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Series
of Issue Papers from ICF International Experts
August 5, 2005
ICF International is pleased to present a series of issue
papers for energy market participants and the regulatory
community providing perspective on the impacts of the
Energy Act.
These papers assess implications of key provisions
of the Act on utility mergers, petroleum markets,
the siting of new energy facilities, nuclear power,
electric transmission, renewable energy, and energy
conservation. |
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The implications of the Act’s passage are substantial,
and stakeholders should move quickly to reflect these new
incentives in their strategic planning. Learn more about
what ICF International experts identify as the implications
of the Energy Policy Act of 2005 in our issue papers:
The repeal of PUHCA in the Energy Act will facilitate
mergers and acquisitions (M&A) in the electric utility
industry. More companies will soon propose to combine with
other utilities, in addition to three such proposals currently
under consideration. Strong European companies and nontraditional
investors may use this opportunity to purchase or co-invest
in U.S. utilities. The U.S. Security and Exchange Commission's
(SEC) traditional role in reviewing such proposals is gone,
as is the requirement for utility combinations to be contiguous
or interconnected. However, M&A approval or success
is not assured, as state approval for M&A will still
be required, and both the states and the U.S. Federal Energy
Regulatory Commission (FERC) are granted additional authority
to review utilities’ books and records to ensure
financial integrity and nonabuse of market power. How that
authority is implemented will be critical.
Whether there will be more refineries and domestic oil
production depends on industry’s response to the
Energy Act’s incentives. In addition to financial
incentives, the Act requires an inventory of offshore resources,
which signals the starting point for future offshore oil
and gas leasing, exploration and production in areas currently
off limits to leasing and drilling. The Act also enhances
the ability to site new offshore pipelines in the Gulf
region. ICF International projects that the United States
will become substantially more dependent on the import
of petroleum products in the coming decades—with
imports more than doubling.
Major energy facilities will be easier to site. The Energy
Act encourages the siting and development of energy facilities
and resources by providing financial incentives and granting
new authority to the U.S. Federal Government. In light
of these incentives and the current level of oil and gas
prices, efforts are likely to accelerate to find and produce
marginal domestic resources. Federal authority for liquefied
natural gas (LNG) siting could be a key factor in encouraging
such projects. Those with pending LNG and oil and gas opportunities
should maximize the development and production of resources
that qualify for the new investment incentives.
Nuclear energy is encouraged in the Energy Act. Tax credits
and loan guarantees are provided for thousands of megawatts
and could substantially lower the cost of those plants
to consumers. Provisions for nuclear energy research and
development demonstrate a renewed commitment from the U.S.
Federal Government to next-generation facilities. Public
opposition will inevitably accompany any proposal to build
new nuclear facilities, but those concerns will be handled
through the Nuclear Regulatory Commission's (NRC) streamlined
licensing process. As with all power plants—especially
nuclear ones—security issues will loom large.
Transmission receives a strong push in the Energy Act.
The Act allows the U.S. Department of Energy (DOE) to designate
transmission corridors of 'national interest' to upgrade
or add transmission for reliability or economic purposes.
The "economic" aspect of this authority will
be controversial. If states do not act, FERC could then
require the development of transmission in those corridors.
This authority will also make it harder for public interest
and environmental groups to delay the approval of power
lines. The Act also promotes transmission by requiring
the setting of common nationwide standards for electric
reliability, the setting of incentive rates for transmission,
and the creation of a national organization that will monitor
the status of the grid. All these measures imply a shift
of authority from the states either to the federal government
or in the case of siting, to multi-state compacts.
Renewables are strongly encouraged, and there is a window
of opportunity to pursue them. The Act provides for substantial
production tax credits (1.8 cents per kWh) for many renewable
energy options for nine years, if they are on-line by the
end of 2007. On the other hand, the Act does not provide
for a national renewable portfolio standard (RPS)—which
would have had significant impacts, particularly on the
development of new wind projects.
Energy efficiency (EE) is given a strong push. The EE
provisions in the Energy Act will establish new efficiency
standards for a wide range of appliances. It also will
make it easier for the U.S. Federal Government to run voluntary
EE programs. Hybrid vehicle tax credits will enhance awareness
of and interest in hybrid vehicles. New home builder tax
credits will enhance a builder's ability to manufacture
more efficient homes. Appliance manufacturer tax credits
may encourage those that build such devices to push the
envelope of energy savings potential. Such measures could
save 1.5 percent of U.S. energy consumption.
As a result of the incentives in the Act, the first few
clean-coal and gasification projects will be in a strong
position to come to fruition, and those pursuing such projects
should accelerate their development efforts. The Act provides
substantial amounts in direct grants, loan guarantees and
accelerated depreciation, divided among different technologies
and types of fuel, to make this option a reality. By encouraging
reductions in the level of emissions, these incentives
(and the target emission reductions in the Act) will provide
part of the response the U.S. can give to critics of its
position on global warming.
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