Covington CleanEquity Conversations: Will Market Driven Innovation Alone Save Us from Climate Change?

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference.  Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported in the conference’s final plenary session key takeaways from the three breakout group discussions.  Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.

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Will Market Driven Innovation Alone Save Us from Climate Change?

This loaded question, perhaps more than the other two topics debated during the Covington-led sessions at CleanEquity, presents a fundamental challenge facing society.  The range of answers helps to inform the commercialization opportunities for the myriad technologies under development by CleanEquity’s presenting companies.  Each of the presenting companies offers some partial solution to climate change by making a process more energy efficient or sustainable.  But the solutions presented were generally early stage.  In order for these companies and their technology-driven solutions to thrive and be impactful, they need to have the right combination of receptive markets, appropriately costed capital for expansion,  and sustainable consumer adoption.

In a session led by Covington’s Scott Anthony, a partner in the firm’s Silicon Valley office, conference participants grappled with two aspects of the overall question:

  • Will technology innovation progress fast enough to overcome the effects of climate change?
  • Is the threat of climate change alone sufficient to incentivize society to find a solution?

The robust discussion benefited from the views of a diverse group of innovative entrepreneurs, investors and consultant thought leaders, but no government officials.

The Pace of Innovation is Quick, but Commercialization is Lagging 

The initial position asserted by the first speaker was that innovation had, in effect, already progressed quickly enough because the technology necessary to overcome climate change already existed.  Another individual agreed and noted that within the Conference alone, many technologies had the potential to mitigate or overcome the effects of climate change.  Several individuals commented that it would not be one single technology or sector, but rather a combination of technologies across many spaces that are deployed at a commercial scale that will be needed.  The group acknowledged the potential for wide deployment of solar power to mitigate climate change, but also recognized that there were many technologies that were part of the solar ecosystem or that would be able to take advantage of greener electricity.  The group also broadly agreed that the solutions went beyond just solar and included energy efficiency of all types as well as wind and alternative fuels.  In addition to energy generation, it was noted that technologies for more sustainable food production, waste disposal, packaging, transportation and energy transmission and management would be essential to effectively combating climate change.  Companies with potentially commercializable solutions in each of these industry sectors were present at the conference.

While the group agreed regarding the existence of potentially viable technologies, the group also observed that all of the new technologies face the common challenge of market acceptance and adoption.   New technologies struggle to compete with existing technologies and to overcome barriers to widespread adoption that threaten their existence.  Commercialization was viewed as the key and impediments to commercialization were discussed as a critical issue.  One person commented that improper or inadequate pricing of carbon emissions generated through the use of traditional technologies adversely impacts the adoption and commercialization of new technologies.  Once the externalities of carbon emissions are taken into account, the group felt that newer technologies would have the potential to be more economically competitive and thereby more readily adopted at a meaningful scale.

Threat of Climate Change Alone is Not Sufficient to Produce Necessary Innovation — Government Intervention is also Needed

One might have expected a gathering of entrepreneurs and investors to favor a free market approach where the best technologies and businesses thrive and profit on their own merits.  Investors are reluctant to risk their capital on the basis of government policies that are subject to change.  Nonetheless, the group coalesced around the view that the threat of climate change alone would not be enough and that market intervention by governments would be required to assure that effective technologies are adopted at scale.

One person commented and others agreed that without government intervention, society would not be able to achieve near or long term climate change goals.  Without discussion of specific government policies, the group acknowledged that the general goal of policies should be to enable climate friendly technologies to achieve commercialization and to compete with existing legacy technologies.  Complexity of determining the “right” policies was recognized, but the goal remained.  The discussion noted that different areas and countries would have and need different policies and incentives.  There is not a one-size fits all set of policies.  But the need for governments to play an enabling role was widely accepted.

One person commented that human behavior is very difficult to change.  People and societies have established practices that tend to be reinforced by established incentives.  Overcoming the inertia of existing regulations and practices requires effort.  Without new and different incentives, mandates or other factors driving behavior change, it is likely that established norms and practices  would continue to prevail.  For example, one commentator raised the question of how many people attending the conference used renewable energy in their home or drove hybrid or all electric vehicles.  For such an economically advantaged and highly educated segment of the population at the forefront of technology and well aware of the dangers of climate change, the number  was remarkably low.  A participant noted that some individuals do not necessarily see the need to make personal sacrifices when the various state actors are not in agreement as to national and international policies regarding climate change.  Another participant asserted that perception of the need for change is lagging behind the actual need for change.  There was general agreement that society did not feel the pressing need to change current behavior.  Another person suggested that the climate needed the equivalent of a “#metoo” movement to raise awareness and galvanize action.  Something that motivated people to reflect on their own actions, call out the bad actors and to change the conversation.  One commenter offered that rational arguments have not been sufficient to change behavior, climate conscious behavior needs to become more recognized as the “right” thing to do if people are to change their behavior.

