Aug 01, 2023
On July 28, The Capitol Forum’s Teddy Downey, Sharon Kelly, Julia Arbutus, and Daniel Sherwood discussed the most pertinent issues impacting energy markets and policy. The full transcript, which has been modified slightly for accuracy, can be found below.
TEDDY DOWNEY: Thanks for joining us for today’s Energy Call. I know it’s late summer on a Friday. So we want to let people get to wherever they’re headed this weekend. But I’m super excited to talk to the Energy Team. I’m Teddy Downey, joined by Daniel Sherwood, Julia Arbutus and Sharon Kelly. And we’ve got a lot to talk about. Good to see everybody today.
DANIEL SHERWOOD: Good to be seen. Happy Friday.
TEDDY DOWNEY: We’re fresh off our energy retreat in Philadelphia, which sounded like it went very well. So let’s talk about FirstEnergy. We’ve been doing a lot on FirstEnergy and ESG, and we’d love to get an update on where the indexes and things are related to FirstEnergy and their ESG issues.
DANIEL SHERWOOD: Absolutely. Thank you. Yeah, this is going to be kind of our last little piece on this subset of our ESG investigation. As you guys know, we’ve been talking about this a lot. And FirstEnergy has served as a really fascinating case study on our obsession of figuring out how ESG has market impacts. And you hear a lot of different people saying yes or no. This week, Bloomberg did a piece that featured Smead Capital, a Buffett booster, talking about, oh, ESG is creating great bargains in the market and you can buy up oil, which I think goes to further strengthen this thesis that there is an impact and what that impact looks like, we’re still figuring out.
We wrote this piece as a follow-up to something that we predicted would be likely to happen, and we could confirm with some kind of internal information from a fund about a ratings agency, that it indeed is slated to happen here at the end of August. So, Julia, do you want to update everybody on the story you did for us?
JULIA ARBUTUS: Yeah, for sure. So, as Daniel mentioned, this is a bookend to our FirstEnergy ESG coverage. In June, we published a story that reported that at least 18 indexes provided by S&P Global, MSCI and FTSE might possibly drop FirstEnergy after we did an independent analysis of those indexes and their exclusion policies to see if FirstEnergy met the thresholds for exclusion. We found that in a lot of cases they did.
We ended up reaching out to all of those fund managers, and one of them that got back to us was the Deka Group, and they have a couple ESG ETFs that they’re expecting to drop FirstEnergy at this upcoming index rebalancing on August 31st by MSCI.
Their ETFs follow two different MSCI indexes. And they told us that due to updated data MSCI has for FirstEnergy, they expect FirstEnergy to drop from those indexes at that time. And that updated data relates to carbon emission intensity and thermal coal power generation.
We had previously written a story about Sustainalytics, an ESG ratings firm and how they updated their number for FirstEnergy’s coal-based power revenue from 2.5 percent of its total revenue to 10 percent, which makes it -ineligible for certain indexes that use a 5 or 10 percent coal-based power generation revenue threshold. But MSCI does not use Sustainalytics.
We didn’t really have an idea of whether or not MSCI would be dropping FirstEnergy until Deka talked with us because MSCI has not returned any of our requests for comment unfortunately. If you’re on this call (or reading this transcript), we would love to speak to you.
The updated data surrounding carbon emission intensity and then thermal coal power generation, we’re not really sure what that updated data is, but we looked at the methodologies that these MSCI indexes follow to get a look at the thresholds that FirstEnergy could exceed. The indexes that we looked at were the Climate Change ESG Select indexes, and they exclude companies with Scope 1 or 2 emissions intensities more than 1,500 tons of CO2 equivalent per million dollars in sales. The index category also excludes companies that derive any revenue from the mining of thermal coal or that disclose any evidence of thermal coal production or that derive more than 10 percent of their revenue from thermal coal-based power generation.
