Update: This article references two pieces of legislation whose passage could impact the Energy market. President Biden signed the bipartisan infrastructure bill into law on November 15, 2021. Congress is still debating the reconciliation bill.

During the 2020 presidential election, then-candidate Joe Biden campaigned on an aggressive energy policy designed to mitigate the effects of global climate change. One year later, Congress is debating those Biden administration policy ideas in multitrillion-dollar legislation that, if passed, could reverberate throughout the Energy sector for decades. To find out what policies are under consideration and other energy priorities the administration could pursue, Baird Global Investment Banking’s Gregg Byers spoke with Courtney Rosenberger of Strategas’ Policy Research team in a two-part energy policy Q&A.

In Part 1 of the Q&A, Gregg asks Courtney about the legislative policy proposals Congress is currently wrestling with. In Part 2, Gregg and Courtney will discuss other energy policies and strategies the Biden administration could pursue, ranging from drilling permits to financial sector regulations to executive powers.

You’ve noted a big theme from the current administration is making fossil fuels more expensive and renewables cheaper. Can you expand on that?

When we think of the 2020 election, climate was one of the front-and-center policy issues after COVID-19. This is an entirely different administration – and Democratic Party – than we’ve seen before in terms of prioritization of climate. President Obama had the goal of moving the U.S. to a clean energy economy but also embraced U.S. production of oil and gas as the country recovered from the 2008 financial crisis. That administration’s strategy was to subsidize renewable energy, reduce the use of coal and commit the U.S. to reduce carbon emissions over time through the 2015 Paris Agreement.

Essentially, President Obama was creating the infrastructure for a future president to deliver on large-scale emission reductions, which President Biden has accepted. In fact, President Biden has committed to reduce U.S. emissions by 50–52% relative to 2005 levels by 2030. To achieve this goal, Biden wants to increase the cost of fossil fuels through higher taxes, more regulation and less distribution, while also lowering the cost of renewables with new subsidies and mandating the use of renewable energy. However, recent increases in oil and natural gas prices create political limits for how far and fast the Biden administration can move on this strategy due to consumers’ sensitivity to higher gasoline and home heating prices.

What are some of the key levers to enact these changes?

President Biden has two levers to enact change – legislation and regulation. Most of the focus right now is on the legislative side with two major pieces of legislation.

  • The bipartisan infrastructure bill, which is a bill focused on physical infrastructure. That legislation is less climate-focused, but it does include measures related to electric vehicle charging ($7.5 billion), electric buses ($7.5 billion), the grid ($73 billion) and resiliency ($50 billion).
  • The Democrats’ reconciliation bill, which is focused on social policy, healthcare and climate. This bill was initially designed to reduce emissions using a three-fold strategy: raising the cost of fossil fuels through tax increases, mandating that utilities use renewable energy sources and subsidizing renewable energy sources.

Regarding the reconciliation bill, political compromise has made the first two of those three strategies difficult to achieve. The legislation is unlikely to have specific tax increases like a carbon tax or carbon import tax, though a methane fee is included along with efforts to make drilling on federal lands more expensive, and the mandating of renewable energy sources had to be cut following opposition from moderate Democrats. However, the scaling back of fossil fuel provisions has led to an even greater emphasis on green energy credits and funding. The latest legislative text includes $320 billion of renewable energy tax credits over the next 10 years. The package focuses on long-term tax credits for solar, wind, energy storage, biofuels, electric vehicles and nuclear power. This is an increase from the $235 billion for clean energy tax credits that was included in the House’s September bill. In addition, the latest text provides $230 billion of funding measures for clean energy.

A big question for the Biden administration will be how they deal with rising energy prices. Does the administration reflexively try to stop crude and liquefied natural gas exports after seeing the first spike in prices since we started exporting?

The regulatory side of climate policy can happen regardless of what is going on in Congress, which is important to keep in mind if legislation cannot pass or there is a shift in congressional control. We see the Biden administration taking a “whole of government” approach to climate change, which ranges from the Securities and Exchange Commission requiring companies to disclose their emissions, to the Federal Reserve incorporating climate risks into bank stress tests, to the Labor Department allowing 401(k)s to invest in ESG funds. These would be in addition to more traditional climate regulators, such as the Environmental Protection Agency, which handles environmental regulation utilizing the Clean Air Act and Clean Water Act. Other traditional players include the Federal Energy Regulatory Commission, which permits natural gas pipelines, and the Department of Transportation, which works with the EPA to set fuel efficiency requirements. A big question for the Biden administration will be how they deal with rising energy prices. For example, does the administration reflexively try to stop crude and liquefied natural gas exports after seeing the first spike in prices since we started exporting? That remains to be seen.

