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Energy Policy and Conservation Act

In response to the Arab Oil Embargo in 1973, Congress passed the Energy Policy and Conservation Act as a comprehensive piece of energy legislation. Among other things, the law established the US SPR, directed the DOE to enact energy efficiency and alternative energy programmes, and improved the quality of energy data.

Energy Policy Act of 2005

Under the Energy Policy Act of 2005, Congress repealed the Public Utility Holding Company Act of 1935, thereby overhauling the federal regulatory regime for the electricity sector. In doing so, Congress granted unprecedented regulatory authority to FERC, including a requirement for FERC to set and enforce reliability standards for the entire transmission network. The law also introduced the RFS, which required gasoline sold in the United States to be blended with biofuels, as well as a 30% investment tax credit (ITC) for solar power installations.

Energy Independence and Security Act

The Energy Independence and Security Act was signed into law in December 2007. Among other measures, the law increased Corporate Average Fuel Economy standards, updated the RFS, established new energy efficiency standards for equipment, and repealed some oil and gas tax incentives.

American Recovery and Reinvestment Act

The American Recovery and Reinvestment Act of 2009 substantially increased appropriations for energy programmes, in particular energy efficiency and renewable energy investments. The law included USD 21 billion of energy tax incentives as well as over USD 11 billion in DOE grants to state and local governments.

Energy permitting and regulatory regimes

From an energy production regulatory perspective, companies need to apply to respective states in which they plan to drill for oil and gas or mine for coal, with the exception of federal lands, for which the US Department of the Interior holds lease auctions. The Interior Department also oversees all offshore energy resource development that falls beyond states’ purview. The Interior Department additionally imposes safety and environmental regulations on drilling and mining activity on federal lands. Outside of federal lands, this regulatory authority falls mostly to states, though the EPA can also impose environmental standards on production activities. In cases where both federal and state regulations exist, an operator must comply with both (in this regard, the federal requirement serves as a minimum baseline).

Midstream infrastructure requires a different set of regulatory approvals. While private companies decide on whether to develop a new pipeline project or export terminal, the government plays an instrumental role in infrastructure permitting. Not only does the FERC make a determination on market need for interstate gas pipelines, it also leads on environmental reviews for pipeline projects under NEPA. Where FERC does not have jurisdiction, state regulators lead on these functions. Additional state permits, such as

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Water Quality Certifications under Section 401 of the Clean Water Act, are often required for energy infrastructure projects.

In an effort to streamline federal licensing for energy infrastructure, Congress in 2015 passed the Fixing America’s Surface Transportation (FAST) Act. Title 41 of the FAST Act defined new co-ordination and oversight procedures, including early consultation among government agencies and increased transparency in permitting reviews and timelines.

In recent years, as shale oil and gas production have surged, midstream infrastructure has occasionally failed to keep up with the pace of output growth, resulting in transportation bottlenecks that widen regional price differentials, and can even restrain production. While in many cases, the pipeline bottlenecks stem from lags in private investment relative to unexpectedly high production growth levels, in some instances, regulatory impediments play a role. In particular, local opposition to pipelines on environmental grounds has grown, resulting in a lack of social acceptance in certain states that leads to rejections of state or local permits. The issue has been most pronounced in the Northeast, where takeaway capacity plans out of the Marcellus and Utica shale basins have, on occasion, been turned down; a recent example is when New York in 2016 rejected a permit application for the Constitution pipeline that was to run from Pennsylvania to New York.

Court challenges have also led to delays on pipeline construction. For example, a 2017 court ruling directed FERC to consider the downstream environmental impacts of its decision to approve the south-eastern Sabal Trail gas pipeline based on a lawsuit brought forward by environmental groups. Similarly, a federal court blocked the Keystone XL oil pipeline on the grounds that its federal permit from the State Department did not consider an alternative route that was approved by Nebraska regulators; the decision required a new State Department permit, which was issued in March 2019.

