What a Biden Administration Means for the Energy Sector

Beyond change at the federal level, this year’s election included significant state-level elections and ballot initiatives that will impact the energy sector. The role of federal and state interests in energy, electric generation, and climate policy will face an ongoing, evolving landscape. Changes in leadership at the Federal Energy Regulatory Commission (FERC), for instance, could presage major shifts in how wholesale energy markets integrate state policies on climate and resource mix.

As always in these circumstances, personnel is policy — the individuals whom President-elect Biden taps to lead on energy issues in the transition phase and the start of a Cabinet will provide key indications of how a Biden administration will impact our energy markets. This will be particularly true in an era of divided government. A Biden administration is seen by many as blending climate change across a wide array of cabinet-level federal agencies — including the Department of State and Department of Defense. Indeed, it is expected there will be a White House climate “czar.”  

Importantly, the increasing number of COVID-19 cases and rising number of state actions to curb further spread threaten once again to dampen energy demand. These concerns will set the stage for volatility during the remainder of 2020 and the bulk of 2021 in our energy markets and in Washington, D.C. 

Below, we highlight 10 key areas on which we’re focused:

1. Green energy and greenhouse gas (GHG) regulation. Biden promised to set the electric grid on a path toward zero emissions by 2035, even though many electric industry executives have raised concerns that such a goal was highly ambitious. He made rejoining the Paris Agreement a signature action planned for his first day in office. Eliminating carbon dioxide emissions from power generation within 15 years will require at least a seven-fold increase in the pace of rollout, which in turn will require rapid increases in the manufacture of wind turbines and solar panels and the supply chains that feed them. (See note 7 below regarding cyber concerns.)

While renewable generation is generally expected to continue enjoying rapid growth (accelerating its pace, which continued over the past four years despite headwinds), a Biden-led Department of the Interior could also advance development of offshore wind, speeding permitting for projects and holding additional offshore lease auctions like the one that shattered price records in 2018. That would help with, but not fully address, the challenges of lower or flat energy demand and heavy price competition.

Many important de-regulatory efforts initiated by the Trump administration remain pending before the courts. That posture would seem to allow a Biden Environmental Protection Agency (EPA) to pull back those regulatory changes (e.g., the Affordable Clean Energy Rule) before decisions are rendered. For example, a Biden EPA and Department of Transportation would be expected to revisit rules easing federal tailpipe pollution standards as well as the Trump administration’s efforts to restrict California and other states from enforcing more stringent rules.

Biden has also indicated his intentions to reinstate methane emissions limits on the oil and gas industry. A Biden-led Department of the Interior might be able to do this relatively quickly on federal lands, for example. We also anticipate a Biden administration would revisit rules limiting the reach of the National Environmental Policy Act and the Endangered Species Act.

2. ITC and PTC. One of Biden’s first legislative initiatives could be to seek to combine economic stimulus for green energy, together with addressing COVID-19. The goal would be to adopt legislation intended to both jumpstart the economy and encourage the development of greenhouse gas-reducing technologies. Any legislative package would almost certainly include provisions making investments in electric vehicle infrastructure, extending clean energy tax incentives, and modernizing the nation’s drinking water infrastructure. Existing clean energy tax incentives were last significantly extended in 2016, subject to planned phaseouts that are currently underway, so a Biden administration could seek a new round of extensions — and modifications — to these policies.

In 2016, in exchange for lifting the oil export ban, the 30% investment tax credit (ITC) for solar was extended for an additional three years through 2019, after which time the ITC was reduced from 30% to 26%, 22%, and 10%, for projects that began construction in 2020, 2021, and after 2021, respectively. The ITC is a one-time tax credit determined by reference to the eligible basis of the energy property at the time it is placed in service. Of particular note is that the ITC, as currently structured, is only available for energy storage projects that are attached to qualifying solar projects (i.e., solar-plus-storage). Updates to the ITC to grant ITC-eligibility for standalone storage projects would be in line with Biden’s clean energy plans.

Additionally in 2016, the production tax credit (PTC) for wind facilities was extended. Projects that began construction after 2016 became subject to a three-year phaseout schedule, with the PTC reduced by 20% in each of 2017, 2018, and 2019 for projects that began construction during those years. At the end of 2019, however, the PTC was renewed and increased to 60% of the pre-phaseout amount for projects that began construction in 2020. The PTC provides an annual credit determined by reference to the power produced and sold to unrelated parties for a full 10 years following a project becoming operational.

