdictional electric storage resources that have been deployed or proposed thus far have been designed to earn revenues from making wholesale sales in the markets administered by the Regional Transmission Organizations (“RTO”) and Independent System Operators (“ISO”), i.e., the energy, capacity and ancillary services markets in RTO/ISO regions. Those electric storage resources largely have not been designed or used to provide interstate transmission service.
Implementing Section 1301 of the Bill would require FERC to address several potential concerns associated with allowing an electric storage resource to earn both generation-based and transmission-based revenues. FERC identified some of those implementation issues in its policy statement on storage-as-transmission issued in 2017, including: (1) the potential for double-recovery of the electric storage resource’s costs; (2) the potential for the electric storage resource to “inappropriately suppress competitive prices in the wholesale electric markets to the detriment of other competitors who do not receive such cost-based recovery”; and (3) the level of operational control that the RTO/ISO would or should have over the electric storage resource. The Bill attempts to address one of those issues by prohibiting “unjust and unreasonable double recovery,” but is silent on the other issues FERC identified.
Section 1302: Bureau of Reclamation pumped storage hydropower development
Section 1302 eliminates the requirement to obtain a FERC permit for pumped storage hydropower projects that exclusively use Bureau of Reclamation (“BOR”) reservoirs, thereby simplifying the permitting requirements for such projects. Whereas permits from both BOR and FERC are currently required for such projects, the Bill would place sole permitting authority for BOR-located projects with the Secretary of the Interior, and therefore with BOR. The Bill also establishes specific requirements that must be satisfied, by both the proposed lessee and BOR, before BOR could issue such permits. The Bill would not impact existing FERC licenses for pumped storage hydropower facilities, nor would it impact projects for which a license application was filed before August 9, 2013, and is still pending before FERC.
The changes proposed by Section 1302 could help streamline the permitting process for certain pumped storage hydropower projects. However, the extent to which those changes would impact the economics of such projects and, accordingly, support their further deployment is uncertain. Read together with Section 1301 of the Bill, it appears that the Bill would provide less support for pumped storage hydropower projects than it would for energy storage projects that use other technologies.
Title I, Subtitle D, Carbon Capture, Utilization, and Storage
Carbon capture, utilization and storage (“CCUS”) refers to processes designed to capture carbon dioxide released by burning fossil fuels for power generation and from industrial processes such as cement production and reuse or store it so that it will not enter the atmosphere. The first large-scale CCUS project began operations in Norway in 1996, but in the subsequent years, CCUS struggled to gain traction due to the significant costs and lack of incentives involved. According to the Global Carbon Capture and Storage Institute (“GCCSI”), as of the end of 2019, there were only 19 large-scale CCUS facilities in operation globally. Recently, however, CCUS is increasingly being seen as a key component to limiting the impacts of climate change, in addition to increasing the portion of power generated from renewable sources, and GCCSI’s 2019 Global Status Report noted 32 CCUS facilities in various stages of development globally.
Sections 1403 through 1405 aim to reduce carbon dioxide emissions by promoting research and development of novel CCUS technologies in hopes of eliminating the cost barrier to large-scale implementation. For example, the Bill directs DOE to establish a large-scale carbon sequestration demonstration program, assess novel uses for carbon, identify carbon capture technologies for industrial systems, and research technologies to remove carbon dioxide from the atmosphere on a large scale. The Bill appropriates more money to CCUS programs than it appropriates to renewables, energy storage, and nuclear programs combined.
At the same time that it focuses on development of CCUS technologies, the Bill also directs DOE, in Section 1402, to establish a program “to ensure the continued use of the abundant domestic coal and natural gas resources of the United States through the development of transformational technologies that will significantly improve the efficiency, effectiveness, costs, and environmental performance of coal and natural gas use,” drawing criticism from certain environmental groups, who argue that the Bill should go further and not support any new fossil fuel development unless it is designed to be carbon neutral through CCUS, and should otherwise focus more heavily on promoting the transition to renewable alternatives.
