On behalf of the team at 5, I am pleased to forward our May 2024 market letter. In this edition, we discuss several interrelated topics. First, we look at ongoing legal challenges to two new federal energy regulations, (i) the SEC’s climate change reporting rules, and (ii) the EPA’s new power plant emission standards. Second, we address a question we are hearing often from our clients, especially those faced with rising energy prices: “Could President Trump’s election reduce the price of electricity?”
Before turning to these topics, however, we need to highlight a fundamental market shift that may overshadow political and regulatory changes. Our last market letter concluded with the question; “Is there enough power to supply New York City?” Today, we face a bigger question: “Is there enough power to supply America?” Over the past 15 years or so, energy policy was set in the context of flat to declining energy prices, the result of flat or declining energy demand as shown in Figure 1. Stable electricity prices permitted state and federal regulators to establish energy policy with limited backlash from voters – and at the same time, there was little need to add generation or transmission lines.1 This long period of anemic demand appears to be over.
Figure 1: NY Times 4/23/24
Almost overnight, electricity demand is growing almost as fast as the stock price of AI chip manufacturers. The demand is coming from several sources including: (i) a massive increase in demand from data centers that use power hungry AI chips, (ii) new manufacturing moving back to the states from overseas, and (iii) increased electrification of systems and processes (e.g., port cranes). Figure 2 below gives a sense of just how much additional load could be consumed by new data centers over the next few years.
GPU-Driven Model Cumulative U.S. Load Growth in Bcf/d
Figure 2: EIA, Raymond James Research
Many energy industry leaders are expressing concern that we may not have sufficient energy supply to meet this demand. On April 23, 2024, ERCOT’s CEO, Pablo Vegas, shocked the energy market. He announced that ERCOT would need to make some significant changes to meet future load growth. Vegas stated that new generation, interconnection and transmission plans were needed to develop sufficient infrastructure to meet “an estimated additional 40,000 MW of load growth by 2030 as compared to last year’s forecast. “(emphasis added)2. This load growth is shown graphically in Figure 3 issued by ERCOT:
Figure 3: ERCOT CEO Board Update: April 23, 2024
Texas is not alone. Many other markets are forecasting similar demand growth. The CEO of Illinois based Exelon recently announced that prospective data centers in the Chicago area could consume some 5,000 MWs of additional energy – on a system that today supports only 400 MW of data center load. AEP, an Ohio utility, announced that they received requests to serve 15,000 MW of new load, again driven by Amazon, Google and other data centers.
Rising demand is causing utilities to scramble to find adequate supply. For the first time in years, utilities are looking to construct new fossil fuel plants to meet some of this supply. Georgia Power announced a few weeks ago that it had received commission approval for a resource plan that included 1,400 MW of new natural gas and oil-fired generation. Like Ohio and Illinois, Georgia Power cited “extraordinary customer growth” as the reason for needing additional generation.
Energy prices support the fact that demand may well exceed supply. Figure 4 shows the recent increase in forward electricity prices in ERCOT and PJM, two of the nation’s largest energy markets.
Figure 4: Chart by 5
A failure to invest in electricity and natural gas infrastructure is putting further pressure on the market. In March, Tony Rice, the CEO of the nation’s largest producer of natural gas, EQT, warned that while gas demand has jumped by 50% since 2010, pipeline capacity has increased by only 25% and natural gas storage by just 10%. The closure of uneconomic coal and oil plants places additional pressure on gas supply as these coal plants provided an alternative source of power that grids could call on when gas supplies were low, or the price of natural gas was high.
If these recent forecasts are accurate and data center demand grows as expected, we will need all the generation, interconnections, and transmission lines we can build. If Trump is elected, he will likely blame high energy prices on the climate-friendly policies of the Biden administration. If Biden is re-elected, he will likely blame high energy prices on the slow development of renewable generation. But in either case, the next President may well need to embrace all forms of generation. BP’s CEO, Murray Auchincloss, summarizes the situation best, “I think we’re going to need every little bit of renewables and natural gas we possibly can.”
SEC’s Climate Change Rule/EPAs New Power Plant Regulations
With this potential energy tsunami looming over the energy markets, there are still a number of material regulatory developments that are subject to ongoing and/or expected legal challenges.
Climate Change Rules: On March 6, 2024, the SEC adopted its final climate change disclosure rules. These rules mandate certain climate-related disclosures by companies that are regulated by the SEC. Figure 5 provides a high-level summary of the rules 3:
Figure 5: Bespoke ESG (https://www.bespokeesg.com/)
Legal challenges were filed against enforcement of the SEC rules in multiple appellate courts, all of which were consolidated for review in the Eighth Circuit 4. In light of the complexity of the case and the large number of parties challenging enforcement, the SEC decided to use its discretion to stay the implementation of the new rules pending the court’s review. The Eighth Circuit has not set a briefing schedule, and it is difficult to determine when the case will be finally resolved. Further, and as noted in our July 2022 market letter, if this case is eventually appealed to the Supreme Court, there is a good chance the Court will find that the SEC did not have sufficient authorization from Congress to pass these disclosure rules. For these reasons, it remains unclear if or when these rules will go into effect. At the same time, many public companies are increasingly subject to similar rules imposed by states (e.g., California) or other international organizations (e.g., European Union). If you believe your company may be subject to the SEC or other carbon reporting rules and would like further information, please contact our head of sustainability, @KarenSweeney.
