This podcast is part of The Bond Buyer’s multi-platform series on the future of infrastructure: Build What Better?
In this four-part series, The Bond Buyer looks at the changes this infrastructure moment could bring to landscapes and markets across the nation. It includes four longform feature stories running every other Tuesday for the remainder of 2021, beginning November 16th and concluding December 28th; a four-episode companion podcast series beginning November 30th; and a live video December 28th on our 'Leaders' channel, all hosted by the author.
In part three, we discuss energy provisions in the new infrastructure law – how much they will fight climate change, and how far they will move America toward a carbon-free future. In this episode, Peter Keating talks with guests Ben King (Rhodium Group), Morgan Hickman (Center for Strategic and International Studies) and Adam Stern (Breckinridge Capital Advisors).
Transcription below:
Mike Scarchilli: (00:00)
Hi, this is Mike Scarchilli editor in chief of the bond buyer. Welcome to the future of infrastructure, our new podcast. It's a series of deep dives into us, infrastructure opportunities, investments, and impact for our first installment. I'm pleased to welcome investigative journalist, Peter Keating in this four part series build what better Peter will break down the most important topics of the new landmark infrastructure deal subscribe today. So you don't miss any crucial insights.
Peter Keating: (00:34)
The infrastructure, investment and jobs act contains dozens of provisions to support renewable energy and fight climate change from plugging orphan to oil and gas Wells to upgrading the entire country's electric transmission grid and seemingly everything in between. And it's more than just a laundry list or a political compromise on spending targets. We'll talk with three analysts about how the law points toward a new and green, or at least greener industrial strategy for the United States. I'm your host, Peter Keating, and welcome to build what better a bond buyer podcast that will explore the future of infrastructure in America. We begin by talking with Ben king senior analyst at the rodeo group, an independent research organization. He recently co-wrote a report called pathways to Paris, a policy assessment of the 2030 us climate target. So over the past 15 years, carbon emissions from the electric power sector and this country have dropped by about 40%. That sounds impressive. Is it impressive? Is it enough
Ben King: (01:47)
Largely what we've seen in that decline in carbon emissions from the power sector that you've, uh, that you pointed to over the past 15 years is a combination of two things. One is really sort of the, the large scale shift from, uh, generating electricity, using coal to generating electricity, using gas owing to in large part, the proliferation of unconventional, um, uh, gas extraction, uh, fracking and, and other sources that have brought down the, the price of gas quite substantially, uh, over the past decade or so. And then the other thing that happened at time period is, you know, substantial increases in the deployment of renewable energy technologies, most notably solar and wind, um, technologies, which have grown at quite substantial rates over the past 15 years and have for the last five years or so comprised the majority of all new generat added to the grid.
Ben King: (02:45)
So, so they're, they're taking off, but they're taking off from a pretty, uh, small starting point. So your question is, you know, is it enough, um, under current policy, we project that, um, it's, it's not nearly enough to get on the pathway to, uh, a hundred percent queen by 2035. Um, they're not enough in and of themselves. They'll need to be paired with fairly aggressive executive, um, regulatory actions from places like the environmental protection agency. But, but the action from Congress is absolutely, uh, a necessary condition to those 2035, um, goals that the Biden administration has set.
Peter Keating: (03:22)
You estimate that cheap natural gas from fracking or, or elsewhere will increasingly drive just the outright retirement of nuclear plants.
Ben King: (03:33)
Yeah, that's exactly right. It's a combination of cheap gas and, you know, there's a little bit of competition from renewables coming in there as well. But yeah, without interventions, we, we projected the nuclear fleet continues to continues to retire and shrink in its contribution to, uh, electric power generation in the us over the next 10 years. As you rightfully point out, that's, that's quite problematic, um, from a, from a greenhouse gas perspective because it, it really puts you behind the eight ball.
Peter Keating: (04:04)
What, uh, what kinda subsidies would it take to keep nuclear power at, at the, at the current proportion of overall electric power that it provides in this country,
Ben King: (04:14)
The civil nuclear, um, credit program that's in the invest, the infrastructure bill that provides 6 billion through over the next basically five years, which probably helps retain most, if not all of, uh, existing nuclear over that period separately, there is a provision in the build back better bill that would provide a different sort of tax credit. Um, what's called a production tax credit to existing new nuclear. An interesting facet of that component is that it would scale the size of that credit to meet the, the sort of the level of need that any given nuclear generator has.