Finally, in response to construction delays anticipated to occur as a result of COVID-19, the IRS issued guidance earlier this year extending by one year (from four years to five years) the date by which construction of ITC- and PTC-eligible projects that began in 2016 and 2017 must be completed in order to qualify for “safe harbor” protection relating to the so-called “continuous construction” requirement. Had the safe harbor period not been extended, developers that began construction of projects in 2016 and 2017 may have lost their ability to claim credits at the higher percentages permitted for those projects.

The future of the ITC and PTC following their phaseout periods is uncertain. While President-elect Biden’s victory makes extensions and updates to the ITC and/or PTC more likely than would a second term for President Trump, without Democratic control of the Senate, prospects for such an extension are difficult to predict. Moreover, it is unclear, particularly in the case of the PTC, whether such an extension would provide a return to pre-phaseout values for the credits.

3. Action through executive order in light of divided government. Federal government procurement, opening offshore areas for wind development, restricting operations on federal lands — these are all part of what a Biden administration can be expected to pursue. That is because they can be achieved by executive order.

Both presidential candidates expressed support for electric vehicles, with Biden’s US$2 trillion climate plan calling for buildout of 500,000 electric vehicle charging stations on U.S. highways. This would be led by the federal government’s procurement function. We expect to see executive orders issued to further these policies. Biden is also expected to revoke Trump-era executive orders in the energy and climate space, similar to actions President Trump took to revoke Obama-era orders.

4. FERC Commissioners. FERC is currently comprised of three commissioners (James Danly, Richard Glick, and Neil Chatterjee). On November 5, 2020, President Trump replaced Neil Chatterjee, the Republican chairman, with James Danly, another Republican who has served as a commissioner since March 2020. Prior to becoming a commissioner, Mr. Danly had served as general counsel to FERC since 2017. The move was largely unexpected, leaving some to speculate that Mr. Chatterjee’s recent actions with respect to carbon pricing and distributed energy resources may have prompted the Trump administration’s decision to elevate Danly. It is generally expected that a Biden administration will quickly appoint Commissioner Glick as chairman. Commissioner Glick has been the only Democrat appointee since Cheryl LaFleur departed in July 2019. There are currently two nominees pending Senate approval (Mark Christie (R) and Allison Clements (D)). If these nominees are not approved by the end of the year, Biden could nominate two Democrats, which would result in a 3-2 majority for his party. FERC requires three commissioners for a quorum. To the extent that either Mr. Danly or Mr. Chatterjee steps down before a new nominee is approved, FERC could find itself without a quorum, which could lead to a temporary backlog.

Over the past months, FERC has begun to tackle whether its policies are creating barriers for offshore wind development and hybrid resources that co-locate generation and storage. Most recently, it took on jurisdictional and logistical questions on the potential for FERC to approve and incorporate a state-determined carbon price into the wholesale markets. We expect to see further development of these policies under a Biden administration. In addition, questions concerning how FERC evaluates greenhouse gas emissions in pipeline certificate reviews are likely to take on greater importance in a FERC chaired by Commissioner Glick, or a like-minded commissioner.

5. Environmental justice. Recently, proposed legislation “Expanding Access to Sustainable Energy Act of 2019” was introduced in the House of Representatives in April of last year. This bill proposes an addition to Natural Gas Act (NGA) Section 7(h) that would mandate a community impact report to assess potential impacts of proposed actions in troubled communities. Under the legislation, a holder of a certificate of public convenience and necessity may not exercise the right of eminent domain unless (among other requirements) the holder obtains all federal and state permits required by law for the construction and operation of pipeline facilities, and complies with all environmental conditions appended to the certificate order.

Whether or not this gets enacted depends on control of the Senate. There may be efforts at seeking to enact these provisions as part of greater compromise for a new energy policy act; or it is possible it is included as part of a COVID-19 stimulus package. Failing a legislative success, we would expect a Biden administration to use executive authority as much as possible to achieve these goals.

