Welcome back to another Energy Source.
It’s another big week in American energy. Today, Californians will decide whether to dump Governor Gavin Newsom — and with him one of the country’s most progressive climate agendas. Also today, oil supermajor Chevron, still headquartered in the Golden State, will unveil its energy transition strategy.
Across the country, meanwhile, the details of Democrats’ proposed climate and energy legislation are starting to take shape. That’s the subject of our first note. Our second is on Harvard’s decision to stop investing in fossil fuels.
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Climate’s make or break moment in Congress
Activists have spent months lobbying US lawmakers to pump hundreds of billions of dollars into green energy at a moment of climate peril. Congress is finally ready to take its shot.
Two key committees in the US House of Representatives — the energy and commerce committee and ways and means committee — have unveiled their proposed legislative text for the budgetary bill that will act as the vessel for the president’s key green policies.
Two proposals are at the heart of the bill:
A “Clean Electricity Performance Program” (CEPP) to incentivise utilities to go green
New tax breaks to drive the buildout of clean energy infrastructure, from wind and solar to carbon capture and transmission
Part 1: Clean Electricity Performance Program
This is the carrot-and-stick mechanism aimed at cleaning up American power — and we finally have some details.
The “Clean Electricity Performance Program” is a rebranded version of the “Payment Program” we examined two weeks ago: it would pay utilities that make sufficient green progress and fine those that do not.
Four is the magic number. If a utility increases the amount of clean energy it sells in a given year by 4 percentage points it is rewarded ($150 per megawatt hour over a 1.5 point rise, with some caveats). If it does not, it is punished ($40/MWh, again with some caveats).
Utilities had been anxiously awaiting details of this policy and had a number of concerns that we discussed some weeks back.
They will be relieved to see that each provider will be allowed to start at its current clean energy mix — with percentage point increases to be hit rather than blanket thresholds. But are the carrots enticing enough to drive the green overhaul necessary to meet the president’s clean energy goal? Reminder: Biden has set a target to make America’s grid 80 per cent carbon free by 2030.
Part 2: Tax incentives
The master plan also comprises $235bn worth of green energy tax credits over a 10-year period, according to the Congressional Joint Committee on Taxation.
This includes a production tax credit for wind, solar and geothermal projects of $25/MWh spanning the next 10 years, before being phased out. There is also an investment tax credit of up to 30 per cent for solar, geothermal and battery storage, again lasting for 10 years before tapering off.
The tax breaks would provide a huge boost to developers and producers in terms of their ability to make plans for the next decade. Similar credits have been repeatedly extended by Congress in recent years, but often at the last minute or even after they had expired.
But the proposed legislation will probably disappoint carbon capture and storage (CCS) proponents.
They wanted the bill to increase the amount of money offered per tonne of carbon stored at such projects. Advocates in the oil industry have argued that as it stands, the dollar-figure is not high enough to justify many new CCS projects.
But it leaves the incentive at $50 a tonne for projects that store the carbon permanently and $35 a tonne for projects that pump CO2 to help improve the flow of oil at old wells. For context, ExxonMobil’s chief executive Darren Woods has said $100 a tonne would be needed for its proposed Houston Ship Channel CCS megaproject.
Expect hard lobbying from the fossil fuel industry in both the House and Senate, where there is broad support for CCS, to get this price lifted.
Critically, though, all of the credits will be eligible for “direct pay” rather than needing to be offset against taxes owed. That simplifies a process that previously relied on complex tax-equity financing. This change will please smaller municipal and co-operative generating utilities that complained that they had been excluded from previous schemes.
Some strings attached
But the conditions attached to some of the proposals will cause some grumbles.
To take full advantage of the credits, for example, companies will have to satisfy certain employment provisions. Workers carrying out construction and (in some cases) repairs have to be paid “prevailing wages”. A certain proportion of the work will also have to be carried out by apprentices.
Full access to the credits will in some circumstances also require companies to source the bulk of materials — steel, iron and other products — from within the US.
Given the administration’s focus on jobs and domestic manufacturing, these aren’t surprising clauses. But they will grate on developers that will argue that the provisions will raise their costs, making it harder to meet President Biden’s targets for fast deployment of clean energy capacity.