As of this date (11/11/2021), what is the status of the fiscal legislation?

The bipartisan bill passed the House on Friday, November 5, and is on its way to President Biden for signature. The earliest the reconciliation bill can get a vote in the House is the week of November 15. But even if the House passes the bill, the legislative debate is still not over. Senate Democrats will almost certainly require changes to the House’s bill, and the Senate also has an unlimited amendments process where Republicans can amend the legislation with just one Democratic vote. This means that House and Senate Democrats, after each passing their respective versions, will have to conference together and then pass a single reconciliation bill. All in, this process is quite likely to take into December, given that Congress has two weeks of recess in November and the debt ceiling and government funding remain on the agenda.

How could these bills affect the outlook for electric vehicles (EVs) and EV charging infrastructure?

About 30% of U.S. greenhouse gas emissions are attributed to the Transportation sector, so greening the vehicle fleet is a priority for Democrats. The administration wants to get electric vehicles to the middle class while avoiding the appearance of giving a tax credit to the wealthy, which is the demographic that has traditionally benefited from previous EV tax provisions.

Under current law, the maximum EV tax credit is $7,500, and vehicles from two of the big EV carmakers – General Motors and Tesla – were no longer eligible for the credit because their sales had surpassed a threshold of 200,000 vehicles. Under the House’s reconciliation bill proposal, the maximum tax credit is increased to $12,500 and the vehicle sales limit is eliminated. That’s a huge increase that Democrats hope, combined with the credit becoming transferable to dealers in 2023, will help consumers see EVs as cheaper alternatives to combustible engine vehicles. There are some important caveats – to get the full $12,500, the vehicle needs to be made with union labor ($4,500 of the credit) and use a battery with components that are at least 50% domestically produced ($500). There is also a price cap and an income cap. Other noteworthy EV measures include an expansion of the credit for commercial vehicles and a new credit for purchasing used EVs.

The bipartisan infrastructure bill includes $7.5 billion for electric vehicle charging stations and $7.5 billion for electric buses. That is not nearly enough funding to reach President Biden’s goal of 500,000 electric charging stations, but it is still considered a massive investment in a very small industry. Funds may be targeted toward areas where commercial charging by private companies would otherwise not be profitable. There is an extension and more generous modification of the tax credit for installation of commercial charging property in the reconciliation package.

Who are some of the biggest winners and losers in the Energy space from the proposed $4+ trillion in infrastructure and reconciliation spending?

There are certainly advantages for electric vehicle and bus manufacturers for the reasons mentioned above, particularly those that utilize union labor and have lower priced cars. And again, $7.5 billion for charging can have a big impact on individual companies.

The House’s reconciliation bill includes green energy tax credits that run the gamut of investment tax credits, production tax credits, nuclear, carbon capture and others. A change that had a notable lobbying force was the expansion of the investment tax credits to also include storage. These certainly benefit utility scale as well as retail solar, along with wind, offshore wind and nuclear. There had been a concern that the Democrats would shorten the 10-year timeframe of the credits to reduce the bill’s overall price tag, but as of now the 10-year timeframe is still in the text.

Not all companies in the renewable space may benefit equally, though. The Biden administration wants to make renewables not just about climate, but also about jobs to get voters on board with the energy transition. Most of the green energy credits in the Democrats’ reconciliation bill have prevailing wage and apprenticeship criteria that, if not met, reduce the credit by 80%. There are also bonuses for meeting domestic production criteria.

Additionally, we would be cautious about companies that are heavily reliant on China for their supply chains. The Biden administration took action this past summer to block solar panels imported from certain Chinese companies that use Uyghur forced labor. Further action could still be taken on issues related to human rights and the broader U.S.–China conflict that continues to play out under the Biden administration.

Interestingly, with Senator Manchin coming out against the Clean Electricity Performance Program – one of the reconciliation package’s major mechanisms to reduce emissions – as well as other moderate Democrats lining up against some of the unfavorable measures for oil and gas, fossil fuels may come out of this package hurt, but far better than expected.

What were the regressive actions under consideration, and what actions could still be taken against the traditional fossil fuel industry in the reconciliation bill?