Overall, the Bill’s focus on CCUS represents a fairly conservative strategy with respect to climate change, but may have helped ensure that the legislation was voted out of the Senate Committee on Energy and Natural Resources on a bipartisan basis. Still, it seems likely that Democratic senators will push to add more aggressive climate strategies to the Bill.
Title I, Subtitle E, Nuclear
In general, the nuclear-energy provisions in Subtitle E of the Bill contain evolutionary changes to existing laws and policies, while aiming to lower barriers to near-term advances. Section 1503 would provide appropriations to support advanced fuel designs for existing reactors, while Section 1507 sets forth non-binding goals for advanced reactor demonstration projects. Section 1509 would address a key gap in advanced-reactor development by requiring DOE to make available so-called “high-assay, low-enriched uranium.” Such fuel is not currently available on the commercial market; its availability would allow reactor vendors to move forward with reactor designs that are more compact and energy-dense, and that generate smaller quantities of irradiated fuel during operations.
Title I, Subtitle G, Vehicles
The transportation sector is a major source of greenhouse gas (“GHG”) emissions. Subtitle G includes measures to support research and deployment of advanced vehicle technologies such as electric, natural gas and hydrogen-powered vehicles. Subtitle G emphasizes the need to make vehicles more efficient and to minimize emissions in the manufacturing processes.
The Bill moves away from the traditional notion that government funding alone will spur innovation by funding a variety of pilot demonstration projects intended to rapidly advance technologies to substantially reduce vehicle emissions and the use of petroleum-based fuels. Subtitle G emphasizes the importance of government and private industry collaborating on research and development efforts to advance vehicle technologies.
Title I, Subtitle H, Department of Energy
Subtitle H of the Bill amends various laws pertaining to the authority of DOE and its programs. The proposed amendments include changes to the gas export authorization regime under the Natural Gas Act (“NGA”), a new requirement for a study to be conducted on the interplay between Appalachian energy and national security, and reauthorization of ARPA-E.
Section 1802: Small Scale LNG Access
Section 1802 of the Bill amends the NGA to expedite DOE approval of applications by determining export volumes up to 51.75 billion cubic feet per year to any country are consistent with the public interest. This provision would not, however, apply to any nation subject to U.S. sanctions.
If passed, this amendment could spur the development of some smaller scale LNG projects with export capacities below the 51.75 billion cubic feet per year limit. However, the currently effective NGA already contains a similar provision that determines any natural gas export volume to be consistent with the public interest if the natural gas will be exported to a country with which the U.S. has a free trade agreement. Accordingly, if the provision is enacted in some form, it would only provide added benefits in cases where companies seek authorization to export natural gas to countries with which the U.S. does not have a free trade agreement.
Section 1803: Appalachian Energy for National Security
Section 1803 of the Bill requires the Secretary of Energy to conduct a study, in consultation with the Secretaries of Defense, Treasury, and other relevant federal departments, regarding the potential national and economic security benefits of building ethane and other natural gas liquids-related petrochemical infrastructure in the vicinity of the Marcellus, Utica and Rogersville shale plays. Among other things, the study must identify potential risks of significant foreign ownership and control of U.S. domestic petrochemical resources.
If enacted, the impact of Section 1803 likely will be determined by the outcome of the mandated study. Despite this, the inclusion of a potentially mandated study demonstrates the importance of the shale boom and associated infrastructure, particularly in the Marcellus, Utica and Rogersville shale plays, which were not historically known for their prolific hydrocarbon production. In addition, foreign investors will need to follow the study’s development closely should this section be enacted, because of the explicit direction to identify potential risks around foreign ownership and control of U.S. domestic petrochemical resources.