The energy and commerce and ways and means committees will embark on a “mark-up” process over the coming days, chopping and changing the text.
Then the Senate gets to have its say. That’s where things get tricky.
West Virginia senator Joe Manchin made clear this weekend that the $3.5tn price tag on the proposed legislation was well beyond anything he is willing to contemplate. The legislation may be taking shape, but it is a long way from the finish line.
(Myles McCormick and Justin Jacobs)
Harvard’s fossil fuel move
Last week, Harvard’s president Larry Bacow announced all indirect investments in fossil fuels “are in runoff mode and will end”.
“Given the need to decarbonise the economy and our responsibility as fiduciaries to make long-term investment decisions that support our teaching and research mission, we do not believe such [fossil fuel] investments are prudent,” Bacow said Thursday.
While the school has no direct investments in fossil fuels, about 2 per cent of its $42bn endowment — the largest such fund in the world — is invested in private equity funds with fossil fuel holdings.
Unity College, a private college in Maine, was the first higher education institution in the US to divest from fossil fuels in 2012. Cornell and Brown are among the larger universities to have followed suit. But Harvard’s involvement is a big coup for activists.
“This is probably the highest-profile win of the divestment movement to date,” said Connor Chung, press co-ordinator for Divest Harvard, a student activist group. The school’s decision is part of the “growing recognition that the fossil fuel industry is on the wrong side of history,” Chung said.
The university’s decision follows a summer of climate-related disasters, a damning IPCC report, and also reflects Wall Street’s growing focus on climate risks facing companies.
“They’ve looked at the risk of continuing holding fossil fuels in their portfolio, and they’ve determined that the best way to manage that risk is to avoid them,” said Tom Sanzillo, director of financial analysis at the Institute for Energy Economics and Financial Analysis. “It’s a message to the financial sector.”
Why does the decision matter?
Harvard’s move marks a sharp reversal from the February Climate Action Report by the Harvard Management Company, which oversees the endowment and argued for engagement with companies on climate change, rather than dumping the assets.
It also bucks a broader trend. While universities have been at the forefront of previous divestment campaigns, including those targeting apartheid South Africa, engagement is in favour among asset managers from BlackRock to Vanguard. Activist hedge fund Engine No 1 emerged as a paragon of the engagement cause earlier this year when it defeated ExxonMobil in a proxy battle that centred on the oil supermajor’s approach to climate change and the energy transition.
In any case, Harvard isn’t selling assets — it doesn’t directly own any. It is simply letting its investments in these assets run down, as partnerships with funds linked to fossil fuels are liquidated.
But Harvard’s move could influence other educational institutions, which together hold over $600bn in their endowments.
“It’s fair to suspect that many other institutions will be looking at this decision . . . and perhaps re-evaluating their own thoughts about prudent investing in the age of climate crisis,” Chung said.
Still, Harvard may need to look inward for further progress on climate change. The school pledged to be fossil-fuel free by 2050, but emissions have remained stagnant since 2016. And in 2019, Harvard’s Kennedy School received at least $1m in donations from Shell and at least $250,000 from Chevron and Duke Energy.
“There’s certainly still work to be done,” said Ted Hamilton, a climate defence lawyer and Harvard graduate. (Amanda Chu)
California, Florida, Texas, Washington, and New York make up 60 per cent of all US electric vehicle registrations, according to the Department of Energy. Only two states — California and New York — have zero-emission vehicle mandates, showing some states have been able to rapidly adopt EVs without such mandates.
Meanwhile, Congress is hoping to pass more EV incentives through the reconciliation plan with tax credits of up to $12,500 for going electric. Doing so would support President Biden’s executive order calling for half of all new vehicles sold in the US to be electric by 2030. (Amanda Chu)
The OECD wants a global plan for carbon prices.
Germany’s Greens are likely to be part of the country’s next coalition government, and climate neutrality will top their agenda. Don’t miss this sharp Big Read on what it will mean.
Western miners are competing to secure sustainable supplies of nickel outside China, an important battery metal.
Norway’s centre-left was set to regain power following parliamentary elections that focused on the role of the country’s oil industry.
Members of the governing Scottish National Party have called for the creation of a national energy company in the country.