So as we’ve said every single time that I think we’ve talked about FirstEnergy on these calls in all of our reporting, FirstEnergy holds a third of the Signal Peak Coal Mine in Montana, and it does derive revenue from that. The threshold for this category is any. And then it has reported at least 10 percent of its revenue from thermal coal-based power generation. And that’s something that we were able to identify independently and also something that FirstEnergy has reported in its holdings.
So, this is really interesting because it demonstrates that FirstEnergy’s still exposed to divestment, including from these passively managed funds, and that funds are kind of taking a bit more interest in these ESG concerns and really kind of hammering down into what it means for companies to be included in their indexes.
TEDDY DOWNEY: Yeah, I mean, we’ve done a lot of on FirstEnergy and what I’ve been struck by is just from what you all have done. I mean, it was a lot of work. It was almost like it just exposed a lot of questions around the rigor of the accounting, the methodology, the seriousness of this effort. Are you actually trying to make these ETFs actually ESG compliant?
And so I’ve enjoyed it. I’m excited to see the next phases of this coverage especially because I know we have a conference call in August on this topic. What are the ways in which the regulators are going to be enhancing this oversight? And then, obviously, all the real-world implications of that and which are the companies that are going to benefit, be exposed, and things like that. I’m excited to see that. FirstEnergy, it seems like some of the times you were actually informing these funds of the errors and the indexes of the errors. Is that a fair characterization? I mean, it’s almost like adding additional rigor really exposed some of their lax accounting.
DANIEL SHERWOOD: And I think that’s what happened here, Teddy. Julia was being very humble. And I’m proud of our team’s modesty. But this change in MSCI policy will impact any fund that tracks an MSCI ESG index. We just confirmed it through a customer of theirs, one of the funds. And the statistic is the same that we uncovered and held Sustainalytics, saying, hey, you guys issued an incorrect data point. And so would it follow that it would be at least related, if not directly inspired by. Just to your point, yeah, it was laborious, but it wasn’t impossible by any stretch of the imagination. And it makes us wonder, okay, what other parts of the hull are leaking, so to speak?
TEDDY DOWNEY: Yeah, I’m also interested to see with these ratings firms how many actual people they have working there and doing analysis and actually figuring out what is ESG? What does it even mean? And what are the standards? It seems like it actually is a lot of work and not just something you can just throw an algorithm at. So I think that’s another thing we can be looking at is how many human beings actually work there? To see, okay, this can probably have some loopholes, versus, all right, this is pretty rigorous. And I think that’s also kind of a thing going forward. Is there going to be any use of the indexes or the ratings firms on quality? Do they actually care? Or they do not care? And is that going to be kind of a dividing point as well? We really haven’t had much of that in credit rating agencies. So we don’t have a lot of examples of it, but I’m interested to see how that plays out. I mean, certainly the regulatory process can dictate that as well.
But maybe we can move onto utilities and LNG updates at FERC. You know, I love FERC. I love talking about FERC because it’s a monopoly utility regulator in many respects. It’s got sort of a rich history around competition or just understanding how to regulate monopolies. And we’ve had a lot of earnings calls. It’s earnings season. There’s a lot of information coming out of FERC. Can we talk about NextDecade development at Rio Grande LNG? It looks like they filed an implementation plan, an authorization to proceed. Can you give us an update there, the timeline?
DANIEL SHERWOOD: Absolutely, yeah. So we’ve been covering NextDecade for the last six months. It’s a relatively large LNG export project, much larger than, say, Delfin, for instance, which is the next discussion topic, but smaller than Exxon’s Golden Pass. It’s outside of Brownsville, Texas, a border town, an interesting and rich place to visit if you’re ever in South Texas. And it’s a huge, huge boon to the economy. And there’s been a lot of environmental opposition and a lot of chamber of commerce type support back and forth.
We covered this a little bit more closely than other projects because there was a lot of question on whether it would reach FID. That’s Final Investment Decision. It was our perspective that we thought that it would come to fruition, and it did. That happened in mid-June recently, about two or three weeks ago. This is always fun for us too, because people get so obsessed over these one little moments and I think they’re often viewed as these binary events. And it’s never that simple, right? There’s always something that happens before or after. Look at any of our investigations. And typically, that tends to be the case.
