Please ensure Javascript is enabled for purposes of website accessibility

Electric utilities shift to green energy goals

New York Times//December 1, 2022//

Marcus Adams replaces a solar array at DTE’s solar park in Lapeer, Michigan

Marcus Adams replaces a solar array at DTE’s solar park in Lapeer, Michigan on Oct. 27. With billions in government subsidies at stake, the electric utility industry put its lobbying muscle behind passing the Inflation Reduction Act. (NYT Photo: Todd Heisler)

Marcus Adams replaces a solar array at DTE’s solar park in Lapeer, Michigan

Marcus Adams replaces a solar array at DTE’s solar park in Lapeer, Michigan on Oct. 27. With billions in government subsidies at stake, the electric utility industry put its lobbying muscle behind passing the Inflation Reduction Act. (NYT Photo: Todd Heisler)

Electric utilities shift to green energy goals

New York Times//December 1, 2022//

Listen to this article

Editor’s note: Business content from The New York Times will now be included with your subscription to Finance & Commerce. Not a subscriber? Start your subscription here. 

 

Just two years ago, DTE Energy, a Michigan-based electric utility, was still enmeshed in a court fight with federal regulators over emissions from a coal-burning power plant on the western shore of Lake Erie that ranks as one of the nation’s largest sources of climate-changing air pollution.

But in September, Gerard M. Anderson, who led DTE for the last decade, was on the South Lawn of the White House alongside hundreds of other supporters of President Joe Biden, giving a standing ovation to the president for his success in pushing a climate change package through Congress — a law that will help accelerate the closure of the very same coal-burning behemoth, known as DTE Monroe, that his company had been fighting to protect.

Anderson’s position reflects a fundamental shift among major electric utilities nationwide as they deploy their considerable clout in Washington: After years of taking steps like backing dark-money groups to sue the government to block tighter air pollution rules, DTE and a growing number of other utilities have joined forces to speed the transition away from fossil fuels.

Their new stance is driven less by evolving ideology than the changing economics of renewable energy, fueled in part by the sheer amount of money the federal government is putting on the table to encourage utilities to move more quickly to cleaner and more sustainable sources of energy like solar and wind.

In that way, it is a leading example of the effects of the Biden administration’s willingness to engage in what is often called industrial policy: providing public funding to bolster critical industries in support of the nation’s broad strategic goals.

But if industrial policy initiatives can provide powerful incentives to corporations to pursue those goals, they also inevitably raise questions about whether they are constructed in ways that reward companies for taking actions that market forces would lead them to take anyway — an issue that hovers over the legislation embraced by both Biden and the electric utilities.

With the passage of the climate and economic policy bill known as the Inflation Reduction Act, DTE and other big utilities like American Electric Power, NextEra Energy and Southern Co. stand to benefit from the largest package of subsidies ever granted to the industry.

It is a 10-year, $220 billion hodgepodge of tax breaks and major changes in federal tax law and other climate-change-inspired inducements that amount to a kind of lobbyist wish list never before considered even remotely possible by the industry.

Buried in the hundreds of pages are carefully crafted provisions that will eventually help electric utilities gain additional profits for years to come, totaling hundreds of millions of dollars per year for some of the larger players, according to Wall Street analysts.

In the course of its two-year lobbying effort, the industry managed to help knock out of the legislation measures that would have mandated actions to curb pollution, largely leaving only those provisions that rewarded it for doing so — in effect securing more carrots while tossing aside the stick.

“Let’s be honest — these guys can say all they want about the environment and how we are all aligned,” said Shahriar Pourreza, who has spent two decades studying the utility industry for Wall Street firms. “But you strip back the layers of the onion, and this is also a major long-term growth opportunity for these utilities.”

The new law also allows utilities that build clean-energy installations to sell large chunks of their tax perks to other companies or Wall Street investors, even those that have no connection to the energy industry.

Embracing Biden

They gathered in early February beneath a portrait of Abraham Lincoln in the White House’s State Dining Room, a room that has hosted countless world leaders over the decades. On that day, it was filled by some of the top executives at the nation’s largest electric utility companies, including Anderson from DTE, as well as the bosses from Southern Co., American Electric Power, Duke Energy and several of the other giant utilities that dominate the nation’s power sector.