It’s important to keep in mind how narrow Democrats’ majorities are in the House and Senate. Even utilizing reconciliation, Democrats need every single Democratic senator to vote in favor of legislation and can only afford to lose three Democratic House members. That’s an extremely tight majority which gives just about any member with a (D) next to their name veto power. There are a number of Democrats who have oil, gas and coal producers in their districts. Those companies are employers and sources of tax revenue, and their representatives know that.

We expect some of the industry’s most guarded tax benefits like the intangible drilling credit and the percentage depletion deduction to survive the reconciliation bill. Additionally, the MLP structure remains safe in the House’s tax bill, and we expect it to remain safe in final legislation as well.

Negotiations around other fossil fuel negative changes have moved considerably since early October. The reason for this is primarily Senator Manchin coming out against the proposed Clean Electricity Performance Program (CEPP), but it wouldn’t be surprising if rising fossil fuel prices are also making members gun-shy.

The House proposed a $150 billion Clean Electricity Performance Program, which would provide payment incentives for utilities that increase their generation from renewable power sources while imposing financial penalties on those that did not. Senator Manchin came out against the policy formally in mid-October. There had been talk of rewriting it to include carbon capture as an alternative solution for coal and gas-fired plants, but this is now viewed as largely dead.

To replace the CEPP, Democrats had revitalized talk of a carbon tax and border-adjustable carbon tax, but these extremely complex ideas, as well as alternative ideas like block grants for states in return for increasing renewable energy generation, were ultimately abandoned. The ideas have reemerged among Democrats at COP26 in Glasgow, but given the complexity and the new urgency to get this legislation over the finish line, we remain of the belief that a carbon tax will not be included.  

A methane fee is still on the table, although it remains to be seen if it too will remain in the package. The latest House text requires the EPA to impose and collect a charge on facilities that exceed emissions thresholds (i.e., emissions greater than 0.2% of gas sent from facility or 10 metric tons of methane per million barrels of oil). Charges would start at $900/ton of methane in 2023 and increase to $1,200/ton in 2024 and $1,500/ton in 2025. There is $775 million provided for financial assistance in the form of grants, loans, rebates and contracts for oil and gas facilities to reduce their emissions and meet the thresholds.

The latest text also includes a number of provisions related to federal lands, such as:

  • Bans new offshore leases
  • Raises royalty rates for new oil, gas and coal leases
  • Increases the minimum bid for oil and gas leases
  • Creates new fees for new producing and non-producing leases as well as expressions of interest
  • Creates a new fee for offshore oil and gas pipeline owners
  • Makes other changes such as reducing lease terms, changing bonding requirements and eliminating royalty relief.

Now that the bipartisan bill has passed and the two bills’ paths are no longer intertwined, power has shifted toward the moderate Democrats. Senators Manchin and Sinema have opposed many of the fossil fuel negative provisions, and the methane provisions are on both of their radars. It’s likely that the Senate’s version of a reconciliation bill will make changes to – if not remove entirely – the House’s methane fee. The methane fee was the primary “stick” left in the reconciliation package to penalize fossil fuel utilization – without it, the legislation relies primarily on incentives via tax credits.

Are there legislative avenues outside of the two main spending bills that the current administration can utilize to achieve climate goals?

There are, but the reconciliation bill and bipartisan infrastructure package represent the Democrats’ best opportunity. Democrats want to pass the reconciliation bill quickly to make good on their promise to progressive Democrats that the bill would pass, as well as show voters tangible wins ahead of the 2022 midterms. The process will not be easy though: Now that the bipartisan bill has passed into law, moderate Democrats can hold their lines on certain spending and pay-for measures. Additionally, Democrats must resolve government funding and debt ceiling deadlines in December.

The good news for Democrats is that while they want this done as quickly as possible, they do not have a near-term statutory deadline for the reconciliation bill’s passage. Congress has until the reconciliation bill’s budget resolution expiration to pass it – that’s not until September 30, 2022. If the current shot at reconciliation fails, they can try again.

If Democrats cannot get the reconciliation bill passed, then the next best option is likely to try and attach measures to must-pass bills. A good example of this would be government funding. Congress needs to either pass a new set of appropriations or a continuing resolution by December 3. There is precedent for including green energy tax extenders and expansion measures onto government funding bills, but this would be at a significantly smaller scale than Democrats are targeting because the measures would have to have Republican support. Tax changes and penalties to fossil fuels would not have the Republican support to be included with this approach.

Stay tuned for Part 2 of this conversation with Strategas, where we discuss additional energy policies and strategies the Biden administration might pursue.