Peter Keating: (04:53)
That's very interesting. It brings up an interesting point because I think, I think, um, just looking at the numbers in the infrastructure bill, a lot of people might be surprised by where money is in where the funding is, is directed very intensely, as opposed to lightly, like there's a surprisingly small amount directed toward, uh, solar and wind. Yeah. So
Ben King: (05:17)
I think, you know, the, the legislative strategy here is you pass the infrastructure bill, and then you also pass, build back better bill or, or some variation thereof that second bill would do a lot of the heavy lifting for those, um, technologies like wind and solar that are already contributing to the power grid today. What the, what the infrastructure bill does is it does a couple things. One is, it makes a, as you've said, major investments in innovation, major investments in research development. So for those new or relatively new technologies that need some need some help getting off, off lab benches out of, you know, the national labs and into, um, commercial deployment. And then the other thing that it does is it helps support deployment of, uh, uh, a fair amount of enabling infrastructure for wind, for solar, for carbon capture for electric vehicles. So, you know, those investments in enabling infrastructure and, and of themselves aren't necessarily, you know, contributing to emissions reductions, but they are, you know, important pieces of what will, what will ultimately bring those emissions down?
Peter Keating: (06:28)
Is there anything you see in the legislation that's still wind its way through Congress, the rest of build back better? That's absolutely as central for, uh, achieving the gains or locking in improvements. Yeah,
Ben King: (06:44)
The most important thing in that bill is this is the extension and expansion of the clean electricity tax credits. Those the it's been, um, over the past 15 and 20 years, those have been some of the largest policy contributors to wind and solar taking off as they have the bill extends those tax credits for a longer time period. And it also increases the payout back to their statutory levels. Those are absolutely critical to getting the deployment of wind and solar and other clean generating technologies that we need in the, in the power sector. There's companies who do renewable energy deployment. There's also utilities who make those investments. So that's, who would benefit from those tax credits,
Peter Keating: (07:28)
Who exactly opposes this package of various tax credits that we've been talking about,
Ben King: (07:36)
Obviously, industries and country who produce fossil fuels the natural gas industry, the oil industry, the, the coal industry. And they see, you know, continued progress toward decriminalization as a, as an existential threat to, to their current business model that said that finding isn't necessarily born out in the research that we've done, um, in our, in our pathways to Paris report, which puts the us on a pathway to achieve the 50 to 52% commitment that the administration has made. Um, as part of the international climate negotiations, we actually find that there's not a lot of decrease in oil and gas direction in this country. What, what we would say I think is that, you know, a bill, you know, the combination of the infrastructure bill, plus the bill back better, bill gives a sort of a long runway for fossil industries to figure out how to shift their business models to compete in, um, in, you know, uh, highly decarbonized economy,
Peter Keating: (08:42)
As you've just pointed out Americans seem okay with keeping oil and gas consumption levels, you know, consuming and burning a lot of oil and gas, particularly if it's American produced oil and gas. And, and, you know, we've seen this approach of quote unquote all of the above, right. Become very popular that, you know, yeah. We invest in hydroelectric and solar and wind and we retrofit vehicles and we keep nuclear power plants running. Okay. And, and we also enjoy all the benefits of cheap fracking, right. and that seems to be very popular. And from what you're talking about, I'm wondering if the biggest obstacle to achieving the goals that need to be hit isn't even so much either investing or innovation. It's about that runway, that you're, you've mentioned where, what if fossil fuel companies say we don't care how long the runway is, we're producing cheap energy domestically, and we're providing good jobs, you know, come try and make us shut down.
Ben King: (09:45)Yeah. I mean, I think you've, you've hit the nail on the head there. Um, and it's certainly true that clean alternatives to, uh, incumbent fossil technologies have been gaining in their economic competitive competitiveness over the past 10, 15 years in the power sector, you know, today in some parts of the country, it's cheaper to build new wind and solar than it is to continue to run the existing fossil facilities. So, you know, the economic side is, is one piece of the story. Our work suggests that pairing that with some regulatory policy can put the us on the, that it to be on.