NextDecade reached FID and that was great. The stock soared. The next day the stock tanked because investors looked more at the deals and thought that they didn’t get good deals. I’m not sure where the stock is at now. But we turn to the FERC docket because in order to initiate construction proceedings or construction operations, NextDecade needs permission from FERC. And they haven’t gotten there yet.
Just in the last week and a half, they’ve been trying to get that. They’re going to be building this levee. I pasted the full term of it because I just thought it was fun and it spoke to its importance. The “storm protection perimeter levee” is its full name. And so you can literally think about this huge facility with hyper-chilled methane that’s being exported out and it’s on the coast that’s subject to extreme weather events and flooding. This levee is integral in making sure that floods don’t hit the facility and then leak into a nearby environmental area that is relatively pristine from what I understand from the readings. I’ve not been to the exact site.
That’s what’s being contested. People I think were hoping for a green light from FERC. FERC can sometimes be a rubber stamp agency. But again, there’s been a lot of opposition over this. And you can see the FERC staff really engaging with the environmentalists and their petitions and these two safety conditions, these environmental concerns, number 53 and 54. This week, FERC was like, hey, NextDecade, you need to give us more information about your emergency plan and your cost sharing plan with the local communities in the event of any kind of incident.
And NextDecade comes back and they’re kind of upset. They’re like what? What are you talking about? Give it to us, you know? And then FERC responds and they’re like, we really, really talked about this ad nauseum in your order—and it’s true. I confirmed that there’s pages and pages of it devoted to it—as kind of the concession to the environmentalists.
And in defense of NextDecade’s stance, it is extraordinary. It’s requiring them to do things beyond what the regulations require. And that stuck out to me because it showed the agency using a little bit of political power there and saying, hey, we actually want you to be even more safe than what the bare minimum would require in the event of an emergency.
So that’s where we are. The FERC staff got off the phone with NextDecade yesterday, according to the docket, and clarified that. NextDecade’s trying to begin construction on August 24th. But they need to address these concerns as it relates to these two safety items.
TEDDY DOWNEY: And taking a step back, once this construction is completed or as we get close, what does it mean more broadly for LNG? Does it have any sort of broader implications there?
DANIEL SHERWOOD: Absolutely. It’s a big deal. I appreciate the opportunity to provide some kind of LNG context. At the beginning of the year, one of the themes that we would talk about a lot as it relates to LNG development was this would be the year where we’d see winners and losers. There’s been all this talk about LNG export expansion. It’s the next new big thing. They’ve had a hard time getting some of their projects off the ground. As we’ll talk about with Delfin, the DOE change in extending those export authorizations is an example of that.
It’s important for the industry and for anybody who’s monitoring this space to see when a project like this does move forward. NextDecade, Rio Grande hitting FID is a big deal. And that means you’re likely going to see this operating in a few years. And so that means more LNG supply. That means possibly cheaper gas in Europe, but more expensive gas in the States. Huge, very broad brush there that I’m painting with. There’s a million different factors that influence those things. But stereotypically, what will be the case if this operates is that it will increase demand for domestically produced U.S. gas and will increase the exports if it’s operating.
So yeah, this is a winner. This would go into the winner category. And it’s a competitive, interesting project with large volumes. And right now, basically, Cheniere is the only serious major LNG exporter. There’s other exporters here and there, Berkshire Hathaway Cove Point. Calcasieu Pass. I’m blanking right now on some of the other larger volume ones, but it’s mostly Cheniere. So yeah, that’s what this means.
TEDDY DOWNEY: Awesome. And then Delfin LNG’s FID date has been updated again. What are we looking at there?
DANIEL SHERWOOD: Moved out again. This would be kind of more in the loser category. This one I tip my hat to Sharon. She really keeps me abreast of this file. So thank you, Sharon. And the reason why we focus on this one is because, as we say, we like those kind of swing projects, the marginal ones, the ones that test new technology, that test new innovations. And this is supposed to be an example of that, where it’s called a floating liquefied natural gas facility. It’s off the shore, in certain respects, and it will load the export ship in the marine setting.