Energy pricing and taxation

The US energy system is largely governed by market-based principles. The prices of fuels are determined by supply and demand, but also incorporate variables such as transportation and taxation. By global standards, US energy taxation levels are relatively low (OECD, 2018).

The most common oil price benchmark in the United States is West Texas Intermediate (WTI), based on a type of light crude produced in the United States. The contracts for WTI are physically settled at the oil trading hub in Cushing, Oklahoma (EIA, 2018b). Henry Hub, which is cleared at a physical distribution hub in Erath, Louisiana, is the most heavily traded gas contract. While US oil prices are strongly influenced by global supply and demand dynamics given import dependency, so far US natural gas prices have tended to be independent of global gas market developments. Most coal used for power generation is sold under long-term contracts, though spot sales of coal also take place (EIA, 2018c). Coal prices vary based on their grade and geographic origin.

As a secondary source of energy, electricity prices comprise several inputs, including fuel costs, power plant operating costs, transmission and distribution, weather, and regulation (EIA, 2018d). Electricity pricing varies by state. While some states fully

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regulate prices, others have deregulated wholesale prices and regulated retail prices, and still others have fully deregulated pricing.

The main consumption tax levied on energy is the federal gasoline excise tax, first imposed at the rate of USD 0.01 per gallon in 1932. Currently the federal government imposes a tax of USD 0.1840 per gallon on gasoline and USD 0.2440 per gallon on diesel (EIA, 2018e). The tax levels are not adjusted to inflation and have not been changed since 1993, eroding the value of revenues on an inflation-adjusted basis. Proceeds from the tax are directed towards road infrastructure upgrades through the Highway Trust Fund, which was created by Congress in 1956. States are also at liberty to levy gasoline taxes on top of the federal tax. In 2018, the average state tax on gasoline was USD 0.2862 per gallon and the average state tax on diesel was USD 0.3021.

The federal government also raises money from energy produced on federal lands through royalties, lease sales and rental payments. Energy production subject to federal payments includes oil, gas, coal, hydrocarbon gas liquids and renewables. The Interior Department’s Office of Natural Resources Revenue manages the revenues collected from energy development on federal lands, collecting an average of over USD 10 billion in revenue annually (Office of Natural Resources Revenue, 2019). The Mineral Leasing Act of 1920 fixed a royalty rate for competitive leases at no less than 12.5% of the amount or value of production. The BLM has set the royalty rate at 12.5% for onshore production. For offshore oil and gas leases, the royalty rate is set at 18.75%, though the administration lowered it to 12.5% for shallow water lease sales in 2018 to help attract investment amid low oil prices. For non-competitive leases, the act established a fixed royalty rate of 12.5%. Coal royalty rates vary depending on the type of mining activity: underground mines face a royalty rate of 8% while surface mines pay a rate of 12.5%. States usually impose royalties and production taxes on top of the federal rates (United States Government Accountability Office, 2017).

In 2017, the Interior Department announced the formation of the Royalty Policy Committee to review royalty rates for energy production on federal lands to ensure taxpayers received the maximum benefit from production (Bureau of Ocean Energy Management, 2017). In February 2018, the committee recommended lowering the royalty rate for offshore oil and gas drilling, and in September 2018 recommended granting companies the option to choose between two methods for calculating royalties – either based on how much they are paid (the traditional approach) or based on the quality and quantity of what they produce.

The US government also offers tax credits and other tax incentives to certain energy sectors to incentivise development or consumption of alternative technologies. For example, consumers can claim tax credits for buying alternative energy vehicles or installing energy-saving equipment in households (DOE, 2019d). Congress has granted the renewables sector support with tax credits in the form of production tax credits and ITCs for solar, wind energy and advanced nuclear technologies. The oil and gas sector does not receive any production tax credits but can claim several deductions, such as a domestic manufacturer’s deduction and intangible drilling costs deductions (American Petroleum Institute, 2017). Oil and gas pipelines can also benefit from master limited partnership structures, under which they organise as partnerships and trade publicly on an exchange, receiving tax benefits. The Oil Spill Liability Trust Fund also serves as a backstop to cover costs associated with oil spills that the

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operator of a facility is not able to cover. More recently, in February 2018, Congress increased tax credits for CCUS under Section 45Q of the tax code.

