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2021 Policy Landscape: Thoughts on Potential Changes, Trends and Impacts

February 15, 2021

With the swearing in of a new federal administration and the change in the congressional make up, our thoughts naturally turn to what that might mean as far as new rules, initiatives and regulations that might affect us here in the energy space (and in particular how these things might impact our customers). In this Customer Insights edition, we’re going to try and scope out what sort of changes might be (and are likely to be) coming our way, and how that might impact you, in a few areas we think you’re most likely to care about:

  • Energy commodity landscape
  • Energy efficiency and technology
  • Energy markets and structures
  • Environmental, social and governance (ESG) disclosure issues and management
  • Broad policy impacts

At the center of much of this speculation is, of course, the energy and climate plan of the Biden administration. And so to start, we’ll look at the plan the Biden campaign had laid out, which they helpfully summarized into nine key elements:

1) Executive action: includes aggressive methane pollution limits on oil and gas operations, increased fuel economy standards, protection of the Arctic National Wildlife Refuge (ANWR) and other areas and the banning of new oil and gas leasing on public lands and waters.

2) 2021 legislation: path to economy wide net-zero carbon emissions no later than 2050.

3) Global engagement: rejoining of the Paris Climate accords, convening of a world summit and pressure on other major carbon emitting economies.

4) Investment in clean energy and innovation: aspiration of $400 billion of investment over ten years.

5) Accelerated deployment of clean technology: includes setting target of reducing carbon footprint of U.S. building stock 50% by 2035, new incentives for deep retrofits, support for electrification, efficiency and on-site clean power generation. This plan also calls for nationwide public charging network of 500,000 new outlets by end of 2030.

6) Environmental justice: address disparate impacts of pollution and climate change on low-income communities, tribal lands and communities of color.

7) Holding polluters accountable: new disclosure requirements for public companies on climate-related financial risks and greenhouse gas emissions in operations and supply chains. This includes new legislation to directly assign costs of climate pollution on ‘polluters’ and for enhanced prosecution of violators (including executive punishments).

8) Create 10 million jobs: plan to increase employment through incentives and infrastructure legislation and incorporate labor provisions to promote union jobs across industries.

9) Support for ‘legacy’ fossil fuel producing communities: increased payments into black lung benefits programs and reforming benefits systems and company liability shields. This plan also calls for establishment of task force to help legacy communities’ access federal investments and leverage private sector investments.

We can imagine that each of these elements and proposals is marked by a certain likelihood of enactment, and that there will be varying tangible impacts across the energy sector, which will flow down to you, our dear customers. And while we won’t speculate on each point above, we will try to incorporate our best assessments of each – likelihood and impact – in our outline below.

It’s also of course important to remember that much energy policy is controlled at that state level, and that – contrary to what we saw in the elections at the federal level – the status quo was more or less upheld at the state level, with perhaps just a bit of a ‘red’ shift. So even as federal pressures may bend things a certain way based on the preferences and proclivities of the Biden administration and supporting congress, state level considerations and momentum will of course substantially influence the unfolding of events in the coming months and years. Consequently, we’ll do our best to incorporate a balance of jurisdictional perspectives in our outlook here.

Energy Commodity Landscape
Our first element of consideration will be the general energy commodity supply, demand and pricing landscape. At a very broad scale, there are likely to be accelerating pressures for both demand and supply of carbon-based energy sources. Additionally, there is likely to be enhanced support for the development of energy infrastructure and new energy related technologies (and related adoption through direct programs, incentives and standards), which will further impact the overall supply and demand balance throughout the energy chain.

Particularly regarding oil and natural gas markets, we are likely to see the most acute pressures on both supply and demand, with the pressures essentially working in uniform – if not entirely coordinated – directions.

On the supply side, the Biden administration is likely to have a fair degree of latitude and impact on the development of new supplies and the transportation of supplies to market. Through the enactment of new regulations and more stringent enforcement of existing rules and regulatory regimes (such as permit issuance), there’s a good chance that the pace of development and the increase of supply will be reduced in the coming years. Taken alone, these developments would place upward pressure on underlying oil and gas markets and prices. However, as we’ll discuss here shortly, there will likely also be downward pressures on oil and gas demand which should act in a countervailing fashion, thus (at least to some degree) neutralizing overall pricing pressures.

As we’ve alluded just above, we are likely to see policy measures that serve to reduce demand for primary fossil fuels. The new administration plans to affect oil demand directly through enhanced fuel economy standards and also through support for electric vehicle (EV) adoption. What’s more, the recent growth in natural gas supply has been absorbed by increased demand for natural gas in the power sector. However, support for renewable power generation through subsidies, tax credits and pressures on standards and disclosures will likely continue to accelerate the pace of renewables growth and work to shift the balance of power generation towards carbon free sources (thus providing substantial headwinds for natural gas demand).

