Muni Credit News October 21, 2024

Joseph Krist

Publisher

AFTER THE STORM

The Biden administration this week has awarded a total of nearly $2 billion in new grants to help harden, expand, and modernize U.S. power grids. The 38 projects that received grants are in 42 states and Washington D.C., and range in scale from $7.5 million to harden a remote grid in Alaska to $160 million for utility Georgia Power to deploy advanced power cables and ​“dynamic line rating” technologies to expand the capacity of its transmission network.

Part of the program are the up-to-$612 million in grid grants President Joe Biden unveiled earlier this week during a visit to storm-ravaged Florida. That funding will flow to utilities in Florida, Georgia, and North Carolina, as well as to the federal Tennessee Valley Authority. The money comes from the third round from the Department of Energy’s Grid Resilience and Innovation Partnerships (GRIP) Program part of the IRA.

DOE has received $50 billion in applications for the GRIP program to date, she noted, but the program has already given out about $7.7 billion of its total $10.5 billion in appropriations.

CARBON  CAPTURE

A leak in a well used to inject carbon dioxide into underground storage wells in Illinois has raised concerns over safety. Monitoring wells monitor the movement of CO2 within injection wells. These wells help ensure that the CO2 is spreading as expected and that there are no signs of leakage. Archer Daniels Midland was the first company in the country to ever put in a CO2 sequestering well. It has been operating for 13 years.

Recently, one of two such wells from ADM was found to be leaking. The timing could not be less favorable. In May, the Illinois Legislature passed the SAFE CCS Act. It makes Illinois just the second state after California to put a moratorium on approval of carbon dioxide pipelines while the Pipeline and Hazardous Materials Safety Administration decides on regulations for such projects. There are currently 22 injection well applications into the Environmental Protection Agency for sites in Illinois that are scheduled to have draft permits issued in the next six months. 

As the process plays out, concerns about issues like eminent domain continue. A recent poll surveyed registered voters across six Midwestern states. It found that eighty-one percent of registered voters say they oppose corporations utilizing eminent domain for private projects. The poll was conducted before the Decatur monitoring wells leaked. Concerns about eminent domain and aquifer protection not being included in the SAFE CCS Act remain an issue. 

As these issues are worked out, the federal government continues to push hard for carbon capture.

CARBON PRODUCTION

Th e US EPA develops an annual report called the Inventory of U.S. Greenhouse Gas Emissions and Sinks (Inventory) that tracks U.S. greenhouse gas emissions and sinks by source, economic sector, and greenhouse gas going back to 1990. Large polluters, which include power plants, belong to a subset known as “large stationary sources” and represent about half of the country’s total emissions. Recently released data for 2023 show where the carbon is coming from.

Power plants cut their emissions by 7.2 percent between 2022 and 2023. The agency said that this sector emitted 1.5 billion metric tons of carbon dioxide in 2023. Power plant emissions are down 33.8 percent since 2011. This sector represents a quarter of the country’s total emissions. in 2023, emissions from oil and gas production and processing increased by 1.4 percent, and are 16.4 percent above where they were in 2016. 

Emissions from other major pollution in industrial and waste sectors fell by 1.1 percent.

HYDROGEN

One year ago, hydrogen hubs were making news as the Biden administration announced financial support for seven of these facilities. They are designed to facilitate the production of hydrogen for fuel without producing carbon dioxide resulting from traditional production methods. These facilities were split between the production of “green” hydrogen and “blue hydrogen”. The federal dollars were designed to allow these projects to attract private capital. Now, a year into the program that private investment is not panning out.

One example is the Appalachian hub known as ARCH2. A study by a regional environmental group documents the difficulties that this facility is facing. In the year since the US Department of Energy awarded ARCH2 up to $925 million in federal grants, four project development partners have exited ARCH2 and five of the 15 originally proposed projects have been scrubbed. 

The result is that the projected economic benefits of the project are much less likely to be realized. The report on ARCH2 finds that it is expected to achieve an emissions reduction of just 2% across the tri-state region and create fewer than 3,000 permanent jobs. The end-uses proposed as part of ARCH2 by project developers – electric generation and home heating – are not currently economically competitive with other sources of fuel for these projects.

Away from the environmental consequences, the economic fallout is a bigger concern for green energy proponents. One of the basic pillars of the Green New Deal is the potential economic benefits of renewable energy as a source of employment and business activity. As proponents rely on the economic potential to offset the potentially disruptive nature of the energy transitions, failures do not auger well for long-term support.

One just has to harken back to the hit that solar energy took under the Obama Administration. Solyndra was a manufacturer of cylindrical panels of copper indium gallium selenide thin film solar cells. It was based in Fremont, California. In 2009, the Obama administration co-signed $535 million in loans to Solyndra. On August 31, 2011, Solyndra announced it was filing for Chapter 11 bankruptcy protection, laying off 1,100 employees, and shutting down all operations and manufacturing.

NUCLEAR

The municipal finance industry will finally take part in the small modular reactor space. After one failed effort by a Utah municipal utility to get involved with an SMR project, a new one has been announced. Amazon has signed three agreements to support the development and deployment of small modular reactors in the United States. The company entered into a deal with Energy Northwest, the successor to the Washington Public Power Supply System to deploy four reactors developed by X-energy that will together generate approximately 320 MW of electricity beginning in the early 2030s.