New Fortress Energy is kind of the reason why I’m personally more interested in seeing this. They’re sailing their jackup rig right now to get their stranded gas out in the Gulf. It just left the bay or the dock yesterday, I saw. So we’ll see if that actually can come to fruition. This is another example of that.
It’s been, I don’t know off the top of my head, but I want to say like ten years of them attempting to develop this. They’ve made some positive moves in the right direction, converting some HOAs, which just basically makes the contract more serious. But they also still have some hurdles we’re watching. They need to extend that DOE authorization that I was referencing earlier. And DOE, this is another example of the political power being exerted in the energy space that we see. Not boosting the Biden administration in any way, shape, or form. There’s obviously a lot there. But this would be an example of the Biden administration’s Department of Energy saying, hey, look, exporters, if you want to have access to these markets, you need to build. We’re not going to just keep on giving you extension after extension after extension as you say that you’re this close to finding an investor. We’ll believe you when you start digging. So there you go. That’s where we are with Delfin.
TEDDY DOWNEY: And then for the utility sector, FERC authorized the transfer of a large coal power plant in West Virginia to Omnis Global, a relatively small, company with lofty plans to bring hydrogen production to the site. Why is this a big deal? And were you surprised by this? And what does this mean going forward?
DANIEL SHERWOOD: Yeah, this is a great one and spawned from our FirstEnergy investigation and then Sharon looking into the Energy Harbor/Vistra deal, which these assets don’t concern. Sharon, if you could give us an update. This is a fascinating development.
SHARON KELLY: Sure. So, when it comes to the impact of the deal for FirstEnergy, it’s perhaps a bit good news on the ESG front for FirstEnergy. The West Virginia Public Service Commission had been putting pressure on FirstEnergy to purchase the Pleasants Power Station. And the Pleasants Power Station is set up as a coal power plant. And for FirstEnergy, if they’d been in the position of having to acquire a third coal-fired power plant, that could also impact some widely-watched ESG metrics.
From an ESG perspective, for FirstEnergy, Omnis making that purchase decision takes some of the pressure off that they had been facing from the West Virginia PSC. Sort of similarly for Energy Harbor, they had been leasing Pleasants from ETEM and generating power at Pleasants until the end of May this year, when ETEM temporarily mothballed the plant. They were planning on demolishing it. And then Omnis steps in and they are effectively like a white knight for keeping Pleasants open.
I want to give a little bit of a hat tip here to Sean O’Leary at the Ohio River Valley Institute. He asked some really good questions about this deal and looking at like, okay, well, what are Omnis’ prospects here? FERC has given Omnis ten days from the date of the authorization to basically let FERC know, will they be moving forward with this purchase? There’s a letter of intent that’s been signed.
So, assuming that Omnis does move forward, they have this really interesting plan to pair the Pleasants Power Station with graphite production that will also generate hydrogen. That hydrogen will then ultimately down the line become a feedstock for the Pleasants Power Station. And so there’s a lot of questions about essentially how does that hydrogen production plan work? How are the economics going to work out in terms of running this power plant that was struggling with profitability as a coal-fired power plant? That’s after—there of course are retrofits that are required before if can run on hydrogen.
And then also with the graphite market, if the idea hypothetically were to be that the goal economically is to use this hydrogen byproduct for power and that the economics of the project overall would really be centered around graphite, then one thing to keep an eye on there will be some of the potential competition that Omnis might be facing from other graphite producers. There’s a couple other projects that are parties to perhaps keep an eye on there. There’s a company called First Graphene that’s patented a similar process to churn hydrocarbons, in their case a petroleum feedstock, into graphite, graphene and hydrogen.