EPA’s New Power Plant Rules: On April 25, 2024, the EPA announced a new set of rules to limit emissions from fossil-based generation units. Existing coal plants and new baseload natural gas plants are required to curtail a staggering 90% of their carbon emissions by 2032. The only way to achieve this level of emissions reduction is by capturing carbon emissions. Carbon capture and sequestration technologies are not yet commercially available, and even if available, it may be too costly. As with the SEC disclosure rule, on May 8 and May 9, 2024, 23 states and the National Rural Electric Cooperative Association filed petitions at the U.S. Court of Appeals for the D.C. Circuit seeking review of the EPA’s rules.
The 2024 Election and Energy Policy: What is at Stake
Will a President Trump victory in November result in lower energy prices? A high-level review of the current regulatory landscape suggests not.
SEC Climate Change Rules: These rules will be immediately canceled. While this change may reduce the reporting obligations of some public companies, this should not impact the energy market. As noted above, however, these rules are not in effect now as they are tied up in legal challenges, and the Supreme Court may invalidate them regardless of who is President.
EPA Power Plant Rules: These proposed rules will be cancelled and likely replaced by rules that favor fossil fuel plants. The Biden rules, if implemented, would certainly put additional cost pressure on fossil fuel plants and, in turn, increase energy prices. However, given how unlikely the new EPA rules survive legal challenges, the cancellation of these rules should not affect energy prices. Similarly, while Trump’s policies could reduce the cost of building and operating fossil fuel plants, we expect that Trump’s new rules will also not survive legal challenges.
Inflation Reduction Act: Repeal of the IRA could certainly slow renewable development. However, most commentators feel it will be very difficult for Trump to successfully reverse the IRA. Even if the IRA is not repealed, Trump’s administration will surely take steps to slow implementation of the Act. Slowing implementation of the IRA may level the playing field between fossil and renewable generation and could promote new fossil fuel generation. At the same time, it will disincentivize new renewable generation. It is unclear what, if any, impact this will have on electricity pricing.
LNG Permitting: In January, the Biden administration paused the permitting of new LNG export plants. Trump is likely to reverse this administrative decision. It is hard to see how lifting this permitting delay will lower domestic prices for natural gas. Increasing levels of LNG exports will spur further drilling of natural gas, but since natural gas bound for new LNG facilities will be exported to Europe or Asia, the domestic price of natural gas should not change. In addition, given the historically low level of current natural gas pricing, we do not see much room for natural gas prices to decline.
Oil and Gas Drilling: The Trump administration will accelerate oil and natural gas drilling on Federal lands. This could certainly reduce the market price of oil and natural gas. We do not see a clear linkage between oil and natural gas production and the price of electricity. There are very few remaining oil-fired electricity generation plants, so oil prices do not impact electricity prices. As noted above, we see little room for natural gas prices to decline.
Offshore Wind: The Federal government, acting through the Bureau of Ocean Energy Management (BOEM), plays a role in permitting offshore wind projects within Federal waters. President Trump generally opposes such projects, and his administration will likely slow the development of such projects. Given the long lead time for offshore wind and the relatively small number of projects in late-stage development, we do not see any linkage between offshore wind policies and the current price of electricity.
Conclusion: What Does This All Mean
This letter does not address how we ended up with an energy grid that appears to be unable to support demand. Potential shortages are common across markets with varied regulatory schemes – the problem is in both regulated markets like Virginia and Georgia, and deregulated markets like Texas and New York. It is easy to point fingers: too much regulation, not enough regulation, lack of Federal control of the grid, not enough state control of the grid, too much focus on climate change, not enough focus on climate change, and the list goes on. One thing is clear – higher energy demand coupled with extreme weather will produce some real challenges. Now is the time to explore ways to better manage this risk.
[1] During this period, we saw many coal, natural gas, oil and nuclear plants retire due to the low price of electricity. Almost all new generation was solar and wind; driven in part by efforts to address climate change.
[2] Please note that the higher forecast reflects a new methodology that was required by HB 5066.
[3] LAFs or Large Accelerated Filers are public companies with a float in excess of $700 million and an Accelerated Filer is a public company with a float in excess of $70 million. Scope 1 emissions are emissions from sources that are owned or controlled directly. Scope 2 are emissions from energy generation purchased by a user. Scope 3, which was left out of the rules, are emissions from sources that are part of a Company’s value chain. Limited and Reasonable assurance refers to the level of assurance required to be provided by a third-party attestation service.
[4] Nat’l Legal & Pol’y Ctr. v. SEC, No. 24-1685 (8th Cir. docketed Apr. 1, 2024)
