On Thursday, June 21, the Senate released their version of this year's energy bill, with a vote of 65-27.
Some of the salient provisions of the bill include:
- Automobile fuel economy standards will be increased to a fleet average of 35 miles per gallon by 2020, a 40 percent increase over the current requirements.
- An upgrade of the Renewable Fuels Standard (RFS), including a mandate that annual ethanol production increase to 36 billion gallons per year by 2022. Fifteen billion gallons will come from corn as a feedstock. This is in comparison to the current RFS, which calls for 7.5 billion gallons per year by 2012.
- A requirement that half of all new cars manufactured domestically be compatible with biodiesel or the E85 ethanol blend by 2015.
- Grants, loan guarantees, and other federal assistance to promote research into fuel-efficient vehicles, including hybrids, advanced diesel, and battery technologies.
- Establishment of a 20 percent greenhouse gas (GHG) reduction standard for conventional biofuels and a 50 percent GHG reduction standard for advanced biofuels.
- Provisions that will prevent price-gouging practices within the oil industry. The federal government will also be given authority to investigate oil industry market manipulation.
- Standards to improve appliance and lighting efficiency standards.
Now that the Senate has passed the bill, it will be reviewed by the House of Representatives, however it was not disclosed exactly when this will happen.
While this bill reflects increased federal attention toward the renewable energy industry from the last energy bill that was passed in the summer of 2005, its overall impact on the sector can be debated.
Last time around, energy security and a heavy dependence on imported oil seemed to be the major issues addressed. As a result, the corresponding energy bill included some tax subsidies for domestic oil and gas production in lieu of incentives for the development of alternative energy. With continued attention toward climate change and the recognition that alternative energy can reduce that risk, this year’s bill has more of a focus on reducing greenhouse gas emissions.
It is encouraging to see that the clean tehcnology sector is receiving additional attention from the federal government, as it will undoubtedly aid in the strategic objectives of the affected companies.
At the same time, while there are no longer tax incentives being introduced for the production of traditional fossil fuels, this year’s bill has a much narrower focus than in 2005.
Indeed, the new RFS mandate will accelerate the production of biofuels and indirectly put downward pressure on the retail price -- a critical element in the advancement of the biofuels sector. This news provided a much needed boost to the shares prices of ethanol pure players such as VeraSun (VSE), Aventine Renewable Energy (AVR), and US BioEnergy (USBE), whose stocks went up 4.9%, 5.8%, and 9.1%, respectively, in last Friday's trading session.
As well, federal assistance to promote research into hybrid vehicles will benefit next generation battery technologies. Nevertheless, in regards to the alternative energy sector, there are some glaring omissions to this bill.
Specifically, the 2007 version is heavily focused on reducing GHG emissions from the transportation sector, where the biofuels segment of clean tech will largely benefit the most. There are no further incentives for the solar industry, which is the most expensive form of electricity generation. There are only a handful of regions in the U.S. where solar is cost effective, and that is generally due to the generous state-level incentives that are in place. Additionally, there are no incentives to advance the development of the wind industry or fuel cells. It appears that players in these industries are no better off now than they were previously.
Furthermore, in regards to the biofuels industry, the incentives included do not address the most relevant market needs. The bill calls for increased production of ethanol, but does not include any specific provisions for the advancement of next generation fuels such as cellulosic ethanol, which provide significantly higher yields and a much larger feedstock base.
In fact, out of the 36 billion gallons of ethanol to be produced by 2022, 15 billion will come from old-fashioned corn. We had hoped to see direct federal aid that would allow biofuels to be produced and sold at a cheaper price, though that does not seem to be included.
Another bottleneck to the progress of the biofuels industry lies in the distribution infrastructure. Currently, ethanol must be transported to its final destination via trucks, as there is no sufficient pipeline. As well, according to the U.S. Department of Energy, there are only about 1,200 filling stations across the nation that are equipped to dispense the E85 blend of ethanol. This figure will have to increase dramatically in the future for the mandates dictating increased domestic production of E85 vehicles to be feasible.
With distribution already being a lower-margin business, not having federal incentives in place to improve the distribution of ethanol is an evident oversight in this year’s energy bill. Simply encouraging increased production of ethanol would only enhance the fears of overcapacity that are enveloping the sector.
Finally, unlike approximately half of the states in the union, there was no mention of a federally-mandated Renewable Portfolio Standard, which would require utilities to generate a certain percentage of power from renewable sources. This would have been a windfall for clean technology.
It should be noted, however, that an important component of this bill—a proposed $32-billion tax package on oil companies that would be subsequently used to subsidize alternative energy—did not get the required votes to become part of the legislation, as it was reported that several Republicans apparently had banded together to prohibit this provision from going through. If this portion of the bill had been approved, there likely would have been clauses that addressed some of the issues above. With a number of senators not voting and the inclusion falling short by only three votes, though, this provision may be resurrected later.
Overall, this bill seems to be geared more toward energy efficiency and the reduction of greenhouse gases rather than the provision of direct support to the renewable energy industry. There is nothing wrong with that, as there are ways to reduce emissions other than clean energy technology.
As far as the sector goes, we did not see an overwhelming rush to buy clean tech stocks and we do not see this bill as a major impetus to invest in the sector.
Disclosure: I do not own any of the stocks above and will not do so in the near future.