August 14, 2023

By Eric Scheriff, Head of Global Energy Policy

With monumental and unprecedented legislation comes the need for monumental and unprecedented policy execution. As we near the one-year anniversary of the passage of the Inflation Reduction Act (IRA), President Biden’s signature climate bill, we believe the energy industry and investors are underappreciating both the size of this unprecedented policy wave, and the complexity of the ride to navigate it successfully.

Capstone expects the IRA to far exceed the Congressional Budget Office’s (CBO) cost estimates. However, despite the enormous price tag, we still believe companies and investors alike are underappreciating the long-term impact of the legislation—developments we think will revolutionize the industrial and regulatory fabric for years to come—as well as the execution risk.

Coming into the year, on the heels of the legislation, Capstone expected the favorable policy backdrop for energy to accelerate at the state, federal, and global levels amid global concerns over climate change, energy reliability, and energy affordability. In the balance of 2023, we expect those themes to continue alongside a host of other underappreciated energy policy themes that are crashing headlong into an evolving global regulatory dynamic.

In a recent Q&A, Capstone’s Eric Scheriff, Capstone’s global energy policy head, provides updates on what the rest of 2023 holds for energy and industrials policy and its unheralded implications for companies and investors.

What emerging trend do you think is not being appreciated?

The magnitude and complexity of the IRA is front and center. The IRA is really going to stress the infrastructure that exists—particularly regarding permitting and the interconnection of green renewable energy. Everyone appreciates what a tailwind the IRA is for the clean energy sector, but we don’t think people understand the policy and regulatory complexity of actually getting these projects online. The basics of being able to get a project from contemplation to completion were always complicated. The IRA has poured gasoline on the fire of those complications. We believe the IRA will unlock an American energy revolution, but that doesn’t mean it will be easy. And we think things are going to get worse before they get better, but ultimately, we believe it will step up the pressure to make things like permitting reform happen.

The IRA will unlock an American energy revolution, but that doesn’t mean it will be easy.

What expectations did you have for the year that have already played out?

In our 2023 preview, we predicted that despite inflation concerns, the Environmental Protection Agency (EPA) would move forward with new powerplant regulations that would increase compliance costs and environmental requirements, accelerating retirements for coal plants and mandating retrofits for some coal and inefficient gas generation. In May, this prediction came true. The EPA proposed new greenhouse gas emissions reductions, including new standards for existing coal plants based on the utilization of carbon capture and storage (CCS) at a 90% capture rate. It included similar restrictions for existing gas plants, proposing standards based on either the use of CCS by 2035 or co-firing of 30% (by volume) low-GHG hydrogen by 2032 and co-firing of 96% low-GHG hydrogen by 2038.

Looking ahead, we expect the proposed rule to be finalized by June 2024, with an effective date 60 days following the publication of the final rule in the Federal Register. However, we anticipate that the rule could face potential rollbacks if a Republican president is elected in 2024, given the nascency of this rule and the prior court decisions striking down the prior versions of the rule introduced by the Obama and Trump administrations. Unlike the other EPA rules, the new carbon emission policy pushes the boundaries on the technical feasibility of compliance, with several grid operators and utilities raising the alarm over impacts on grid reliability.

In addition, we anticipate that the rule could be reversed through legal action or through a congressional challenge utilizing the Congressional Review Act (CRA) if Republicans gain greater footing in the 2024 elections.

What do you think was overlooked in the first half of this year that clients should be paying attention to?

In the first half of 2023, state policymakers have taken significant steps to support the demand for renewable natural gas (RNG) and clean hydrogen from utilities. In April, Indiana Governor Eric (R) Eric Holcomb signed H.B. 1421, which allows utilities in the state a cost-recovery mechanism to fund RNG projects. Similar legislation progressed in many other states, including New Jersey and Texas. State regulators have also taken on an active role in incentivizing RNG and hydrogen adoption. In Massachusetts, the Department of Environmental Protection took its first steps toward establishing a clean heat standard in March. The clean heat standard would require fuel suppliers in the state, including gas utilities, to retire a certain amount of clean heat credits each year, with credits being generated by eligible clean heat measures potentially including RNG or Hydrogen.

Going forward, we believe this trend is highly likely to continue, with additional states adopting policies that would enable utilities to recover costs associated with the blending of RNG and hydrogen from ratepayers. As the RNG industry matures, we believe states will be increasingly likely to consider carbon intensity when determining eligibility for RNG procurement since it plays a significant role in determining the cost-effectiveness of using RNG versus natural gas in the thermal sector.

What underappreciated themes do you expect to play out this year in your sector?

We think the likelihood of 3M Co. (MMM) and DuPont de Nemours Inc. (DD) settling cases brought by state attorneys general (AGs) over the next year is underappreciated. Several relevant deadlines are approaching in mediation and trial for attorneys general proceedings in state court, and there has been a significant upswing in state participation, with 11 AGs filing PFAS-related cases since May. In our view, these developments suggest momentum toward a settlement has begun to build. Public court proceedings also indicate that 3M and DuPont are actively pursuing settlement discussions with attorneys general within the aqueous film-forming foam (AFFF) forum. Chemours, in particular, has also disclosed that the DuPont entities are pursuing mediation in New Jersey and North Carolina outside the AFFF multi-district litigation (MDL).

We think the likelihood of 3M and DuPont settling cases brought by state attorneys general over the next year is underappreciated. 

What are the big questions you are paying attention to for the balance of 2023?

Permitting reform discussions are expected to accelerate as we head into the end of the year and Congress returns from recess. Despite the passage of some changes to the National Environmental Policy Act (NEPA) with a debt ceiling bill earlier this summer, we believe there is still significant bipartisan interest in passing a broader permitting reform package by the end of this year. If passed, a broader permitting reform agreement could streamline and facilitate renewable energy and electric transmission buildout and mitigate state-level permitting risks for natural gas, hydrogen, and carbon pipelines. Following the conclusion of the August recess, we expect discussions around permitting reform will resume in earnest in Congress and that a bipartisan permitting reform bill has the most likely chance of emerging from the Senate. Another issue we will follow closely is the Low Carbon Fuel Standard (LCFS) rulemaking in California. LCFS credit prices have fallen sharply in recent years, and currently, credits are trading under $80, down from prices near $200 at the end of 2020. The California Air Resources Board (CARB) is considering several policy changes that will be highly supportive of credit prices. However, the rulemaking process has been much slower than what was initially outlined by CARB staff. We will be watching to see if CARB will be able to meet its original goal of implementing new LCFS policy changes in January 2024 and how it will treat thorny questions around the future participation of RNG and crop-based biofuels in the program.

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