Precisely how these forces – pressure on both fossil fuel supply and demand – will balance out in the short-to-intermediate term is difficult to forecast. In the long term it is likely that the value of fossil fuels will trend asymptotically towards zero and so pressure on supply will become increasingly irrelevant. There is, however, potential for pricing dislocations if the effects of these pressures are uneven – i.e., near term regulatory restrictions on oil and gas production and transportation may place significant pressures on supply before offsetting reductions in demand are put into place. You may expect some increased volatility, particularly in certain locales as pressures on delivery infrastructure (i.e., gas and oil pipelines) serves to inflate localized pricing dislocations.

Turning our focus to power market conditions, we are likely to see continued and accelerated support for the expansion of renewable generation sources (solar and wind really), likely through a mix of subsidization, push for increased standards and increasing adoption of carbon pricing/ rationing mechanisms. We are also likely to see broad support for infrastructure development, particularly with reference to the transmission grid, but also local distribution grids – as each are aligned with broad themes of renewable integration, enhanced resiliency in the face of increased climate volatility and cyber threats and general infrastructure repair and investment to support overall growth.

The ultimate bottom line effects of increased support for expansion of renewable generation sources are somewhat difficult to untangle, as the differing mechanisms for support – namely subsidization, increased standards and carbon pricing/rationing – have differing effects on end user energy costs, and also present varying likelihoods of enactment at national, regional and local scales. Subsidization will of course have a downward effect on power prices across the board and it is the policy lever that is most likely to be applied at a national level. Increasing standards and carbon pricing and rationing will push costs the other way, but we are likely to see uneven adoption and growth here.

The most likely outcome is that local and regional disparities in renewable standards and carbon pricing and rationing will grow, which will continue to drive cost dislocation between regions. Look for increased tension as states and locales with higher standards and carbon pricing seek to pressure other states and locales that build cost advantages as a result of lighter (or non-existent) standards and no carbon pricing. This tension is likely to grow, but not be resolved, over the next four years (and probably not eight either).

Regarding costs for transmission and delivery – all signs point in one direction, and that is towards a continuation (and likely acceleration) of recent trends of high levels of investment and associated growth in utility rates. While management of transmission and delivery costs has mostly been a ‘niche’ effort adopted by the largest and most sophisticated end users, as these costs continue to grow we expect to see increased demand for – and utility of – management of distribution and transmission demands and costs (we’re here to help!)

Energy Efficiency and Technology
While energy efficiency is generally regarded as wholesome and non-controversial as just about anything that is considered or discussed in the energy space, there’s clearly more that can be done across the board to make do with less than we currently use. This is an element of our present landscape that is not lost on the Biden administration (and probably a fair number of folks presently sitting in policysetting and implementing circles), and so we are likely to see strong support for the increased adoption of energy conserving measures and associated technologies.

Support for increased efficiency is generally provided in two forms – through incentives and mandates, each of which may be applied at both national and local levels. And so as with other topics we’ve discussed here given the uneven political landscape at federal, state and local levels – we are likely to see broad support for efficiency through incentives and mandates in some respects and varying support in other respects.

What this means for energy end users is that you will be presented with substantial opportunities, as well as some challenges, in adapting to the developing energy efficiency landscape. As your all around, committed energy partner, we encourage you to get ahead of these developments and leverage them to your full advantage. End users that work with capable and trusted energy industry partners to develop well considered efficiency programs and seek out advantageous incentives and technology developments will put themselves at great advantage to competitors that ignore these factors.

Increased energy efficiency is both a societal imperative as we seek to navigate the coming challenges associated with addressing global climate change and a great opportunity for organizations to assume leadership that provides substantial bottom line and value driven benefits.

Energy Markets and Structures
Over time, regulators have generally supported the increasing development of energy markets and associated structures, as these have served to promote enhanced pricing and cost transparency and discovery and have facilitated advanced commercial structures. These commercial structures have in turn enabled varied and sophisticated means of satisfying commercial and policy objectives. While we don’t necessarily foresee any sort of renewed drive to further deregulate energy markets, we do see continued support for the formation of structures that promote enhanced organization of energy markets, with the attendant benefits to transparency, discovery and commercial tailoring.

Two areas in which we can speculate growth here are in the increased participation of utilities in organized energy markets such as RTOs (Regional Transmission Organizations) and ISOs (Independent System Operators) like PJM in the Mid-Atlantic/ Midwest, Midcontinent ISO, ERCOT in Texas, Southwest Power Pool (extends throughout the plains and down into southern states) New York ISO and ISO New England; and also in potential expansion and adoption of carbon rationing and pricing mechanisms and markets (such as the Regional Greenhouse Gas Initiative (RGGI) in the Northeast/Mid-Atlantic).