6. Oil and gas developments. Another key theme of his candidacy was Biden’s pledge to “transition away from the oil industry.” A first step is likely to be to direct the Department of the Interior to stop processing permits to drill on public land. However, a Biden administration seems unlikely to take dramatic action to reduce oil and gas output, since most U.S. production occurs on private land, and an effort to curb fracking would require Congress to act. Reports suggest Biden is wary of how such a move would affect employment, and some on his team consider oil and gas exports useful for trade and as a foreign policy lever, but a Biden Department of the Interior could adjust royalty rates for fossil fuel extractors and for solar and wind producers using public land. Leveraging economic incentives to achieve the results desired (e.g., carbon-free electricity) would square to Biden’s campaign.

We expect permitting battles to continue. With a Biden administration, we expect more stringent regulations, such as a decision not to renew Clean Water Act Section 404 and Nationwide Permit (NWP) No. 12, currently used by oil and gas pipeline companies for project construction. Without NWP 12, projects will increase in cost, and time for completion will increase, because individual 404 permits will be required. With a Republican-controlled Senate, however, the chance appears to be reduced for passage of legislation that would revise the Natural Gas Act to require greater consideration of greenhouse gas emissions in certificate decisions.

It is worth mentioning that a draft version of NWP 12 has been issued for public comment and is currently under consideration. We anticipate, however, that this will not be published in final form before January 20, and, when published, may be reworked substantially, including a requirement that linear projects with multiple waters of the United States crossing be disqualified from using an NWP.

It is also important to flag the National Environmental Policy Act (NEPA) — the Trump administration promulgated substantial revisions to NEPA regulations. Those changes are currently the subject of litigation in multiple venues. A Biden administration could choose to pull the regulations or take a “sue and settle” route to address the concerns of the states and non-governmental organizations (NGO) challenging them. This would put activity back in a world where expediency is not valued as greatly and could cause additional delays in approvals of projects that require federal authorization.

Also, there is a chance that Biden will revoke Executive Order 13867 (presidential permit for transboundary infrastructure, such as oil pipelines). Trump issued this Executive Order to bypass federal agency involvement that triggered compliance with environmental laws and historic preservation laws. This could be revoked, making transboundary infrastructure more complicated to construct.

7. Cybersecurity and ongoing concern about adversary access to controlling parts of our bulk power system. President Trump issued two Executive Orders intended to address concerns about attacks on the nation’s electric power networks. Order 13920, issued May 1, 2020, directed the Department of Energy (DOE) to prepare a ban on future purchases of foreign-made grid controls and components that could be infected with concealed malware. Order 13865, signed March 26, 2019, pledged to accelerate decisions on hardening the grid against electromagnetic pulse shock waves.

The White House’s issuance of the May 2020 bulk power supply chain security order surprised many. Reports indicated that, while the possibility had been discussed, neither the White House nor DOE informed a high-level group of grid officials about the directive prior to its public announcement. The order created the possibility that DOE was planning to issue a list of foreign equipment vendors whose products would be barred, or a list of approved vendors, or both. Now, that is less clear.

When DOE solicited comments, many complained it would spawn unnecessary red tape and would result in increased costs for manufacturers of equipment used in the U.S. bulk power system. Concern was expressed that the red tape could cause needless reengineering of existing products, longer product lead times, adverse impacts to existing project schedules, increased costs to customers, and, ultimately, increased costs to the American energy consumer, without a commensurate security benefit.

Even so, we expect a Biden administration would continue to pursue this initiative. Protecting against threats like this in real, practical terms would be consistent with Biden’s campaign. Balancing the needs for the future of electricity generation free from carbon that Biden aims to achieve by 2035 against the serious threats to critical electric infrastructure will require attention. Congress gave DOE specific responsibility for protecting grid facilities serving critical defense sites, so that appears to be the first focus. An ongoing issue will be developing a trusted process for sharing classified intelligence about cyber adversaries’ capabilities and intentions.

8. FERC market designs; adapting wholesale energy markets to state policies for renewable energy and emissions. A number of states, counties, and municipalities have adopted policies with an eye toward encouraging the use of electric vehicles and charging stations. Increased use of electric vehicles in the United States is expected to add to electricity demand and could stress the transmission system if certain upgrades and considerations are not made in the coming years to account for vehicle charging. Further, as FERC moves to implement its order on distributed energy resource aggregations, there are implications for electric vehicles and their charging equipment that could benefit from access to wholesale power markets.

