Keeping pace with change: sustained investment in clean energy infrastructure requires streamlined regulations

April 2024 | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2024 Issue

The passage of the Bipartisan Infrastructure Law (BIL), the Inflation Reduction Act (IRA) and the CHIPS and Science Act (CHIPS Act) in 2021-22 catalysed industry interest in the energy transition.

By February 2024, according to invest.gov, private companies announced $649bn in planned investments in clean energy infrastructure. By January 2024, the federal government had announced $442.6bn in funding for clean energy investments under the BIL and IRA.

Realising these projects, however, is challenged by energy federalism. The current regulatory construct was designed for a different era and neither reflects nor accommodates modern technology, investment cycles and infrastructure needs.

While the energy transition has the potential to revolutionise the American economy and save the planet, without a legislative solution to state-federal regulatory obstacles and jurisdictional questions, it will be difficult to execute the transition at the necessary pace and scale.

Benefits of the energy transition

The energy transition involves not only a shift from a fossil fuel-based energy system to a lower-emitting one powered by renewables, battery storage and hydrogen, but also a fundamental transformation of the modern economy. Integrating new business models, employment channels and advanced communications technologies into the energy ecosystem is all part of the energy transition.

Today, buttressed by shareholder pressure, consumer preferences, government policy and market trends, nearly every major energy company, utility and manufacturer has incorporated decarbonisation, energy-efficiency or other ‘green’ goals into their respective long-term strategy.

In the US, the BIL, IRA and CHIPS Act have further propelled these tailwinds. The BIL and IRA have authorised the Department of Energy (DOE) to greenlight over $110bn in funding for 90 clean energy infrastructure programmes across six categories: (i) clean energy demonstrations; (ii) federal, state, community & tribal infrastructure; (iii) grid infrastructure; (iv) loan programmes; (v) manufacturing & supply chains; and (vi) research & development (R&D).

Similarly, the BIL and IRA earmarked $5bn in federal funding for the Department of Transportation to erect a national network of 500,000 electric vehicle (EV) chargers by 2030. Meanwhile, through 2027, the CHIPS Act authorises about $52bn to advance US semiconductor manufacturing and microchip development, nearly $170bn to support quantum computing and artificial intelligence (AI), and $1.5bn for R&D in advanced wireless technologies.

Across these initiatives, project funding – through grants, prizes, cooperative agreements, direct federal spending and federal expenditure borrowing authority – is distributed to a variety of stakeholders in all 50 states, including state governments, industry partners, utilities, manufacturers, educational institutions and Indian tribes.

As implementation proceeds, the widespread benefits of the energy transition are becoming quite tangible, as outlined below.

First, the energy transition is propelling societal change through workforce development. The BIL, IRA and CHIPS Act created workforce hubs designed to help students of colour, women and underrepresented groups pursue clean energy careers. Pilot workforce hub programmes are slated to launch in Phoenix, Columbus, Baltimore, August and Pittsburgh in summer 2024. All three laws contain additional provisions to support project-specific workforce training and science, technology, engineering and mathematics (STEM) education.

Second, the energy transition is stimulating the development of entirely new industries, particularly with respect to the development of alternative fuels such as hydrogen. In October 2023, the DOE awarded $7bn to seven regional clean hydrogen hubs across the US to manufacture clean hydrogen. While each hub will uniquely rely on a different combination of feedstocks (such as renewables, natural gas, biomass and low-cost nuclear energy) to manufacture hydrogen, all of them will contain dedicated transportation and storage infrastructure and cater to different consumer segments. Some hubs will advance decarbonisation in heavy duty transportation, while others will fuel industrial processes and power plants. All, however, will have dedicated off takers. Addressing demand-side constraints is perhaps this initiative’s most important accomplishment, as hydrogen has historically struggled to compete with natural gas and refined products due to cost competitiveness and technical constraints.

Third, the energy transition allows for modernisation of the electric grid through the creation of transactive energy systems, or what the DOE labels “connected communities of grid-interactive efficient buildings”. Transactive energy systems are comprised of a network of suppliers delivering energy to each other. Peer to peer deliveries allow the system to be ‘energy smart’ and ‘do more with less’. In a ‘traditional’ energy system, electrons flowed in one direction, electricity was generated at a plant, shipped across a long-distance, high-voltage transmission line and fed into a localised distribution system before reaching the consumer. By contrast, in a transactive energy system, power travels in multiple directions. Electrons can be generated at the place of consumption through rooftop solar, stored in residential and EV batteries, and sold to the utility.

Private telecommunications networks, supported by AI technology, are the lifeline of transactive energy systems, as they allow sensors, smart controls, devices (such as an EV battery) and distributed energy resources to communicate with each other and with the utility. Large, private long-term evolution (LTE) networks, such as those maintained by Anterix, a wireless spectrum provider servicing utilities with 900MHz spectrum private LTE networks, play important roles in this respect, as they allow millions of heterogeneous data points to be aggregated, analysed and processed in real time.