It was unseasonably mild for midwinter in Washington — the temperature reached 54 degrees Fahrenheit — and the agenda was global warming and what these companies could do, in an alliance with the White House, to help address it.

The power plants run by these executives are by far the single biggest source of carbon dioxide and other air pollution in the United States. The companies are all members of a powerful trade association called the Edison Electric Institute, which organized the gathering. Collectively, the members of EEI, as it is known, provide electricity to 235 million Americans in all 50 states plus the District of Columbia.

As members of the group sat around a large table, Biden was blunt about what was at stake as he pushed Congress to take steps toward meeting a goal of allowing the nation to produce all its electricity carbon-free by 2035. Biden also let the assembled group know he was well aware many of them in the past were hardly ready to rally behind him for ambitious climate change measures.

EEI members, in some cases, had organized their own sophisticated, but covert, political operations to try to block renewable energy mandates in the past.

But despite a history of opposition to clean-air regulations, the industry in recent years has been abandoning fossil fuels such as coal, largely for economic reasons. Southern Co., which serves 4.4 million electric utility customers in Georgia, Mississippi and Alabama, has long had one of the largest fleets of coal-burning power plants, and it waged an intense fight to protect them, including donations to those who do not agree with mainstream science that says the climate is changing.

But late last year, Southern Co. announced it intended to close all but three of its coal plants by 2028, cutting its coal fleet capacity by 80% compared with 2007, and replacing it mostly with solar, natural gas and nuclear power.

Part of the shift away from coal was driven by federal mandates that were going to force the company to spend hundreds of millions of dollars to upgrade the plants to reduce toxic water pollution sent into area rivers and streams. At the same time, natural gas had emerged as a plentiful, cleaner and more affordable alternative, and the costs of renewables like solar and wind were coming down rapidly.

By the time of the meeting with Biden in February, executives from Southern, like DTE and other utilities, were ready to tell the president they were on board to support legislation that would accelerate the industry’s move away from coal by providing tax breaks and other inducements.

Nick Akins, the chair of American Electric Power, which serves 5 millions customers in 11 states, pointed out much of the value of the tax breaks that were then under debate in Congress would be passed on to ratepayers, in the form of smaller future electric power rate increases, since the federal government would effectively be subsidizing the cost of the transition to cleaner-burning fuels.

But renewables even without federal subsidies are now cheaper than coal, meaning the market was already giving the utilities plenty of incentive to change how they produced power.

What the utilities did not mention at this meeting with Biden was that credit rating agencies were pressuring them to move more quickly to clean up their energy production or face higher costs to borrow money. They also did not detail how the federal subsidies, by changing the economics of the power industry, were going to increase their own profits.

No company is better positioned to cash in on the subsidies than NextEra Energy, which serves 6 million customers in Florida as well as millions more in 38 other states that rely on electricity produced from wind and solar installations it has built to supply other utilities.

The tax subsidies have also increased the value of renewable projects owned by utilities, which is in part why many companies — including American Electric Power, North Carolina-based Duke Energy and Boston-based Eversource — are already putting some of them up for sale.

NextEra, based on previously granted subsidies, already has a $4.3 billion backlog of federal tax credits on its books — so much, in fact, that it has been unable to take advantage of them all, leading the company to carry them forward for use in future years.

The provision in the new law that will allow NextEra and other utilities to sell these tax credits to the highest bidder — including buyers that have nothing to do with the clean-energy business — gives them the opportunity to take in billions of dollars in cash payments in the coming years.

The offer is even sweeter when it comes to newer technologies, such as using hydrogen as a fuel source. Rather than waiting to claim the tax break after making certain kinds of these investments, utilities will be able to go to the Treasury Department and get a direct payment equal to the amount of the tax break as they bring it online — effectively a grant to cover part of the price tag.

This article originally appeared in The New York Times.

Upcoming business events

See the full list of events here

Beyond The Skyline Podcast

    Beyond the Skyline is a podcast and video interview about economic development, real estate and construction in Minnesota.

    Listen here