Energy legislation for dummies

A number of important legislative steps have been taken over the past few years to promote energy efficiency in the commercial and industrial sectors, and new energy efficiency provisions as part of Climate Change legislation are actively being debated as of the publication of this article. To better understand the context of prospective energy legislation, we first take a closer look at enacted energy legislation and policy initiatives over the past 3 years.

EISA 2007

The Energy Independence and Security Act (EISA) touched on a wide variety of issues including vehicle efficiency standards, accelerated biofuels research and deployment, appliance and equipment efficiency standards (including a planned phase-out of incandescent light bulbs), federal energy management, building efficiency measures, and authorization (but not appropriations) for numerous clean-energy R&D initiatives. Also included were R&D authorizations to support the adoption of combined heat and power (CHP) and thermal waste recycling. These technologies have demonstrated the capability to drastically boost the efficiency of electric power generation, industrial process heat, and building heating and cooling on a commercial scale.

EISA 2007 also authorized creation of regional Clean Energy Application Centers to provide expertise, education and project-specific support to deploy clean energy technologies in the private sector. Other noteworthy EISA provisions include new authorization for block grants to help state and local governments establish efficiency incentives and support energy intensive subsectors such as data centers, consumer product manufacturing, food processing and materials manufacturing (e.g.: aluminum, chemicals, forest and paper products, metal castings, etc.).

Some but not all of these 2007 energy efficiency provisions have recently been funded as part of the economic stimulus legislation in early 2009.

H.R. 1424

In the fall of 2008 the U.S. economy experienced the early stages of an economic free-fall. On October 3rd, 2008, President Bush signed into law H.R. 1424, the Emergency Economic Stabilization Act. H.R. 1424 both renewed and introduced a number of energy efficiency tax incentives for individuals and U.S. businesses to stimulate smart investment.

Many of the efficiency incentives originated in the Energy Policy Act of 2005 (EPACT-05). The tax deduction for energy-efficient improvements to commercial buildings was extended five years, through 2013. This deduction provides up to $1.80 per square foot for buildings achieving a 50% energy savings as compared to their previous performance. A new tax credit offered up to 10% of the cost of combined heat and power systems 50 MW or larger, provided they operate at greater than 60% efficiency. Another tax incentive permits smart electric meters and smart grid systems to be depreciated over 10 years rather than the usual 20-year recovery period. A similar provision extended a commercial tax credit offering 10% for commercial installations (no price cap included) of geothermal heat pumps, and reduced the depreciation period of the equipment to 5 years.

Obama Administration Goals

Almost immediately in January 2009, the incoming administration signaled a firm stance on energy and climate policy with the appointment of Cabinet and sub-Cabinet officials having strong records in support of energy efficiency and clean energy resources. President Obama has proposed a target of reducing U.S. GHG emissions 80% by 2050, compared with 2006-levels. The American Clean Energy and Security Act, now being considered by Congress, is seen as a critical step toward this goal.

ARRA 2009

In response to continued economic woes, President Obama and the 111th Congress enacted the American Recovery and Reinvestment Act of 2009 (ARRA 2009) as a fiscal stimulus to the U.S. economy. ARRA 2009 authorized unprecedented levels of spending to enhance energy efficiency across all sectors of the U.S. economy. All told, approximately $25 billion of the total $787 billion is directly allocated to energy efficiency projects. Additionally, other parts of the stimulus funding on infrastructure renewal can contribute indirectly to efficiency improvements. Key appropriations under ARRA 2009 include:

• Roughly $300 million to support industrial research and development, adoption of CHP systems, and improved energy efficiency of data centers;

• $400 million for high-risk, high-reward, transformational energy technology research;

• Over $3 billion to state energy programs, much of this to help finance efficiency improvements across all sectors;

• $4.5 billion for ”Smart Grid” investments;

• And $500 million to train American workers for green jobs.

EPA Climate Change

“Endangerment” Finding

On April 17, 2009, the U.S. Environmental Protection Agency (EPA) laid the groundwork for possible federal GHG regulation by officially confirming the results of a previous EPA study that declares GHGs are a threat to public health and wellbeing. This “endangerment finding” formally classifies GHGs as pollutants that require federal regulation under the Clean Air Act. The political implications of this announcement are significant, signaling to federal policymakers that GHGs will be regulated even if Congress fails to enact climate change legislation this year.

Despite a relative flurry of activity in domestic energy policy over the last half decade, many feel that the United Nations Climate Change Conference, an international climate summit, will subject U.S. energy strategies to international scrutiny. Some expect this UN conference, COP-15, will serve as a catalyst for transformational U.S. energy policy in the mid-term.

COP-15

The United Nations Climate Change Conference of the Parties, COP-15, is scheduled to convene in December, 2009. COP-15 will gather nearly 200 developed and developing nations in an effort to draw up an international environmental treaty aimed at stabilizing GHG concentrations in the global atmosphere. COP-15 will focus on developing GHG reduction commitments to begin in 2012, replacing the Kyoto Protocol which is set to expire. The Obama Administration has expressed clear intentions of participating in COP-15 and helping to shape resulting international agreements. However, it is widely recognized that without domestic regulation of GHG emissions, the U.S. would have much less credibility in influencing COP-15 negotiations.