Energy data

The Energy Information Administration (EIA) is the independent energy statistics and analysis arm of the US government. The EIA was established under the Department of Energy Organization Act of 1977 to serve as the federal government’s authority on energy statistics and analysis, following up on data collection that was put in place in 1974, after the 1973 oil market crisis. The EIA is funded each year through the annual Congressional appropriations process (EIA, 2019b).

The EIA is housed within the DOE, though it operates independently from it and from any other departments or agencies within the federal government. In this regard, its data and analysis are not subject to prior review or approval by other government entities. The EIA collects, analyses and publishes objective data and information, which helps to inform energy policy decisions. The EIA’s high quality and dependable data are also widely used around the world by financial markets, investors and the general public. Its data cover all aspects of the energy system, including production, stocks, demand, imports, exports and prices. The administration collects historical data as well as makes projections.

The EIA offers a number of products, services and tools to disseminate its work, including daily, weekly, monthly, quarterly, annual and special topic reports. Among the EIA’s flagship publications are the Annual Energy Outlook (AEO) and the Short-Term Energy Outlook (STEO). The AEO provides long-term projections for US energy supply, demand and trade over a 25to 30-year time horizon based on several scenarios, including a reference case, high and low resource and technology cases, high and low oil price cases, and high and low economic growth cases. The STEO is a monthly publication that provides forecasts of US energy supply, demand, trade and prices over a 12to 24-month time horizon. The EIA’s Weekly Natural Gas Storage Report and Weekly Petroleum Status Report are industry benchmarks for providing natural gas and oil stocks information, and help inform oil and gas markets and prices. All of the EIA’s data are available from databases on its website: www.eia.gov.

Assessment

Since the last IEA review of US energy policies in 2014, energy markets and policies have undergone dramatic change in the United States.

The shale revolution continues to be a driving force in US energy policy, shifting gears from a mindset of energy scarcity to one of energy abundance. Further innovation in oil and gas extraction through additional refinements in horizontal drilling coupled with hydraulic fracturing has made oil and gas production a mainstay of the US energy landscape and, indeed, the world. The same types of technological breakthroughs that led to the shale revolution hold promise to unlock opportunities in other areas of the energy field. Notably, the United States remains at the forefront of clean energy technology innovation, more recently with regard to research efforts on small modular reactors and CCUS.

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Commitment to innovation and sensible risk taking, combined with conducive legal, regulatory and tax frameworks as well as the general entrepreneurial culture of the United States, have contributed to economic growth. Key policies underpinning this success include the full liberalisation of oil exports by Congress in 2015, the federal approval process for LNG exports, improved co-ordination of infrastructure projects under the FAST Act, continuous public support to research, development and innovation as well as the favourable tax environment (decrease in corporate tax from 35% to 21%). The United States has extensive natural resource endowments, and bringing them to market will require that these conditions remain strong.

The results, so far, are impressive. Crude oil production is up 25% from October 2014 to October 2018, and natural gas production has increased by 19% over the same period. These changes, which make the United States the largest oil and gas producer in the world, put it on track to be a net energy exporter by 2020 on an annual average basis. While US energy costs are low compared with many of the other OECD countries, decreasing fossil fuel costs and wholesale electricity prices have not translated into decreasing retail electricity prices. While the fuel component of retail rates has declined, other rate components have increased, yielding slight overall increases in rates. Nevertheless, customer bills have remained relatively steady. This is a major driver for the competitiveness and productivity of US businesses, assisting continued economic growth and prosperity.

Improvements in energy efficiency and renewables are equally impressive, contributing to US prosperity, jobs and economic growth. Total energy consumption has fallen by 3.3% since 2007, while the economy grew by 15.5%. This gain in energy productivity has been an important boost to US productivity throughout the economy. From 2007 to 2017, energy-related CO2 emissions fell by 16% due to lower energy demand, energy efficiency, the shift from coal to natural gas use in power generation, and growth in renewable electricity. In fact, the largest emissions reduction happened in power generation, with a decrease of 27% below 2007 levels, with coal-to-gas fuel switching being a dominant driver.