And then in British Columbia last year, there was an announcement from FortisBC Energy, Suncor, and an Australian company, about a project, actually their plan is to start with a pilot project, a demonstration project, that would use a methane, a natural gas, pyrolysis process to make hydrogen. So a lot happening in terms of hydrogen proposals in addition to Omnis’ and it’s very, very early on in the sector. But FERC did greenlight Omnis acquisition of Pleasants.
DANIEL SHERWOOD: So can we just run that back for everybody? Is it true that you just told us that FERC greenlit a basically non‑known entity with a small team, if any, acquiring a multi-hundred or at least 100 plus megawatt coal plant that was operating and supplying electrons to the grid just a month ago, two months ago, to produce graphite and then sell hot hydrogen? What? That is insane. It’s hard for me to believe.
SHARON KELLY: In the authorization this week, FERC acknowledged that Omnis’ membership’s interests are owned by Hodson Investment, all of whose voting securities are owned by two individuals. So this is a privately held company, number one. And then number two, this plan would involve sort of like, as I understand it, it would be two different products. You’d have the graphite production onsite. And then through the graphite production, you’d get hydrogen as a byproduct. And then the hydrogen would be used as a fuel once this power plant is converted to generate electricity in the Ohio River Valley.
And the other thing to keep in mind here too is that, with a hat tip to the to The Hydrogen Podcast, which reported this recently, that Omnis’ plan will be to continue running the Pleasants Power Station on coal until they are able to do the conversion.
DANIEL SHERWOOD: There it is.
TEDDY DOWNEY: So I was actually wondering if it was like, all right, this is some kind of environmental thing where we’re going to stop using the power plant and start making this. But they’re going to keep running the power plant. Is it typically this easy to hoodwink FERC? I don’t know if we’d necessarily call it hoodwink. But before we get to that question, do they have a lot of scientists and like patents for this type of thing, Omnis? Did they put a lot of that in the filing to prove that they could even do this?
SHARON KELLY: So one of the interesting things here is that if you look at other similar projects, like, for example, this plant in British Columbia, what they’re doing is starting with a pilot project or like a demonstration project. I haven’t heard any discussion of a pilot or a demonstration project. And this is something that I’ve heard analysts question when it comes to this Omnis plant, like why no pilot or demonstration project? Why not prove the technology before sort of like going straight directly to a commercial scale acquisition?
TEDDY DOWNEY: It does not seem like a very rigorous process over at FERC on this.
DANIEL SHERWOOD: How I would explain—and this is just totally like kind of podcast level discussion here. Like, I didn’t report this out as this docket is in particular. You know, FERC does have like, just in reading, for instance, FERC’s deliberation over those two concerns as it relates to the Rio Grande project, they can be quite thorough. I mean, remember Teddy, for instance, our whole investigation on whether or not they had jurisdiction over the LNG plant in Puerto Rico. That came down to pressure readings in inches and literally where the bolts were screwed into the wall.
So, I mean, it can be a hyper technical, super serious agency in many respects. Why I think this is something that happened was because of the pressures here. And without the WV PSC pushing for this to be done, to be bought by someone, I don’t think really anybody wants it. I think that’s why FERC is like, okay, fine. Like if you want to buy it, go for it. You know, good luck with this graphite thing. And who knows what their perspective is—Sharon may—about future production based on like just keeping it running. But if I remember correctly, Sharon, it was already running at 40 percent capacity. And it’s not like Omnis will be able to boost that either. You know, Energy Harbor would have been the savviest operator in that regard.
So I think my answer to, is it easy to hoodwink them, I’m not even sure if it’s hoodwinked, it’s more like this is a best case scenario with a pretty hot-potato asset that’s not working great. But it’s this coal-fired power station and we have these people who want to buy it.
SHARON KELLY: Yeah, absolutely. And I think it’s something that you see repeatedly asked with coal power plant retirements is, are there ways to potentially take existing infrastructure and put it to different use? So again, it’s sort of another energy transition kind of question that FERC is forced to confront.