Section 1808: ARPA-E Reauthorization
Section 1808 of the Bill reauthorizes ARPA-E through fiscal year 2025, and the Bill contains an added emphasis on projects that improve the resilience, reliability and security of energy infrastructure. Congress authorized the creation of ARPA-E in 2007 through the America COMPETES Act, and ARPA-E received its first appropriations in 2009. To date, ARPA-E has provided approximately $2 billion in research and development funding to more than 800 projects, 145 of which have gone on to attract almost $3 billion in private-sector follow-on funding. In addition, ARPA-E funded projects have led to the issuance of more than 300 patents. Consequently, if enacted, the reauthorization likely will facilitate numerous research and development projects, some of which may go on to secure private sector funding. The added emphasis on resilience, reliability and security of energy infrastructure, as evidenced by this reauthorization proposal, is likely the product of increasing policy discussions revolving around these important areas. If enacted, this provision could potentially lead to increased investment in energy infrastructure, especially efforts to increase resilience, reliability and infrastructure security.
Section 1813: Bakken and Three Forks Natural Gas Liquids Report
Section 1813 was included as part of the modified substitute amendment to the Bill filed on March 6, and directs the Secretary of Energy to prepare a report on the feasibility of establishing a natural gas liquids storage and distribution hub near the Bakken and Three Forks shale plays. The study must examine various issues, including potential locations for the storage and distribution hub and any economic benefits or benefits to energy security that could result from its establishment. Similar to the study on Appalachian natural gas liquids infrastructure in Section 1803, the impact of Section 1813 will likely be determined by the outcome of the mandated study. Accordingly, natural gas liquids industry participants and their investors should follow the progress of this provision and any study that may be developed per Congress’ direction for potential opportunities.
Title II—Supply Chain Security
Title II, Supply Chain Security, focuses on a range of topics including cybersecurity, grid security, grid modernization and workforce development.
Title II, Subtitle B, Cybersecurity, Grid Security and Modernization
Part I, Cyber Security and Grid Security
Section 2201: Incentives for advanced cybersecurity technology investment
Section 2201 of the Bill requires FERC to conduct a study and rulemaking proceeding to establish, within 18 months of the AEI Act’s enactment, “incentive-based, including performance-based, rate treatments” to encourage FERC-jurisdictional public utilities to invest in “advanced cybersecurity technology” and participate in programs to share information about cybersecurity threats. However, Section 2201 requires that any rates approved pursuant to the rule satisfy the Federal Power Act’s requirement that all rates be just and reasonable and not unduly discriminatory or preferential. It also prohibits rate treatments that allow “unjust and unreasonable double recovery” for advanced cybersecurity technology.
If enacted, the rate treatment set forth in Section 2201 would provide an incentive for public utilities to invest in cybersecurity capabilities beyond the minimum level required to comply with mandatory regulatory standards. Under Section 215 of the Federal Power Act, FERC has approved a regime of mandatory reliability standards pertaining to cybersecurity that were developed by the North American Electric Reliability Corporation. Section 219 of the Federal Power Act provides that public utilities are entitled to recover all prudently incurred costs to comply with those reliability standards.
Section 2201 of the Bill would incentivize investment beyond the level needed to comply with those reliability standards by providing additional revenue for investments in “advanced cybersecurity technology” (defined as “any technology, operational capability, or service, including computer hardware, software, or a related asset, that enhances the security posture of public utilities through improvements in the ability to protect against, detect, respond to, or recover from a cybersecurity threat”). In theory, the amount of incentive that FERC can provide under Section 2201 is limited by the provision’s prohibition on “unjust and unreasonable double recovery” for advanced cybersecurity technology, and the requirement that the resulting rates be just and reasonable and not unduly discriminatory. However, both of those limitations are likely to require subjective determinations by FERC, which could give the agency significant discretion to determine the magnitude of the authorized incentives.
