Key Takeaways: Achieving Low-Cost Decarbonization Through Power Markets, Infrastructure and Grid Operations



McDermott hosted Rob Gramlich, Founder and President of Grid Strategies, LLC, on July 16 for a discussion of low-cost decarbonization strategies for the electricity sector. We framed the discussion around 2020 US Presidential Candidate Joe Biden’s recently announced goal of getting to zero carbon emissions from the electricity grid by 2035.

Here are three takeaways from our conversation:

1. Three Areas of Change. Rob highlighted three areas where improvements can be made to substantially increase the deployment of wind and solar resources: Power markets, grid infrastructure and grid operations. With respect to power markets, Rob emphasized that regional transmission organizations (RTOs) can play a bigger role in achieving very fast dispatch over large geographic areas. With respect to infrastructure, he emphasized that new transmission lines will be required to reach the best wind and solar resources, but also that many of those new lines can be built on existing rights-of-way. And with respect to grid operations, he emphasized that there are technologies and operating practices that can help us improve the efficiency of the grid.

2. Flexible FERC. Rob suggested that under a new Democratic administration, FERC would likely prioritize flexibility in pricing design and in FERC’s interactions with states. He emphasized the importance of a flexible design for the pricing of “capacity” services and suggested that a Biden administration would likely be supportive of state level efforts to promote renewable energy.

3. Transmission Costs vs. Electricity Costs. Rob suggested that over the next ten years transmission costs will become a greater share of the overall cost of electricity, but that building out transmission would help bring that overall cost down.



Five Takeaways: What’s New in Energy Private Equity? Trends and Developments in a Shifting Investment Landscape

McDermott recently hosted Andrew Ellenbogen of EIG Partners and Jeff Hunter of Apollo Global Management for a lively discussion about the trends and developments in today’s shifting investment landscape.

Below are key takeaways from this week’s webinar.

      1. The most impactful changes in energy investment over the last decade have been the drop in natural gas prices, the decrease in the cost of capital for renewable investments and the increase in renewable capacity factors (and a dramatic decrease in equipment pricing).
      2. As the energy market has become crowded for traditional operating assets, some investors are seeking opportunities in non-traditional spaces, such as investing in non-traditional technologies (such as solar plus storage or offshore wind) or investing in service providers or construction companies.
      3. In search of returns, some investors are continuing to take a greater amount of merchant risk or development risk than they previously would have accepted, and some investors are investing in platforms rather than projects.
      4. There are smart investments in power to be made in areas with higher barriers to entry (if you can make reasonable projections on the regulatory environment). For example, California peaking resources have provided interesting opportunities in recent years. Larger returns come from taking thoughtful positions on the market and taking carefully analyzed risks.
      5. Prudent investors pay attention to intrinsic risks of power investments, including risks that the market may not be pricing correctly. A successful investment in power assets requires realistic (and conservative) estimates of both basis risk and the merchant tail (and a view on back-end electricity prices).

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Key Takeaways | Developments in the PJM Market

On June 18, 2020, McDermott partners Neil Levy and David Tewksbury were joined by Paul M. Sotkiewicz, PhD, of E-Cubed Policy Associates, LLC, to discuss recent developments in the markets operated by PJM Interconnection (PJM).

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Below are key takeaways from this week’s webinar.