Two energy bills are actively being considered within the U.S. congress

The American Clean Energy and Security Act of 2009 (ACES 2009) was drawn up and approved by the House of Representatives, while the American Clean Energy Leadership Act (ACELA) originated with the Senate.

ACES 2009

The American Clean Energy and Security Act of 2009 (ACES 2009) was narrowly approved by the House of Representatives in late June and now goes to the Senate for consideration. The current version is divided into four major titles: Clean Energy, Energy Efficiency, Reducing Global Warming Pollution, and Transitioning to a Clean Energy Economy.

The Clean Energy title includes provisions to support R&D and technology deployment for renewable energy and energy efficiency, authorizing over $190 billion through 2025. This title also includes a federal renewable energy standard requiring electric utilities to meet 20% of their supplied electricity through renewable energy sources and quantifiable energy efficiencies by 2020. Clean energy also encompasses technological enhancements to the electric grid including smart grid modernization and transmission planning.

Under the Energy Efficiency title, provisions include a series of standards for buildings, appliances, and vehicles. Robust building standards require new construction to be 30% more energy efficient by 2012 and 50% better by 2016. The bill includes a provision implementing a building energy performance labeling system.

Appliance standards apply to lighting products and commercial furnaces, among others. Funding authorization to support technical literacy for both governmental and industrial leaders is included in ACES to communicate the energy-savings potential of efficient appliance selection and low-cost efficiency improvements. To ensure house passage of the bill, sponsors yielded on light-duty vehicle standards, although EPA is granted authority to devise emissions standards for heavy-duty, off-road and construction vehicles, in addition to trains and large ships.

The third title, Reducing Global Warming Pollution, has been by far the most contentious. The backbone of this title is the Carbon Cap-and-Trade mechanism. The proposed Cap-and-Trade program is structured to reduce CO₂ emissions to 17% below 2005-levels by 2020, and 83% by 2050. This program would impose a cap on large emitters by establishing a system of tradable allowances. Should emitters choose to pollute above the level of their allowances, they must compensate for additional emissions by purchasing emissions allowances or certified emission offsets. Offsets are generated by approved projects of unregulated sectors — largely agriculture and forest products — that successfully reduce, eliminate, or destroy GHG emissions.

Allowance allocation has been the source of much debate. Initially, all allowances were proposed to be auctioned off to the highest bidder, but concessions were made to reduce the cost burden on American industry, energy-intensive subsectors, and power generators. The bill currently states that 80% of total allowances will be distributed for free in the early years of the program. These and many other provisions could change over the course of Senate consideration.

The final title, Transition to a Clean Energy Economy, offers allowances and rebates to private industry as safeguards to ensure U.S. competitiveness during the transition to a carbon-regulated economy.

The current draft of ACES also includes a border tax adjustment — widely regarded as a carbon tariff — on imported goods originating from countries without GHG regulation in attempt to level the playing field in respect to manufacturing costs. The concept of a carbon tariff is another subject of significant debate, as critics are concerned about the effects on U.S. trade relationships. Additional provisions under this title offer funding and training programs to develop a clean energy workforce. ACES also identifies developing nations that are eligible to receive U.S. support in adopting clean energy technologies.

ACELA 2009

On June 17, 2009, the Senate reported its own version of an energy bill out of the Senate Energy and Natural Resources Committee — a counterpart to ACES 2009 — entitled the American Clean Energy Leadership Act (ACELA) of 2009. ACELA tackles many similar issues related to clean energy, energy security and energy efficiency; however, it does not address GHG regulation.

Ultimately, should Congress choose to move forward, the two versions of energy legislation would likely undergo a detailed reconciliation process and formal revote before seeking Presidential approval. The current discussion draft of ACELA features six titles, Clean Energy Technology Deployment, Enhanced Energy Efficiency, Improved Energy Security, Energy Innovation and Workforce, Energy Markets and Policy Studies and Reports. Key provisions related to the commercial and industrial sectors are centered around enhanced building codes, building retrofits, appliance standards, industrial efficiency initiatives and a Renewable Electricity Standard requiring up to 12% of nationwide energy use to originate from renewable sources by 2020. Building codes featured in the bill target energy reductions of 30% by 2010 and 50% by 2016. Industrial initiatives include expanded funding for research, development and deployment of new, efficient technologies and the expansion of Industrial Assessment Centers (IAC) under the Dept. of Energy's Industrial Technologies Program. ACELA also establishes a number of clean energy investment mechanisms including grants, loan guarantees, and a family of revolving loan funds to finance clean energy projects in the private sector.

In sum, the United States is amidst a dynamic energy climate and legislative prospects seem to be changing on a weekly basis. Federal support for energy efficiency, clean energy and GHG reduction may come in a number of forms, but it is difficult to predict before final legislation is adopted.

What appears clear is that some form of GHG regulation is likely, and nearly all sectors are reaching for energy efficiency as the low-cost, low-risk solution to meet the challenges of energy security and economic growth in an increasingly carbon-constrained world.