The first phase of the Energy Northwest agreement would see the deployment of four 80-MW Xe-100 SMRs at the Columbia Generating Station in Richland, Washington. Future phases could add eight more reactors, bringing the site’s total SMR generating capacity to approximately 960 MW.

EPA AND EMISSIONS

The Supreme Court will not stop regulation from the Environmental Protection Agency which requires coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039, one year earlier than the agency had initially proposed. The E.P.A. also imposed three additional regulations on coal-burning power plants, including stricter limits on emissions of mercury from plants that burn lignite coal, the lowest grade of coal. Lignite limits would impact Texas generators.

The rules also more tightly restrict the seepage of toxic ash from coal plants into water supplies and limit the discharge of wastewater from coal plants. Toxic ash ponds have long been a source of concern. There are about 200 coal-burning power plants still operating, with many concentrated in Pennsylvania, Texas and Indiana.

More than two dozen states challenged the regulation, arguing that the federal government had failed to prove that the techniques used to control emissions would curtail them to the degree that the government is seeking. It is a temporary setback to efforts to fight the rules. West Virginia, said it would continue to contest the rule.

The state’s challenge is currently pending in the U.S. Court of Appeals for the District of Columbia Circuit. In July, a three-judge panel refused a request by the conservative-led states to stop the E.P.A. rule from going into effect while the court case continued, prompting the states and other groups to ask the Supreme Court to step in. Ultimately, this case could end up in the Supreme Court argued over different issues.

THE POST-REFUNDING WORLD

To the extent there has been any focus on the municipal bond market during the Presidential campaign, it has been on the SALT deduction. In Congress, recent disasters have focused attention on the issuance and use of tax-exempt private activity bonds. One thing lost in the era of Trump tax cuts which does not look to be resurrected is advance refunding. That has limited options for issuers in terms of reaping the benefits of favorable interest rate movements. It has renewed interest however in a different technique – the bond tender offer.

The Division of Bond Finance of the State Board of Administration of Florida (the “Division”), on behalf of the State of Florida is offering holders of up to $500 million bonds it selects the chance to sell their bonds and receive a premium for doing so through a tender offer process. This week, marks the midpoint of a tender offer which extends through October 23.

The Tender Offer is being made as part of a plan to reduce the State’s debt. The candidates for purchase were selected to maximize debt service savings through principal reduction and/or avoided future interest cost. The bonds were issued as both general obligation debt for education and transportation and revenue bond debt for the Florida Turnpike. The State has the funding to pay for the tender and it has been legislatively appropriated.

Will the offer succeed? It’s not mandatory so if you wish to keep your targeted bonds, feel free. Estimates from Barclays suggest that some $30 billion of debt will have been the subject of tender offers over this and last year. It seems that only half of the targeted bonds in these offers have been sold back. It will be interesting to see if the timing of the offer relative to the two hurricanes has any impact on the amount of bonds tendered.

PENSIONS

The Equable Institute is a bipartisan nonprofit that works with public retirement system stakeholders to solve complex pension funding challenges with data. It produces annual reports and interim results on state pension funds. It recently reported on results through 3Q24. Equable found that the funded status of public retirement systems in the U.S. has continued improving as of September 30, 2024 — thanks both to strong financial market performance and record high contribution rates.

That’s the good news. Several negative pressures on public plans include steadily growing benefit payments resulting in record high negative cash flow combined with over 1 in 5 public plans contributing less than the interest accumulating on their existing unfunded liabilities. The net result is a nearly 6 percentage point increase to the national average funded status that hovers at a fragile 81%. Why is it fragile? After investment returns of nearly 25% in 2021 the national average funded ratio had improved to 83.9%. Public plans then suffered sharp losses, strong gains again, and some flat performance as well.

Current trends support a more positive few through this year. The national funded ratio average is projected to increase from 75.6% in 2023 to 81.4% in 2024. The total pension funding shortfall will decline to $1.29 trillion in 2024, down from $1.63 trillion in total unfunded liabilities in 2023.

RENEWABLES AND PUERTO RICO

We have long advocated for a reconstruction of the public power grid in Puerto Rico on a localized basis. This reflected the ongoing failure to consistently operate a heavily centralized system in an environment does not support that approach. Now, we see steps being taken to address a portion of the capital need to support a local approach and employ resources at hand such as the sun to power the island.

The U.S. Department of Energy announced this week that it has finalized an $861.3 million loan guarantee for the development of two solar+battery facilities and two standalone battery facilities in Puerto Rico. Project Marahu, will add 200 MW of solar generation and up to 285 MW/1,140 MWh of standalone storage to the island’s grid. The Marahu solar installations are expected to produce approximately 460,000 MWh of energy annually.

Disclaimer:  The opinions and statements expressed in this column are solely those of the author, who is solely responsible for the accuracy and completeness of this column.  The opinions and statements expressed on this website are for informational purposes only, and are not intended to provide investment advice or guidance in any way and do not represent a solicitation to buy, sell or hold any of the securities mentioned.  Opinions and statements expressed reflect only the view or judgment of the author(s) at the time of publication, and are subject to change without notice.  Information has been derived from sources deemed to be reliable,

official statements and other disclosure documents on their own and/or to consult with their own investment professional and advisors prior to making any investment decisions.