  • In December 2019, the US Federal Energy Regulatory Commission (FERC) issued an order requiring PJM to expand its Minimum Offer Price Rule (MOPR). Under the expanded MOPR, a capacity resource that receives a state subsidy will be subject to a minimum offer floor price in PJM’s capacity auctions, unless it is entitled to one of the exemptions set forth by FERC.
  • The expanded MOPR is not expected to have significant impacts on the results of PJM’s capacity auctions, particularly in the near term. There are at least three reasons for this: First, there are various exemptions to the expanded MOPR, including, but not limited to, exemptions for existing renewable resources, as well as for resources used for self-supply. Second, default offer floors are determined based on the technology of the resource, and certain of these default offer floor prices are low enough to allow resources to continue to clear in PJM’s capacity auctions. Third, and most importantly, a resource can submit offers below the default minimum offer floor price if it can demonstrate that its costs are below the default price.
  • FERC acted relatively quickly on requests for rehearing of its December 2019 order, and issued an order on rehearing in April 2020. Petitions for review of FERC’s orders are pending in the US Court of Appeals for the Seventh Circuit and the US Court of Appeals for the District of Columbia Circuit, and are expected to be consolidated in the Seventh Circuit.
  • PJM has made two compliance filings in response to the December 2019 and April 2020 orders. Given the speed with which FERC acted on rehearing, there is the possibility that FERC could also act quickly on the compliance filings. PJM has indicated that it intends to hold the Base Residual Auction for 2022/2023, which was originally scheduled to take place in May 2019, six and a half months after FERC issued an order accepting the compliance filings.
  • Various states are considering opting out of PJM’s capacity markets by using the Fixed Resource Requirement (FRR) alternative. The FRR alternative could give state regulators more control over the mix of resources in the state, but has historically resulted in higher costs for ratepayers in the FRR states.
  • FERC also recently approved modifications to PJM’s rules to provide additional compensation for operating reserves. At the same time, FERC also required PJM to adopt a forward-looking, rather than historical, methodology to calculate the energy and ancillary services offset (E&AS Offset) that is used in the capacity market. Notwithstanding the expected increase in energy and ancillary services revenues as a result of the operating reserves rule change, using a forward-looking methodology may not result in significant changes to the E&AS Offset in light of other offsetting changes, including reductions in fuel prices.


Six Takeaways: Utilization and Structuring for Section 45Q Carbon Capture Credits

On Thursday, June 11, McDermott partners Phil Tingle, Heather Cooper and Jacob Hollinger were joined by Ken Ditzel, managing director at FTI Consulting, to discuss their insights into the proposed Section 45Q carbon capture and sequestration credit regulations.


The Treasury Department and IRS recently published proposed regulations implementing the Section 45Q carbon capture and sequestration credit. The regulations clarify some questions about the credit, though many questions remain. For further discussion, see our On The Subject.

Below are six key takeaways from this week’s webinar:

      1. Carbon capture projects are likely to be economically important moving forward. Ken Ditzel estimated there are more than 600 economically viable projects, including both secure geological storage at deep saline formations and enhanced oil recovery projects.
      2. The proposed regulations provide a compliance pathway for satisfying the reporting requirements. For long-term storage, taxpayers should comply with Subpart RR of the Clean Air Act’s greenhouse gas reporting rule. For enhanced oil recovery projects, taxpayers may choose either Subpart RR or alternative standards developed by the American National Standards Institute (ANSI).
      3. Taxpayers can claim the credit if they utilize the captured carbon for a purpose for which a commercial market exists, instead of storing it. Additional guidance is needed to determine what commercial markets the IRS will recognize and how they will go about making those determinations.
      4. The proposed regulations offer considerable flexibility to contract with third parties to dispose the captured carbon and to pass the section 45Q credit to the disposing party. Contracts must meet certain procedural requirements, including commercially reasonable terms and not limiting damages to a specified amount.
      5. If the captured carbon dioxide leaks, the carbon capture tax credit is subject to recapture by the IRS. The taxpayer who claimed the credit bears the recapture liability, but IRS guidance permits indemnities and insurance for credit recapture.
      6. The partnership allocation revenue procedure issued in February 2020 provides flexibility for the section 45Q credit relative to other tax equity structures, by only requiring 50% non-contingent contributions by an investor member. This may make projects easier to finance, especially in light of the other contracting flexibility in the proposed regulations.

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Three Takeaways: Tensions in the Renewable Energy and Environmental Markets


McDermott recently hosted Jonathan Burnston, Managing Partner of the energy sector financial services firm Karbone, for a discussion of recent developments affecting environmental, social and governance (ESG) investing, renewable energy and carbon offsets.

Three takeaways from this week’s webinar below:

      1. Interest in ESG investing is unlikely to fade. ESG indices have performed relatively well in the COVID-19 environment and the concerns that motivate ESG investing are not going away.
      2. ESG investing is different from reducing emissions or pursuing carbon neutrality. Positive returns from ESG investments do not themselves reduce emissions or mitigate the impacts of climate change.
      3. Corporate interest in becoming “carbon neutral” is also likely to continue. Due to recent economic disruptions, there may be some delays in achieving some previously announced commitments. However, the pressures and concerns that have motivated the interest in carbon neutrality remain powerful forces.

Listen to the full webinar.

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