Positioning Your Business Favorably for the Clean Power Plan
For many businesses, the cost of energy is a significant expense. The Environmental Protection Agency's recent adoption of the Clean Power Plan—which many industry observers describe as the most significant environmental regulations in United States history—has only heightened the concern over energy costs. The Clean Power Plan is essentially an effort by the EPA to stem the implications of climate change and calls for a 32% reduction in carbon dioxide emissions from the power sector by 2030. The transition toward such reductions is scheduled to begin in 2022—only seven years from now. While much has been publicized regarding the detailed requirements of the Clean Power Plan since its adoption, it is equally if not more important for business owners and executives to understand how the Clean Power Plan will impact their businesses and what, if anything, they can or should be doing to most favorably position their businesses to deal with those likely implications. This article summarizes some of the likely impacts that the Clean Power Plan will have to your business's bottom line, and identifies some important measures that you can undertake in order to mitigate those impacts and even turn them into advantages.
How will the Clean Power Plan impact your business?
For states located in the Midwest, like Wisconsin, where roughly 62% of the electricity is generated from coal-fired plants, the impact of such regulations will likely be significant (some say dramatic) in terms of energy generation, cost and usage. At least one industry analysis predicts that in the absence of other cost-effective energy generation options costs of compliance with the Clean Power Plan could result in annual energy cost increases of 17%-30% per year beginning in 2022. Compare this with historical increases over the past 15 years which are more typically in the range of 4% per year. Not surprisingly, many businesses in competitive markets with tight margins will have difficulty absorbing those energy cost increases.
The ultimate impact, however, will depend in substantial part on how each state crafts its specific plan to achieve the emission reductions goal established for it under the Clean Power Plan. The EPA has granted wide latitude to each state in determining how best to achieve the desired emission reductions. Possibilities identified by the Clean Power Plan include measures to (i) directly reduce carbon dioxide emissions at the source, (ii) increase the power generation load at facilities that utilize natural gas, (iii) reduce electricity usage through energy efficiency equipment and programs, and/or (iv) expand renewable energy production. A well-designed state plan can help moderate the impact on energy rates in the near term and potentially result in lower energy costs in the long-term. Thus, both states and businesses that more proactively plan and position themselves now will be in a far better position to deal with the likely ramifications in the future, and even turn those into opportunities.
As a business executive or owner, what can you do now to best position your business for the effects of the Clean Power Plan?
1. What Do We Use and Where Do We Use It?
Analyze your energy usage and become an active participant in the state implementation plan process to help craft solutions that can benefit your business.
Given the importance of the state implementation plans on the ultimate impact of the Clean Power Plan, you should be analyzing the energy environment of the states where you have business operations as well as your energy usage within those states. It is important for you to understand what measures identified above or otherwise would best enable your business to reduce its energy costs and/or usage. The purpose of this exercise is to position your business to get engaged in the policy formulation process at the state implementation stage. With stakeholder input, states should be able to design innovative and effective regulatory programs that can help minimize the impact on energy consumers—and even set the stage for new businesses, or even industries, to grow in your state. However, state implementation plans must be submitted to the EPA as early as September 2016, so there is a limited window for stakeholders to influence the measures adopted by a particular state.
2. How Can We Creatively Reap Benefits?
Consider on-site renewable energy generation for your business to take advantage of current incentives and hedge against future energy cost increases.
Industry analysts predict that renewable energy will continue its growth as a significant part of our national electricity fleet. In 2014, the installed solar capacity grew by 34% from 2013, and installed wind capacity grew by 8%. There is currently a suite of proven renewable energy strategies and technologies that not only mitigate energy cost risks, but in some cases turn those risks into business advantages. Thus, you should seriously consider incorporating on-site renewable energy generation, such as a commercial rooftop solar energy system, into your business facilities and operations. The cost of solar energy systems continues to decline and, at least through the end of 2016, there are advantageous tax incentives that can defray the upfront investment. Even if you have not budgeted for the upfront cost, there are a number of solar developers that offer sophisticated financing approaches that can minimize, and in some cases eliminate, your upfront investment burden. Some of the financial strategies and tools that can be utilized to deploy renewable energy include the following:
Tax equity financing to utilize federal and state tax incentives such as the investment tax credit and production tax credit
Renewable energy certificates or RECs which, in some states, are tradable credits created from renewable energy production
Property Assessed Clean Energy or PACE which enables building owners and tenants to finance renewable energy and energy and water efficiency improvements to their real property through special charges
Energy performance contracting which require contractors to provide performance guarantees for renewable energy or energy efficiency improvements
In many cases, there is little (if any) upfront investment on the part of the energy consumer. Owners simply furnish the rooftop space and agree to either lease the solar energy system or purchase the energy generated by the system at a fixed rate over a set duration of time (typically 12-15 years), after which they have the option to take over full ownership of the system. The energy produced by the solar energy system merely supplants the electricity that the business would otherwise purchase from the local utility. Properly structured, commercial solar energy systems can result in significant energy cost savings.
Incorporating on-site generation can be an effective hedge against future energy cost increases, create significant cost savings that drop directly to your bottom line, and potentially increase the value of your facilities. In addition, if your state ultimately adopts a carbon trading or similar incentive as part of its implementation plan, it may be possible for you to sell RECs generated by your solar energy system, thereby creating a new revenue source for your business. However, there is no assurance that the federal tax incentives for solar will be extended beyond 2016 and, therefore, now is the time to assess the advantages of an on-site commercial solar energy system.
3. How Can We Operate Leaner Now and In the Future? Evaluate energy efficiency upgrades to your facilities and/or operations.
You should also consider undertaking energy efficiency retrofits (such as new HVAC systems, efficient lighting and water efficiency technologies) to reduce your energy usage. These retrofits and upgrades can produce tangible, and oftentimes immediate, savings. When implementing any such measures, you should be sure to establish a pre-retrofit baseline of your energy usage in order to document and demonstrate efficiency gains as some state implementation plans may incorporate rewards or other incentives for such gains.
If available in your community, PACE can be an effective method to finance energy efficiency improvements (in addition to renewable energy projects). As an example, the University Club in Milwaukee, Wisconsin, utilized Milwaukee's PACE program to make efficiency improvements projected to save 30% in energy costs. Similar savings may be achievable for your facilities. While the City of Milwaukee has the only active PACE program in Wisconsin at the moment, there is reason to believe that PACE programs will expand across the state in the near future. Many Midwestern states have already developed statewide programs including Michigan, Minnesota and Missouri. In addition to providing an effective method to finance your energy efficiency and renewable energy improvement to your facilities, PACE programs provide states with another tool to develop compliant state implementation plans.
4. Can You Outsmart the Plan? Explore operational efficiencies you could obtain from incorporating "smart" technologies.
Smart technologies will continue to play an important role in business operations and there will be opportunities for technology to help in dealing with the ramifications of the Clean Power Plan. Accordingly, you should continually assess how technology or other such resources may help make your operations more efficient or productive, and/or reduce your energy usage and costs.
Other advantageous measures and opportunities will come to light as states get further along in the development of their respective implementation plans. Thus, even if you decide not to actively participate in the state implementation plan process, it will be critical for you to stay informed of implementation measures and options being considered by states where your business operations are located.
Debates continue to rage on as to the legality, feasibility and potential effectiveness of the Clean Power Plan. It has survived at least one legal challenge so far, and more have been threatened and filed. Whether you agree with the Clean Power Plan's legality, purpose or approach, it would be an expensive mistake to not plan for its implementation. Consider the measures identified above as part of your solid business planning process. The Clean Power Plan merely amplifies their relative importance in positioning your business for future success.