But this energy success has brought challenges. The United States now needs to address midstream bottlenecks, especially with regard to gas and oil. Infrastructure investment has been lagging behind production. Interstate pipeline transportation is occasionally challenged by the lack of public acceptance and concerns around environmental integrity along the pipeline track. Therefore, some states refuse pipeline projects. FERC has federal authority over siting, construction and operation of interstate gas pipelines and LNG export terminals and is the lead agency on environmental reviews (under the process defined in NEPA).

Other challenges include the fact that gas has overtaken coal as the main fuel source for electricity generation – it accounted for 31.4% in 2017 (compared with 31.0% for coal) and in some states 60% of total generation. The low cost of gas has assisted in significant GHG emissions reductions across the economy and in low wholesale power prices. In combination with the rapid growth of renewable energy, gas has been displacing higher-cost coal generation as well as nuclear, leading to the retirement of some of these plants. On the other hand, “lower for longer” energy prices, while desirable for end users, can also deter investment into existing and new energy infrastructure, especially in competitive markets, and may raise reliability concerns as more baseload generation is retired.

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The US federal structure adds challenges to the policy-making process. Moreover, a complex array of regional wholesale markets and regional operators, North American regulatory authorities, state utility commissions, federal authorities, and split responsibilities with regard to infrastructure planning, regulation and permitting leaves business with a complex system, notably with regard to environmental and historical preservation rules.

US environmental and climate policies continue to face a lack of bipartisan support, and frequent regulatory course changes increase the risk of legal challenges against regulatory action and can create uncertainty for states and industry alike. The United States does not have national market-based carbon policy instruments such as a carbon tax or cap-and-trade programme. Past attempts at passing carbon pricing legislation have not garnered sufficient support in Congress. As a result, US federal emissions policy is directed mainly through regulation under existing environmental laws (primarily the Clean Air Act) rather than climate-specific legislation.

Planned US withdrawal from the Paris Agreement has resulted in some regulatory uncertainty. As a number of states, particularly some more populous ones, move to set clear, long-term targets, this uncertainty might be alleviated. There is a role for the federal government to continue to improve collaboration between states and between state and federal departments and regulators. The very different policy stances of various governments make this even more important. However, even without an encompassing federal emissions policy in place, according to the latest long-term projections from the EIA AEO 2019, CO2 emissions from US energy consumption will remain near current levels through 2050, as emissions associated with coal and petroleum consumption fall and emissions from natural gas consumption rise (assuming current laws and policies).

Energy security remains a priority issue for the United States. The country continues to demonstrate a strong focus on reliability and resilience, recognising that its national and economic security depends on the reliable functioning of its energy infrastructure. In this respect, the DOE’s creation of CESER is a welcome initiative.

The United States continues to work with its partners to ensure its own and global energy security. US energy exports are already playing an important role in diversifying global energy supplies and mitigating the impact of disruption events. In this regard, continued careful consideration is required when examining proposals to modernise and sell down its SPR, given its critical role in any future IEA collective response.

Innovation remains a hallmark of US energy policy. Significant resources continue to be directed to fundamental RD&D, including in the extensive network of DOE national laboratories as well as the research centres and universities with which the government collaborates. This is highly valued by industry. Noting that resources are always constrained, it is nonetheless worth continuing to explore whether additional marketoriented demonstration and commercialisation support might have net benefits. The international focus should also extend to continued US leadership in technological collaboration. The high-quality data and analysis by the EIA are acknowledged as best practice and relied upon by many in the industry.

The changing nature of the energy landscape means there will be continuing adjustment in the mining and supply chain sectors, particularly for coal and nuclear. As with any adjustment in the economy, careful attention is necessary to ensure that impacts on the

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