With regard to organized markets such as ISOs and RTOs, it is our supposition that policymakers will increasingly look to expand coverage of these sorts of mechanisms as the attendant benefits are undeniable, and as highly influential national (and international) energy consumers increasingly demand the access to the transparency and associated structuring opportunities that these sorts of markets provide.

Put simply, these market structures have proven to be far superior to non-organized power markets that still exist in parts of the southeast and west, and they are also compatible with continued local regulation of energy supply, and so it’s our view that over time these structures will continue to be extended throughout the national grid. Indeed, we are presently seeing efforts to develop enhanced, regional market structures in both the west and the southeast.

Organized carbon rationing and pricing markets are broadly supported by economists and influential policy experts as a means to efficiently and effectively transition the underpinnings of our energy supply away from carbonbased fuels. Given this support, and given that precedents have been established here with the RGGI, and given further that even the current FERC has acceded to the exploration of carbon pricing mechanism in our nation’s largest coordinated electric market (PJM), it seems to be a reasonable speculation that we will see accelerated growth and adoption of these mechanisms. It is notable that China has recently issued final regulations providing for the launch of carbon markets there on February 1.

Each of these developments should be viewed positively – and encouraged – by energy end users, as they support both efficient adoption of broad policy objectives and provide the best array of opportunities for engaged end users to actively manage the transition to the new energy economy to their benefit.

Environmental, Social and Governance (ESG) Disclosure Issues and Management
Management of, and disclosure around, environmental, social and governance (ESG) issues have taken on an increasing level of visibility and importance for companies that access public capital markets, as investors increasingly demand visibility into organizational performance in each of these key areas. Investors care about these measures because they have been found to correlate with overall company performance and are seen as key indicators of the health and robustness of an organization’s management practices and structures.

Put simply, well-run organizations tend well to considerations associated with ESG impacts. Consequently, measurement and disclosure of a broad variety of ESG performance factors are a table stakes requirement for any organization looking to effectively access broad capital markets and companies that score relatively poor on these measures will increasingly find themselves disadvantaged on cost of capital and financial market performance.

As we’ve identified above, the Biden administration sees one of its top priorities as increasing the scope, scale and depth of measurement and reporting in these areas. Consequently, we should expect to see increased adaptation of standards around carbon intensity reporting throughout organizations’ operations and into their supply chains. This may well have far flung impacts on how large, public organizations operate and is also likely to push pressure for decarbonization down into and throughout the supply chains of these organizations.

What this means is that, even if your organization does not currently see carbon reduction as a priority, it’s likely to become more important to you, because your customers will ultimately make it so. We encourage our customers to start considering now how you will ultimately adapt to these demands and we are eager and able to help you begin that journey.

Other Impacts and Considerations
While we’ve given you a lot to consider already, we’ll conclude the topical discussion with a few thoughts on other potential impacts and considerations of the changing policy landscape. As different localities and political bodies stand today with diverse range of outlooks, perspectives
and preferred prescriptions, and as policymakers, regulators, players and polities adopt varying strategies and express individual and grouped preferences, there will be all sorts of dislocations and gradients that arise and there will be measures attempted to address these dislocations
and gradients in order to address actual and perceived imbalances and injustices.

For instance, at the global level, there is a good chance that we will eventually see some sort of border adjustments (e.g., tariffs, quotas, subsidies and supports, etc.) on imports and exports to account for differing policies related to carbon emissions and attendant differences in carbon intensity of finished products.

At the national and regional level, we are likely to see a greater drive towards national standards and federal control of energy markets and regulations. We are also likely to see greater calls for regional coordination and harmonization of policies and practices. On the flip, we are also likely to see in some regions and localities increased resistance (and perhaps even hostility) to such regional and federal coordination and control.

All of this points towards increased complexity and turbulence on energy policy matters and everything that energy policy ultimately touches (such as trade in goods and tax and tariff policy and the like).

Some Final Words
Energy is central to our economy and our society and climate change concerns and considerations associated with our use of energy are increasingly central to our politics. There is no escaping an engagement with an increasingly complex landscape. These issues will come to you, even if you do not see them as important for your organization to engage with today, as regulatory, competitive and stakeholder pressures will continue to mount on all sides.

Put simply, organizations that do not actively engage with the changing energy landscape, and everything that is associated with it, will find themselves blindsided, surprised and ultimately and substantially disadvantaged relative to those organizations that address these issues proactively and thoughtfully. As your most trusted energy partner, we want to help you understand what’s around and what’s likely to be ahead, and as the leading integrated energy provider, we are able and eager to help you form and execute the strategies that will put you out front.

Interested in learning more?
If you are interested in learning more about the energy commodity landscape, energy efficiency, energy market structures or ESG disclosures, contact George Deljevic, Vice President, Energy Services for AEP Energy, at gdeljevic@aepenergy.com or call George at 312-488-2238. If you are already working with an AEP Energy Sales Representative, they will happily provide more information.

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