Section 2202: Rural and municipal utility advanced cybersecurity grant and technical assistance program
Section 2202 of the Bill requires DOE to establish a program to provide grants and technical assistance, and enter into cooperative agreements, to certain types of entities in order to protect against, detect, respond to and recover from cybersecurity threats. The type of entities eligible for the program are rural electric cooperatives, certain state-owned utilities, certain not-for-profit entities and investor-owned utilities that sell less than 4,000,000 megawatt hours of electricity per year. The Bill appropriates $50 million to this new DOE program, requires that grants and technical assistance be awarded on a competitive basis, and establishes criteria to prioritize those awards. Although the program will be available to all eligible entities, it is uncertain how many of those entities will benefit from the program. For example, depending on how DOE applies the priority criteria, the program could provide significant assistance to a select few entities whose infrastructure is particularly critical to the reliability of the bulk power system, or DOE could instead spread the program awards out over a larger percentage of the entities in an effort to generally raise the floor of cybersecurity preparedness.
Part II, Grid Modernization
Section 2210: Grid storage program
Section 2210 directs DOE to establish a program for the research, development and demonstration of electric grid energy storage “that addresses the principal challenges identified in the 2013 Department of Energy Strategic Plan for Grid Energy Storage.” The Bill requires that the program target several specific topics. Those include researching certain aspects of energy storage technology, developing certain industry standards and techniques, and the testing and analysis of grid-scale storage devices.
Like many other provisions of the Bill, Section 2210 is not likely to have a direct, near-term impact on the energy storage market, but it could advance the market penetration of energy storage resources in the medium- to long-term. However, the program’s efficacy could depend, in part, on the extent to which the “principal challenges” identified in the 2013 Department of Energy Strategic Plan for Grid Energy Storage — i.e., cost competitive technology, validated reliability and safety, an equitable regulatory environment and industry acceptance — remain the principal challenges facing grid energy storage going forward.
Section 2212: Micro-grid and hybrid micro-grid systems program
Section 2212 requires DOE to establish a program to promote the development of: (1) micro-grid systems to increase the resilience of critical infrastructure; and (2) hybrid micro-grid systems for communities that are powered by a standalone electric generation and distribution system. Section 2212 defines “micro-grid system” as “a localized grid that operates autonomously, regardless of whether the grid can operate in connection with another grid,” and “hybrid micro-grid system” as a micro-grid system that “comprises generation from both conventional and renewable energy resources” and “may use grid-scale energy storage.” The Bill specifically requires DOE to conduct a feasibility assessment, develop implementation strategies, conduct cost-shared demonstration projects, and establish a benefits analysis plan to help inform regulators, policymakers and industry stakeholders. The Bill also requires DOE to issue a report on the benefits of, and barriers to, isolated communities’ and municipal governments’ implementation of micro-grid systems, and then award grants to at least 10 municipal governments or isolated communities per year to overcome the barriers identified in the report. Section 2212 has the potential for direct, near-term impacts insofar as it facilitates the deployment of demonstration projects. However, those near-term impacts will be highly localized. The program has the potential to foster the development of micro-grid and hybrid micro-grid systems more broadly in the medium- to long-term, but the extent to which it will do so ultimately will depend on the value proposition indicated by the benefits analyses.
Title II, Subtitle C, Workforce Development
Section 2302: Addressing Insufficient Compensation for Employees and Other Personnel of the FERC
Section 2302 of the Bill provides the FERC Chairman authority to compensate employees with scientific, technological, engineering or mathematical skills at a higher level than federally mandated civil service compensation level. To use this authority, the FERC Chairman must publicly certify that compensation categories for certain categories of employees are too low. If enacted, this could help the FERC attract and retain employees that may not have considered federal agency employment otherwise. Consequently, it could provide FERC a larger pool of applicants for eligible positions, thereby ensuring FERC has adequate technical staff to address the numerous issues within its jurisdiction.
The Proposed AEI Act does not represent groundbreaking energy reform or comprehensive climate legislation. Rather, it appears designed to keep energy affordable by taking a “technology-neutral” approach to energy efficiency, while supporting innovation for a range of technologies, and strengthening national security and competitiveness. Thus, any impacts of the Proposed AEI Act are likely to be incremental and not radical. By taking this moderated approach, however, incorporating positions that have enjoyed bipartisan support previously, it is possible that discrete aspects of the Proposed AEI Act may pass both houses of Congress, presenting new or changed opportunities for energy industry participants and investors.