TEDDY DOWNEY: All right. Well, it seems pretty crazy to me. It seems pretty interesting. So I’m kind of interested to see how that plays out. And last lastly, we want to get to this new petition to protect sturgeon. The Delaware River Keeper Network filed a petition with the U.S. Department of Commerce and National Marine Fisheries Service to give special protections to the Atlantic Sturgeon. Is this where we get our caviar from locally? [laughs] Got to make sure that supply remains intact. But I would love to hear from you all an update on this. What does this mean for the Energy Transfer Marcus Hook Complex or FIP’s Repauno export plants? So, it is another Sharon.
DANIEL SHERWOOD: Totally. This is another Sharon one. Sharon, we love our fish here. I mean, with the candy darters staying the Mountain Valley Pipeline. And we love the Endangered Species Act. It’s an interesting act and they can have a major impact on the market. And Sharon wrote a story about how this was likely to happen and the scope was even broader than kind of what we initially discussed. So Sharon, please take it away and then we’ll release our poor listeners to the weekend.
SHARON KELLY: Very good. I’ll try to be brief. So, as Daniel said, this petition just filed by the Delaware Riverkeeper, it strikes at the foundation of permits for anything that might affect an endangered Atlantic Sturgeon in the Delaware River. You can see potential impacts for not just Repauno, but other industrial projects in the Delaware that plan dredging or will drive ship traffic. Repauno is particularly interesting because their planned dredging location happens to be in a spot that some of the newly emerging science suggests may be particularly important spot for the species.
But what this complaint does is it asks the National Marine Fisheries Service to take another look at how they’ve been approaching the Atlantic sturgeon populations. So, without getting too, too deep into it, what the Riverkeeper petition says is they say, hey, NMFS, what you’ve done is you’ve lumped together two groups of this endangered species.
You have our Delaware River population, which is tiny. It’s very imperiled. And you put them in the same sort of like classification, same—they call it a bight—as the Hudson River population, which is actually one of the biggest populations in the U.S. And they say that by doing that, what National Marine Fisheries Services has done is they’ve ignored some of the emerging science. We know that Atlantic sturgeon, one of the things we know about them is that they don’t just go to any river to breed. They go specifically to the river that they were born in to breed. So you wind up with these two genetically distinct populations. And this matters because that specifically links to the language of the regulations and agency policies in question here, which discuss reproductive isolation and genetic uniqueness.
And so DRN is asking National Marine Fisheries Service to recognize this, and in turn to make the Delaware River Atlantic sturgeon into their own population. If they do that, then all of the vessel strike analysis, all of their dredging work and work on—they call it hypoxia, which is the impacts of low dissolved oxygen—all of your biological opinions that are at the foundation of these permits for commercial activities, they’ll have to be based on this smaller population. And so it could have some pretty significant impacts for permits on the river if NMFS does what DRN has asked.
Now that the petition is filed, NMFS has about 90 days to make a determination. It’s rather interesting because that determination, it’s not like a public comment process or something like that. The determination is internal and about whether there is substantial scientific or commercial information included in the complaint to justify a status review. So, it’s something to watch.
DANIEL SHERWOOD: Which is robust and Sharon’s done an incredible amount of work on the legal side and the science side to demonstrate that. So, I mean, to summarize, if I may, the Shakespearean tale of the Montague and Capulets, of these two different sturgeon and these two different rivers, has taken on importance that possibly impacts industrial permits that underlie wastewater treatment plants, any kind of export facility, anything that has an effluent into the Delaware River. And this move could possibly jeopardize the underlying permitting of all those projects.
SHARON KELLY: You’re looking at dredging, which is a contentious issue in the Delaware. You’re looking at vessel strikes, which means river traffic, and so there’s a wide array of commercial permits that could potentially be impacted.
TEDDY DOWNEY: You know I love all that Delaware River stuff because DuPont has all that junk at the bottom of that river. God knows what’s in there from the history of whatever has been dumped in there. So this is super. I mean, I’m amazed that any fish really can survive, to be honest.
So I think that’s a great way to cap off the call. Again, thanks for doing this. Thanks to everyone for joining.