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<title>July 2007: Snow White Vs. Green Goddess</title>
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<p align="left"><font face="Arial"><strong><small>About The Author:<br>
<br>
</small></strong><span lang="X-NONE" style="color: black"><font size="2">
ROGER FELDMAN, Co-Chair of Andrews Kurth LLP Climate Change and Carbon
Markets Group has practiced law related to the finance of environmental and
energy projects and companies for 40 years. In particular, he has analyzed
and executed a wide variety and substantial value of project financings. He
chairs the American Bar Association’s Committee on Carbon Trading and
Finance, serves on the Board of the American Council for Renewable Energy,
and has been a senior official in the Federal Energy Administration. He is
a graduate of Brown University, Yale Law School and Harvard Business School.</font></span></font></p>
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<img src="../images/feldman.gif" alt="Washington Viewpoint by Roger Feldman" border="0" width="375" height="75"><p align="left"><b><u><br>
July</u></b><u><b> 2007</b></u></p>
<p align="center"><font size="6"><b>Snow White Vs. Green Goddess</b></font></p>
<p><strong>by Roger Feldman --
</strong><b>Andrews Kurth, LLP</b><strong><br>
</strong><font face="Arial" size="2">(<em>originally published by PMA OnLine
Magazine: 2008/01/05</em>)<br>
</font><span style="font-size: 10.0pt; font-family: Palatino; color: black">
</span></p>
<p class="BodyText05DS" align="left" style="text-align:left">Energy mirror
on the wall, who’s the greenest of them all? For years it seemed to be
natural gas: no SOX, no NOX, no waste disposal problem. Amidst the hoopla
of the titanic conflict between oil and renewable tax incentives (and
incidentally Federal RPS in the recent Senate Bill), the potential impact on
natural gas of clean/renewable energy legislative developments has received
less attention. A National Environmental Energy Development (NEED) Act was
indeed proposed in mid-June in the House at the instance of the natural gas
industry. It would significantly lift restrictions on domestic production
on the Outer Continental Shelf and, in return, plow resulting royalties into
renewable energy and carbon sequestration research, selected major
environmental restoration projects, and even low-income energy and
weatherization programs meant to be a green-for-green swap, so to speak.
</p>
<p class="BodyText05DS" align="left" style="text-align:left">This type of
proposed tradeoff obscures the larger quandary, however, which
clean/renewable development poses over the long term for clean natural gas
use in the United States, depending on the form this new “Green Goddess”
eventually takes.</p>
<p class="BodyText05DS" align="left" style="text-align:left">First, one of
natural gas’s premier markets is, of course, the electric power industry
(which, not so long ago, never saw a combined cycle plant it didn’t like).
In this market, natural gas is being pushed, by several forces, somewhat
away from its “clean fuel favorite” status. As a result of the Resource
Performance Standards, now spreading to many states (though not yet
Congressionally enacted), many electric utilities are required to meet an
increasing portion of their power purchase requirements from specified
renewable sources, without reference to relative cost competitiveness.
Thus, while many eastern utilities are being pushed by the Clean Air
Interstate Requirements and the continuing requirements of the Clean Air Act
to lower SOX and NOX emissions, they cannot turn to natural gas as they
otherwise might have been inclined to do. The consequences of the
Greenhouse Gas regulations (especially combined with RPS) could further
renewables development, rather than catapult natural gas back to preeminence
as the clean fuel. </p>
<p class="BodyText05DS" align="left" style="text-align:left">As entry of
renewables into the electric utility fuel mix accelerates, the effect will
be to increase the overall price of power. As that occurs, even without any
Federal incentives for energy efficiency or to support demand/response
measures, there may be expected to be market-driven conservation, reducing
natural gas use at the margin in many jurisdictions. (Some of which marginal
price increase will either impact existing gas plants or dampen the
incentive to build new ones.) In significant part, that is what the
so-called “Clean Tech” movement is about: finding processes which either
through significantly improved industrial operation, through process waste
system utilization, or through quantum improvement energy technology
production, anticipate or respond to higher electric costs of production.
(Two other aspects of Clean Tech thinking are to combine improving
renewables, like solar, with energy efficiency measures which, for example,
reduce the use of energy by commercial and residential establishments or
with natural gas use for power firming.)</p>
<p class="BodyText05DS" align="left" style="text-align:left">Second, on a
smaller scale, a clear advantage of natural gas has been its use in smaller
power engines either used in Clean Air Act Non-Attainment Areas or in
certain industrial facilities as part of user reliability strategies. An
emerging contender for this market niche, however, is biodiesel or renewable
diesel. While still in short supply in the United States (particularly as
compared with Europe), these fuels seem likely to enjoy an increasing
incentive from the Renewable Fuel Standards (“RFS”) which, first, are
increasingly-higher requirements for their blending with conventional
hydrocaron fuel and, second, provide significantly more favorable weighting
of biodiesel’s RFS fulfillment value (2.7) relative to ethanol (1.0). There
are also, of course, significant tax incentives for biodiesel manufacture.
Along similar lines, the extent of use of natural gas in vehicles such as
municipal bus fleets is vulnerable to increased biodiesel (and hybrid
vehicles) uses. Monetization of Renewable Energy Credits and possible
future GHG reduction credits are not, and likely will not be, available for
natural gas use. </p>
<p class="BodyText05DS" align="left" style="text-align:left">Natural gas use
also is subject to its own environmental challenges, although in different
ways. Methane leakage, for example, will be subject to harsh GHG
regulation, thus the reduction of pipeline leakage likely will be required.
</p>
<p class="BodyText05DS" align="left" style="text-align:left">Finally, the
development playing field has been somewhat tilted towards renewables. Like
tax, R&D loan guarantees and other market incentives, issuance of proposed
carbon reduction credits is a province of the Green Goddess, not Snow
White. </p>
<p class="BodyText05DS" align="left" style="text-align:left">So it would
appear that there is a natural gas industry NEED for a legislative and
regulatory radar that tracks all Green Goddess movements, if current market
niches are not to be snatched from Snow White. All types of clean and
renewable energy incentive programs have significance, but Resource
Performance Standards, Renewable Fuel Standards, and future Green House Gas
Regulations stand out as potential counterbalances to natural gas use’s
current cost edge. When Wall Street appraises gas company corporate
governance, sensitivity to these issues, indeed countermeasures to hedge
their stake in the green market, may well be factors that will be examined
more carefully. The beauty contest between Snow White and the Green Goddess
is just beginning, and Snow White had better check her rear view mirror now.</p>
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text-align:left"><font face="Arial" size="2">
<span lang="X-NONE" style="color: black">ROGER FELDMAN, Co-Chair of Andrews
Kurth LLP Climate Change and Carbon Markets Group has practiced law related
to the finance of environmental and energy projects and companies for 40
years. In particular, he has analyzed and executed a wide variety and
substantial value of project financings. He chairs the American Bar
Association’s Committee on Carbon Trading and Finance, serves on the Board
of the American Council for Renewable Energy, and has been a senior official
in the Federal Energy Administration. He is a graduate of Brown University,
Yale Law School and Harvard Business School.</span></font></p>
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