Peter Keating: (10:26)Do you think they'll also include health regulations, regulations of pollutants,
Ben King: (10:32)The, the leg that we haven't really Decart 15 or 20 years in the power sector is public health regulations on coal plants in particular, uh, in particular regs on mercury and air toxics. What, what we're talking about in this report is, is pairing a suite of those sort of public health regulations with regulations on carbon dioxide emissions under the clean air act. The Biden administration is in a position where they need to, you know, to, to achieve these goals, uh, under our modeling, they need to make some aggressive regulatory moves to, you know, under that clean air act framework. In addition to the suite of public health regulations that that they've been, that have historically been used in the power
Peter Keating: (11:18)Next, I spoke with Morgan, Higman a fellow at the center for strategic and international studies about specific provisions of the new infrastructure law. Talk to me a little bit about what the most important parts are of this new law in setting up or reestablishing an entire framework for greener and more electric future, as opposed to attacking CO2 emissions.
Morgan Higman: (11:43)When we think about the infrastructure act and its value for emissions, we really need to think about whether we have the technology we need to create the low carbon future we want. And I think we can probably agree the answer is that right now we don't renewables are incredibly important and we need them to continue to decarbonize the power sector. And they'll become more important as we electrify other areas like transportation and buildings, but heavy industry represents about a quarter of us emissions and reductions in, in that area. We're required to technologies that are not yet in widespread use. There are some good reasons to make big bets on technologies like hydrogen and carving capture. We're gonna need those technologies and getting them to scale will take some time. Another is that the president emphasized bipartisanship in developing this infrastructure bill and focusing on a me, uh, merging technologies can help of the value of our country's fossil fuel resources, which is a good way to get bipartisan support for this bill. I think in general, too, we can say that innovative technologies and emerging technologies are probably a little less political than some of the attention that renewables get in terms of emissions reductions.
Peter Keating: (12:50)We'll continue our discussion after this short break. And we're back with Morgan Higman of the center for strategic and international studies. Let's, uh, talk about a couple of other areas besides power of majority, something like 60 something percent of the new law devotes its fund, the funds are devoted to transportation. Are we, are we dedicating enough to charging stations to make the country traversable with low carbon vehicles?
Morgan Higman: (13:22)I think almost certainly it's not enough, but it is an important start in decarbonizing transportation. When we think about low carbon mobility, a a primary area that, uh, gets a lot of attention is, is vehicle electrification, which of course is already underway. You might have seen a Tesla on the road, uh, recently. And so the bill provides, uh, 7.5 billion for an electric vehicle charging network, which is gonna be important in setting up the infrastructure that makes it pleasant and accessible to drive that Tesla across the country. Um, there's also about 5 billion for grants to electrify buses, but I think more broadly when we think low carbon mobility, we have to think about things like complete streets. And there's a lot of, um, funding, particularly for state and local governments to think about how to encourage alternative modes of transportation that will include public transit, of course, but also, um, making it more pleasant to walk or bike. Um, there's some tax credit it's in, in the act for, um, scooters and e-bikes, which might improve, uh, mobility, particularly in urban areas and gets more of those cars off
Peter Keating: (14:28)The street. It seems like there's a lot in this bill that kind of works to embed, uh, a lower carbon future in our lives. I mean, once you, once you have a, a bus that's driving past your window, that's not belching smoke into your neighborhood, right. Or once you can walk down a nice street, or once you, you know, you can drive to see your family, if you have an electric car. Whereas the range was too short to do that before once, once these kind of low carbon, nice things are in your lives, you're gonna wanna keep them there. When
Morgan Higman: (15:05)We think about embedding some of these technologies, a lot of the funding here provide the down pain and helps, uh, make these low carbon technologies accessible to people like you and me. But we're also thinking about trying to prove that the models will be viable for our markets and attractive to investors. And that's critically important in getting these technologies to scale.