Two key areas are carbon pricing and wholesale markets.

a. Carbon pricing. Carbon pricing will likely continue to be a key focus of a Biden administration at FERC. On September 30, 2020, FERC convened a technical conference to discuss considerations related to state adoption of mechanisms to price carbon dioxide emissions, commonly referred to as carbon pricing, in regions with FERC-jurisdictional organized wholesale electricity markets (i.e., regions with regional transmission organizations/independent system operators, or RTOs/ISOs). The conference focused on legal and technical issues associated with carbon pricing approaches where a state, or group of states, sets an explicit carbon price, whether through a price-based or quantity-based approach, and how that carbon price intersects with RTO/ISO-administered markets. Following that technical conference, on October 15, 2020, FERC issued a proposed policy statement to clarify that it has jurisdiction over organized wholesale electric market rules that incorporate a state-determined carbon price in those markets. The proposed policy statement also seeks to encourage regional electric market operators to explore and consider the benefits of establishing such rules. We expect that FERC, under a Biden administration, will continue to find, consistent with its proposed policy statement, that RTO/ISO rules incorporating a state-determined carbon price can fall within FERC’s jurisdiction over wholesale rates.

b. Wholesale energy and capacity markets. We expect that FERC may take a different approach with respect market design in the organized wholesale energy and capacity markets, particularly as it relates to state subsidies for electric generators bidding into the wholesale electricity markets. In the past couple of years, FERC has issued a number of orders addressing the impact of state subsidies for renewable and nuclear resources on wholesale power markets, which FERC viewed as distorting capacity prices and undermining the non-subsidized fossil-fuel-fired generators. For example, FERC issued orders requiring PJM Interconnection LLC (PJM) to expand its Minimum Offer Price Rule (MOPR) to nearly all state-subsidized capacity resources. Similarly, FERC issued a series of orders related to the scope of the New York Independent System Operator (NYISO) buyer-side market mitigation rules, which were intended to address perceived price distortions in the NYISO capacity market. Commissioner Richard Glick, the sole Democrat at FERC at the moment, has consistently dissented from these FERC orders that have imposed minimum prices on state-supported renewable and nuclear energy resources. A number of the relevant FERC orders, including the PJM MOPR orders, are going through appeals in federal court, with FERC defending its prior orders. Under a Biden administration, FERC could take a different position on appeal or seek a remand to reevaluate its position.

9. Greater focus on enforcement. We expect that FERC enforcement activity and scrutiny of wholesale energy market conduct will increase under a Biden administration. During the Trump administration, FERC’s public enforcement figures declined, as we saw fewer orders to show cause and settlements as compared to the Obama administration. For example, in September 2019, a group of Democratic senators wrote a letter to FERC noting the apparent curtailment in enforcement activity as demonstrated by the decline in the number of civil penalty actions initiated by FERC in recent years. We anticipate that a Biden administration will focus on enforcement efforts and pursue high-profile market manipulation cases at FERC, more similar to the enforcement regime under President Obama. We also expect a proactive enforcement approach to policing the wholesale electricity and natural gas markets under a Biden administration, especially with the fully staffed FERC Division of Investigations and Division of Analytics and Surveillance. Even if the Democrats do not regain control of the Senate, the Senate will not be in a position to prevent FERC from following the new administration’s enforcement.

10. PURPA reform. Earlier this year, FERC finalized various revisions to the rules that govern qualifying small power producers and co-generators under the Public Utility Regulatory Policies Act of 1978 (PURPA). These revisions were contained in FERC Order 872. Key revisions included additional flexibility to state regulatory authorities in establishing avoided cost rates or sales inside and outside the organized electricity markets, modifications to FERC’s “one-mile rule,” and changes to utilities’ obligations to purchase from qualifying facility resources. Commissioner Glick issued a dissent with respect to the PURPA reforms. Despite this dissent, it is unlikely that a FERC under Democrat control would attempt to reverse or significantly “undo” the changes made by Order 872. There could, however, be some attempt to modify the changes made with respect to the “one-mile rule” or the threshold governing when a qualifying facility is presumed to have access to a competitive market.