What do the EPA’s proposed new rules mean for cleantech?

You’ve most likely heard the big news: on Monday of this week, the US EPA proposed new rules to reduce carbon dioxide emissions from existing power plants. Since the EPA is using the Clean Air Act—specifically Section 111(d)—as its framework for the proposed regulations, it’s no surprise that these rules focus on a specific pollutant (CO2) emitted by facilities already in operation. In an interesting twist, however, the rules give states significant latitude to figure out how they will reduce their emissions.

Will these new rules drive investment in cleantech? Yes, I believe they will. First a bit of background… while we have seen a number of success stories (e.g., Tesla, SolarCity, Nest, Opower), overall investment in cleantech innovation has declined these past couple of years. According to i3, investment in cleantech declined by 15% from $8.3 billion in 2012 to $7.1 billion in 2013.

When we explore the macro challenges with our clients, we often hear concerns about US policy: “Too much uncertainty”, “there is no national policy” or “policies are prescriptive” are all common refrains. While the new rules are a long way from law, they represent an important step in addressing these challenges. The EPA proposal is bold and removes doubt on whether the EPA is serious. Climate change is a priority for this Administration. The US has suffered from a lack of coordinated policy across all 50 states. The first state renewable portfolio standard (RPS) was enacted by Iowa in 1983. Thirty one years later, only twenty nine states have RPSs. The result? Confusion and a turnoff for potential investors. Such varied progress demonstrates the need for Federal level policy. Over the years, many EPA regulations have been prescriptive. For example, other parts of the Clean Air Act emphasize specific “best available control technology” (BACT) and require industry to implement these exact technologies. It’s refreshing and encouraging to see the EPA emphasize outcomes and state empowerment in these new power plant rules.

So, what impact will these new rules have on the private sector? Who will be the winners and losers? The jury is still out in these early days, but I have a couple of ideas and reactions. I believe states and utilities will vary in their response to the proposed rules. Let’s start with states. California (and a number of other states) often leads the country when it comes to environmental protection. The rest of the country sometimes follows, but often leaves California to fend for itself. These proposed rules provide strong validation for California’s efforts over the past several years. For example the inclusion of market-based trading programs in the guidelines, and options for multi-state plans indicate significant validation for California’s cap-and-trade program (established by AB 32). The rules are also strong validation for California’s huge push into renewables and its efforts to promote energy efficiency. Other states will not welcome the new rules.

Not all utilities will strongly oppose these rules. Some utilities and energy companies have been investing significantly in cleantech, and have been preparing for policy for some time. National Grid, Calpine Corp., Consolidated Edison, and Exelon Corp have been collaborating on the Northeast Regional Greenhouse Gas Initiative (RGGI) cap-and-trade system. Other utilities have created non-regulated businesses to focus on renewables and energy efficiency. For example, Edison International recently created Edison Energy, acquired solar developer SoCore, and made investments in a number of cleantech companies (Clean Power Finance, SCI, and Optimum). NRG, NextEra, E.ON and a number of other energy companies are investing in cleantech ahead of their peers.

I think these rules will be good for the natural gas industry as the power sector finds yet another reason to switch from coal to natural gas, but the rules will be even better for cleantech.

The emphasis on renewables will accelerate an already fast-growing market. Renewables accounted for 44% of newly installed generation capacity globally last year. The EPA rules will push states and utilities to continue these investments. While many solar and wind companies will applaud the rules, companies that reduce specific costs in the renewable value chain will benefit the most. For example, Qbotix is deploying robots and a robotic tracking system to reduce operating costs for solar power plants. They are well-positioned to benefit from the increased attention. The EPA’s flexible approach means that distributed generation (DG) companies stand to benefit from the new policy. This certainly includes solar, but may also boost the deployment of fuel cells and micro-turbines. As DG continues to rise, storage systems grow in their value to utilities and also to end customers seeking to optimize their energy spend.

Energy efficiency companies will get a boost as state guidelines emphasize the importance of demand-side energy efficiency. Companies like Opower have inspired the next generation of cloud-based companies that are leveraging smart meter data to help customers reduce their consumption. Companies like Gridium and First Fuel will benefit as utilities seek partners.

One surprise for me: I saw very little mention of carbon utilization technologies. I’m not sure if this was intentional, but I suspect it just did not make the EPA’s top priorities. I expect companies like LanzaTech and Skyonic—that seek to convert CO2 to useful fuels, chemicals, and other products—will see increased investment as a result of these rules. In fact they could be the biggest winners as they are building products and services that can directly capture CO2 from power plants and use it as a feedstock for new products. These technologies could be very disruptive and profitable.

Obviously these rules are not yet set in stone. The flexibility introduced means there’s plenty of time for court challenges and for future administrations to change their mind. I don’t dispute this, but I view these rules as a bold signal that sentiment has changed regarding cleantech. This change in sentiment did not start with government policy. It came from investors and executives appreciating the growth we are tracking in a number of cleantech markets. This has led Wall Street to reward specific companies (Tesla trades at a $25.8 billion market cap; SolarCity at $4.6 billion). The change in sentiment is also illustrated by Wall Street punishing incumbents that are not responding to market disruption. For example, Barclays recently (and in advance of the EPA announcement) downgraded the entire US utility sector (on the corporate bond market) to underweight, saying it sees long-term challenges to electric utilities from solar energy.

It’s also exciting to consider how the new EPA rules and the inevitable accompanying media attention we will see over the next few years will impact the public’s perception of cleantech. From a marketing perspective, I applaud the EPA’s efforts to tie carbon to health issues. Well played.

What do you make of these rules? Do you agree that they will impact cleantech investment in a positive way? Send me an email (Sheeraz@cleantech.com) and let me know.

Originally posted on Medium on June 6, 2014.