“Maintaining investment at the pace and scale required to achieve long-term climate and policy goals requires immediate and robust regulatory reform.”

These networks are also secure, as they create an airgap with commercial carriers that effectively operates as an isolated system that is capable of withstanding cyber security threats. In 2022, Anterix and Xcel Energy inked an agreement to realise private networks to support grid modernisation in eight states.

For utilities, transactive energy systems with private communications networks are critical for grid and load management and ensuring reliability, especially during extreme weather events. For consumers, these systems empower individuals to track their energy consumption, select their energy source, take advantage of time of day rates and even reduce household expenditures by selling excess energy. This is perhaps the fourth major benefit of the energy transition – the democratisation of energy flows and the empowerment of consumer choice.

Improved supply chains and streamlined regulations are needed to sustain investment

Despite robust federal policy and financial support, two major challenges could hamper long-term investment in the energy transition: supply chain constraints and a broken system of energy federalism.

The energy transition requires huge amounts of critical minerals. According to the ‘White House 2021 Supply Chain Assessment’, the widespread implementation of net-zero policies will cause global demand for lithium and graphite – two vital inputs for EV batteries – to increase by 4000 percent by 2040.

Other components, such as polysilicon (used in solar panels), neodymium (used to make permanent magnets in EVs and wind turbines) and battery-grade nickel, cobalt and lithium, could also be in short supply in the longer term. Already, supply chain constraints are prompting investors to prioritise onshore solar projects over offshore wind farms, given elevated raw material costs and wind turbine production backlogs.

While BIL marked nearly $3bn to advance domestic battery production, a targeted strategy for sourcing raw materials at scale and on cost-competitive terms is essential to sustaining long-term investment in clean energy infrastructure.

The second major challenge is the need for regulatory reform, particularly in the power sector. Conceptually, existing laws are based on the legacy system of centralised command and control. Regulations should be updated to allow for distributed energy resources integration and more dynamic load management practices appropriate for a transactive energy system. Procedurally, regulations must be streamlined. Siting, construction, permitting, ratemaking and transportation decisions often implicate federal and state laws, leading to long delays. Reforming the regulatory process is essential to modernise existing assets, commission new projects and sustain consumer engagement. There is no point in purchasing an EV or installing a charging station at home if the utility cannot provide power.

Failure to reform state-federal energy regulations at the legislative level will compel parties to seek resolution in court. This dynamic renders the judiciary a policy-making body – a function it is not designed to carry out – and will delay, if not bludgeon, investment.

The need to reconcile these questions is even more pressing given the pending US Supreme Court decision on the future of the Chevron doctrine in Loper Bright Enterprises v. Raimondo and Relentless Inc. v. Department of Commerce. Dating from a 1984 decision, the Chevron doctrine allows courts to defer to agencies’ reasonable interpretation of ambiguous statutory text.

The widespread adoption of Chevron by federal and state courts has afforded agencies a certain level of influence in implementing legislation across a range of sectors. While it remains unclear whether the court will invalidate, modify or preserve Chevron, the court’s decision will invariably inform regulatory actions and reforms over the coming years, although the precise ramifications are nearly impossible to quantify. Certainly, a revision to Chevron could deride clean energy investments.

The energy transition can yield numerous societal, economic, technological and climatic benefits. Already in the US, buttressed by government support, industry is actively investing in clean energy technologies throughout the value chain. But maintaining investment at the pace and scale required to achieve long-term climate and policy goals requires immediate and robust regulatory reform.

Clint Vince is a partner, Jennifer Morrissey is counsel and Dena Sholk is a legal intern at Dentons. Mr Vince can be contacted on +1 (202) 408 8004 or by email: clinton.vince@dentons.com. Ms Morrissey can be contacted on +1 (202) 408 9112 or by email: jennifer.morrissey@dentons.com. Ms Sholk can be contacted on +1 (202) 496 7657 or by email: dena.sholk@dentons.com.

Clint Vince is the chair of Dentons’ US Energy Practice and co-chair of Dentons Global Energy Sector. Mr Vince is rated as one of the leading energy lawyers in the US and has directed the expansion of the US Energy team into a premier practice that includes professionals spanning the continent coast-to-coast, offering a full range of services to energy industry clients. He is widely recognised for his cutting-edge theories and solutions within the energy industry and has a top-tier litigation track record. Recently, Mr Vince created the groundbreaking Dentons Smart Cities & Connected Communities Think Tank.

Jennifer Morrissey, a member of Dentons’ Energy practice, divides her practice between traditional regulatory and transactional matters relating to energy, resources and infrastructure, and federal litigation and appellate work related to energy and resources. Her clients include asset managers, private equity firms and investors, banks and financial institutions, trade associations and ad hoc coalitions, foreign corporations, municipal entities and rural electric cooperatives, natural gas producers, public utilities, cogeneration facilities, project developers, state utility regulators, federal hydropower customers and large industrials. Ms Morrissey advises clients operating in the electricity and natural gas sectors before the FERC.

© Financier Worldwide

Clint Vince

Dentons