Peter Keating: (15:28)Why is there have to be this public role to start innovation, to kind of demonstrate the potential for things to go commercial? I
Morgan Higman: (15:36)Think one thing to consider is that these new technologies are up against some really well entrenched, powerful incumbents, right? We think about coal oil and gas. Um, but the other thing to think about is that, um, not all of these tech are brand new, our commitment to carbon capture technology dates back to 2005. And of course you would be right to say, well then why isn't it widespread like solar at this point? But I think the increasing ambition we see with respect to climate is one thing that's gonna motivate greater investment. Another thing that we see is that, uh, um, we've moved from kind of individual grants and loans dating back to about 2008 to this infrastructure act expands support to carbon transportation and storage. And it also has funding for the development of supportive policies like permitting and safety standards. I think the other thing we can think about in terms of some of these, uh, big bet is that we've done a little better, um, setting up the infrastructure act so that, um, we have more appealing business models for technologies like carbon capturing storage, rather than focusing on a single power plant, which is what we've done historically.
Morgan Higman: (16:48)There's a lot more attention to large industrial hubs, which creates better economies of scale. The final thing that I would highlight is that, uh, under the American recovery and reinvestment act, a lot of funding was prioritizing shovel, ready projects, and the infe, uh, infrastructure act doesn't have this requirement. So some of the funding for these innovation projects might come down slower, but hopefully it means that that of energy. And some of the folks steering this investment will really refine the, the investment priorities and, and technologies they think are most likely to succeed.
Peter Keating: (17:23)Hmm. Well, when it comes to the tax credits for some of the industries that have already grown like solar projects, wind projects, the investment tax credit to product tax credit, those are not in this law. Those those have been left for build back better as, as, as have many things, how important is build back better as the companion and the supplement to get done what this new infrastructure law envisions for the future when it comes to, to climate and energy.
Morgan Higman: (17:57)Ooh, that's a million dollar question, isn't it? I think that certainly it is important. I, I don't know of anyone who would suggest that it is not. I think that the framing of this infrastructure act as a down payment on climate commitments and new technologies is a terrific way to think about it. I think that some of the tax incentives that you mentioned and all, and also frankly, some other incentives for, um, scaling technologies that are already really mature, like solar and wind and to a lesser green energy storage is, is certainly needed, especially to meet the more near term goal of 50% by 2030. And I am hopeful that we'll see that pass. Uh, but I think it's, it's a little up in the air. Finally,
Peter Keating: (18:46)I talked with Adam stern about what it means for markets and investors that America now seems launched on a new path toward greener infrastructure while it's future trajectory in fighting climate change remains uncertain. Adam is the head of municipal research at Breckenridge capital advisors. So Adam, you have written that the bipartisan infrastructure bill overall is an credit positive for the muni market. How about the energy and climate provisions themselves in the new law,
Adam Stern: (19:18)One aspect of infrastructure finance that the, that muni market participants have, I think become a little more aware of over the last seven, eight years. You really, as the, as the infrastructure funding, uh, crisis in, in this country has deepened, is that there's a lot of infrastructure that goes on beyond our muni market power, right about, um, 75% of, uh, you know, generation in the country. If you go to energy information, administrations website, there is, is through private utilities, not public once wildfire, you know, mitigation efforts and, and the, uh, the federal government does a lot, uh, as well. So a lot of this funding flows flows through that channel, not, uh, the state and local government channel of the 550 billion increase, which is intended to be paid out over the next five years. But about 62%, um, of that amount will flow to sort of traditional muni sectors.
Peter Keating: (20:11)My follow up to that would be will that lead to any kind of different mix of projects coming online, if some version of this build back better plan now being hammered out or negotiated in the Senate, uh, ends up coming to become law.
Adam Stern: (20:27)You know, some of the provisions in build back better do bear on climate. And, uh, it does seem like we'll, we'll get a little bit more of, of that kind of funding, um, coming down. But again, most of it seems to be flowing, you know, away from state and local governments. I do think regardless of whether build back better passes, you know, we are witnessing in, uh, the, the financial markets generally, maybe a sea change is too strong, a word, but a, but a, a changeover in, um, prioritizing green projects, low carbon companies, low carbon processes. And you're seeing it more in the corporate markets, but it spilling into the, the muni market. Um, I know bank of America, I think has like a, an estimate of 55 billion in green bond issuance in the muni market next year. Um, you know, that seems reasonable. Do
Peter Keating: (21:16)You think that changeover is coming because it's just where the money, I should say the interest and then the money is flowing.
