As individuals and corporations shift away from the use of fossil fuels toward clean energy practices, varying state and federal policies, coupled with political influences, have left the energy industry in flux. In this article, Frank Lee, partner and co-chair of the firm’s energy practice, explores renewable energy trends and what we can expect from the energy industry moving forward.
Frank focuses on corporate finance and securities, mergers and acquisitions, SEC compliance, and corporate governance matters with an energy industry focus. His clients consist primarily of publicly traded and privately held energy companies, as well as investment banks, private equity funds, renewable energy developers and project sponsors. Frank has also advised his clients on transactions involving the merger, financing, development, and acquisition and sale of transmission and generation facilities—including merchant and peaking fossil fuel facilities—and renewable generation facilities, including solar, wind, hydro, geothermal and waste-to-energy facilities.
What major trends are you seeing in the energy industry?
The biggest trend in the energy industry we’re seeing is a continuation of a long-term trend that we’ve observed for quite some time now, and that is the continued movement away from fossil fuels to clean energy. The convergence of technology, regulation and market forces is causing an accelerated adoption of clean energy practices. On the regulatory front, the lack of consistent national leadership in energy and environmental policy has created a void that states, cities and private enterprise have begun to fill. More and more states and cities are pursuing their own aggressive clean energy goals and implementing incentives to promote clean energy usage, and increasingly there is a focus on solar energy technology.
Major corporations are also increasing their renewable energy commitments, and financial institutions are rushing in with creative financing techniques, such as hybrid energy delivery/financial hedge instruments, to help corporations large and small meet their clean energy goals. In addition, traditional utilities are beginning to explore different business models that depart from their traditional energy delivery paradigms. This reflects economic realities and a recognition by state and federal energy regulators that transitioning away from traditional rate-based models utilizing an agreed-upon rate of return based on utility assets to more risk-based incentive rate-making that encourages movement to clean energy and customer choice might be more appropriate in the brave new world.
What factors have contributed to the rise and use of solar energy? What can we expect from this area in the next few years?
Initially, when there was a fairly broad national consensus that promoting clean energy was a good thing, various federal and state policies were implemented that really kick-started and nurtured a renewable energy industry in its infancy. These were things such as federal and state tax incentives, state monetary incentive programs, and renewable energy credits—all of which helped foster the growth of the wind and solar energy industries, as well as encourage creative financing techniques to help pay for the development of major wind and solar energy production facilities.
Then, advances in wind turbine and photovoltaic technologies, combined with continued long-term declines in the coal industry, narrowed the cost gaps between fossil fuel generation and renewable energy. As this gap continued to close, the industry saw that the economics of renewable energy was continually improving, now to the point that renewable energy is not only cost-competitive with fossil fuel-generated power but in some cases is more cost-effective.
The wind industry, technologically and in terms of overall market, is somewhat mature now—wind turbines can only achieve a certain maximum size—so the efficiency level of current wind technology is approaching its max. I think it will be difficult to achieve growth in the wind industry through technology. Growth will probably be driven by increased market penetration in such things as offshore wind development.
I believe the solar industry will continue to drive overall growth in the renewable energy sector. In particular, this growth will continue to be driven by technological advances and the development and wide implementation of battery storage facilities. Ultimately, the efficiency of solar facilities is constrained by the intermittent nature of sunlight. The use of energy storage drives efficiency upward geometrically, further driving down the cost of the solar power generated, by flattening and smoothing the demand curve.
Battery technology has advanced by leaps and bounds every year, and it has become the preferred solution to address the intermittent nature of solar (and even wind) resources. As we continue to see advances in battery technology and widespread adoption of battery storage, I believe we will continue to see increased solar development over the next few years and a further expansion of the reach and adoption of renewable energy sources.
Other than solar energy, what’s the one development in the energy space that you think is going to have the biggest impact in the next three to five years?
The one development that I think will have the biggest impact over the next three to five years in the energy space actually has nothing to do with energy itself—it’s politics. When the election dust settles, each political party may face a reckoning with certain elements of its base, and how the parties navigate the sometimes-conflicting currents will dictate any potential national energy and environmental policy. Certainly, each party has a different view on the appropriate level of investment in and reliance on renewable energy. However, there are powerful constituencies within both parties that could encourage continued development of renewable energy, whether they are the corn and soy farmers growing feedstock for biofuels or Midwestern states that have benefited from the growth of the wind industry. I do not believe that either party will reinstate some of the tax incentives that are ramping down or have already expired, but the election outcome might help set the course for the future of the renewable energy space as different constituencies jockey for position in a changing energy and environmental policy climate.
What makes Loeb & Loeb a leader in the industry?
There are quite a few law firms with national footprints that have an “energy practice”—which usually means one or some of their corporate lawyers have worked on a merger or finance transaction involving an energy company. Loeb & Loeb is one of the few national law firms with a true energy practice—a dedicated group of lawyers and professionals spending the vast majority of their time and efforts representing energy companies and other energy industry participants across a broad range of matters and areas of experience.
But what really separates us from even the national firms that actually do have an energy practice is our blend of transactional and regulatory expertise. Not only does our practice boast the regulatory and transactional expertise under one roof, but also most of the core members of our energy team are both transactional and regulatory practitioners. The efficiencies that this creates, and the advantages for our clients that result, cannot be overstated. Aside from obvious cost efficiencies, this blend of experience creates strategic advantages for our clients because most energy transaction economics is driven in large part by policy and regulatory considerations, so it is important to have an energy lawyer who understands this interplay and can translate this into sound legal counsel for clients.
What excites you about working in this area?
I get excited when I consider that each solar installation we help our clients to build might contribute, in some small way, to a slightly better future, whether it’s the jobs that the project might create or whether it’s the pollution to our environment that it might prevent. That’s something that makes me proud of our energy practice and of Loeb & Loeb.