Adam Stern: (21:24)It's a number of factors we've definitely seen over the last, you know, 10, 15 years, uh, renewable power standards in the states across the board, uh, have become more stringent. And, you know, the utility sector in terms of its carbon footprint is, is now, uh, less intense than even the transportation sector. Uh, I believe so. You're seeing policy percolate, uh, in the states, but I, I would actually say a lot of this is more sort of organic coming from a customer base. It's been known for a while, that if you go to the grocery store and you look at a, um, shampoo, right, and one is green and one is not, the customer will tend to prefer the green one, all things being equal. And then even if it's modestly more expensive, they often prefer the green one. And I think, um, what we're seeing in our muni market is a, is that kind of customer preference migrating to a degree into, uh, what folks wanna buy and put in their portfolios.
Peter Keating: (22:17)It often seems to me that we've jumped right from a world that, that wasn't embracing these technologies at all to, to this world you're describing where they're really getting quite popular with without, without maybe understanding how to find out what you need to know either as an issuer or an investor in some of some of these areas. Let me ask you a really basic question. Does climate change increase the risk of municipal bond defaults? I
Adam Stern: (22:48)Would say, but marginally. So we know of a lot of municipal bond issuers, right? They own physical assets manage physical assets, finances them through the bond markets. Um, and they can't move them, right? They're not like a company that could say, you know what, we're down in Florida where our manufacturing plan is, but the great lakes are gonna be a, a better place. Climate change happens over the 30 years. You know, we think we'll move, we'll move to Milwaukee, right? A corporation can do that. Um, the city of Miami beach cannot do that, right. They can't move their roads to Milwaukee. Um, they can't move their water system there. So they either build to sort of protect and adapt or, um, or you're gonna see, uh, slow, you know, erosion of home values, people, businesses, more expensive insurance, et cetera. So it, it should have a credit impact.
Adam Stern: (23:38)Now would the city of Miami beach actually default? I think that's not likely, but the reason for that is more, uh, analogizing the climate change problem to just what you we've tended to see over decades and decades, where you have, uh, multi decade population loss and decline, which is you tend to see bond issue in slow, less and less debt because less and less economic activity, you might see downgrades multiple notch down rates over time. And then eventually there's just not much there. That's typically how the muni market works. If you really got in a bad spot, you could do some, um, you know, bond bank kind of borrowing or something like that, or you'd have some enhanced borrowing. I think, I think that's sort of what the, the base case is for really, really high exposure issuers. And assuming we can't get ahold of climate change, but there's risk there, certainly that may not be true of everyone. Certainly if climate change accelerates, um, in certain places faster than expected, these shifts, uh, in population and businesses could happen faster than we think. And we don't know candidly. So it's something finale to keep an eye on in, in terms of, you know, what needs to be disclosed
Peter Keating: (24:50)For, for the issuers that you might think were in danger, is that information something that investors can ascertain easily enough or clearly enough to, you know, price that risk in and decide whether to take those risks,
Adam Stern: (25:04)You know, are we getting enough disclosure to, um, price the risk? I would say, um, no, but I think the fault there lies both with issuers and, and investors, municipal investors can do a better job thinking about what they wanna see that would actually cause them to buy or sell a bond materially affected by client change. So, you know, there are a couple of different data providers now that do a pretty good job of showing the physical climate risk that an issuer faces, you know, you can use that information and then you can sort of make an evaluation of, you know, do I think the risk is being addressed either in the capital plan or some other disclosure that you might see in the official state, but you could look at a variety of, uh, different aspects of governance to sort of figure this out.
Adam Stern: (25:52)You could look at built and codes. You could look at land, use, uh, plants. You could look at public statements about sustainability, uh, uh, these kinds of things, which could get you a little bit more comfort that the problem was being thought about, um, and managed. And there's a number of other things you could do as well, but, but those would sort of be the low hanging pieces of information that we probably wanna see standardized in, um, in, in official statements. Um, even if it's in sort of, yes, no kind of questions or that, that sort of thing. Um, it does get us further along in terms of assessing preparedness and, uh, the seriousness with which some of these issues are taking this problem.
Peter Keating: (26:32)I hope you've enjoyed this. Look at how the new infrastructure law will affect how we produce and use energy and what will happen with climate change. Thanks to all of our guests for participating and to you for listening, please join us again. I'm Peter Keating.