Shifting the discussion to the role of governments in changing behavior, the group agreed that concerted international efforts involving all nations would be important.  One commenter suggested that so long as some countries and peoples could continue to deploy old technologies and practices, other countries would not have an incentive to adopt and pay for new technologies and practices.  It is the collective action problem on a global scale.  Another participant  noted that many political leaders lack the political will or desire to adopt climate friendly policies.  The group generally acknowledged there were and are many reasons for the lack of political will, but still faulted political leaders for failing to lead in an area that is so critical.  One participant observed that the political will of the leaders is influenced by the absence of a clear mandate from their citizens.  Another commented that part of the problem is the portrayal of climate issues in the media.  Popular media was credited with the power to help shape and influence the perception of the need for change and thereby the mandate of politicians.  While the media’s role was viewed as important, one participant brought it back to a failure of leadership at the highest levels.

Amplifying this thought, another participant suggested that the nature of democratic societies was partially to blame for the paralysis of political leaders.  The clash of various constituents and interest groups all seeking to influence the system invariably leads to a slower process as incumbents who are threatened by new technologies and business practices are economically incented to slow the pace of competing change.  These competing voices are reflected in the political system.  The group then discussed the success of Germany in adopting solar energy through a program of incentives and targets and that Germany succeeded in this effort despite initial skepticism.  Some of that success was attributed to German citizens wanting to “do the right thing” and adopt solar.  Another important factor was the government’s commitment.  The group then compared Germany’s success with the development of solar energy in China.  The group generally acknowledged that China, because of the government’s ability to control its economy, had the ability to mandate change more rapidly and broadly than any Western government.  Some participants expressed admiration for China’s ability and willingness to establish specific targets and to execute on plans to achieve those targets.  There was general acknowledgement, however, that China’s ability stems from the government’s control of Chinese society in general.  Nobody in the group advocated that Western governments be more like China.   But there was a desire for Western governments to take more of a leading role in promoting climate friendly policies and helping to solve the problem of getting climate friendly technologies to market.

Conclusion

The conversation covered many issues and raised important questions and observations.  A consistent theme throughout the conversation was the need for governments to take a leading role in promoting climate friendly technologies.  Only governments would have the ability to adopt policies that will cause enough behavior to change.  Which specific policies and behaviors were beyond our group, but it was clear that the group believed that while the technology exists to combat climate change, government action will be required to facilitate adoption and commercialization of that technology.

Covington Hosts 14th Annual Environmental Transactional Roundtable

Covington hosted the 14th Annual Environmental Transactional Roundtable on May 18, 2018. More than 70 attorneys attended, including from multiple countries outside the U.S., representing 31 law firms and organizations. The event was a great success, and featured panel discussions that sparked lively discussion among participants. The three panels covered product stewardship issues, environmental issues in bankruptcy, and risk management in transactions.

Both co-chairs of Covington’s environmental group, Cándido García Molyneux and Don Elliott, spoke as panelists, joined by eight other practitioners from other firms.  Candido spoke about developing product stewardship and chemical regulation issues in the EU, including the complex rules related to carcinogenic, mutagenic or toxic for reproduction (CMR) substances, bans on consumer products, amd Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) registrations and authorizations.  He also discussed significant requirements for transactions involving products with the CE (Conformité Européene) mark and the Nagoya Protocol rules on biological diversity.

Don Elliott discussed best practices in environmental due diligence, including risk management strategies and effective methods for law firms to memorialize the scope, results and client communication of such due diligence.

The Roundtable is an annual gathering at which panels of practitioners meet to discuss current environmental issues and trends in transactional work.  This year was Covington’s first time hosting the event, which has been organized in the past by other leading national law firms.   Past Roundtables have featured discussion of sustainability reporting, climate change liability and disclosures, insurance developments, and lessons from major environmental disasters.

 

Featured:  Cándido García Molyneux discusses product stewardship developments in the EU.

European Commission Proposes Marketing Restrictions on Single Use Plastic Products

Citing a responsibility to tackle the problem of marine litter originating from Europe, on May 28, 2018, the European Commission presented a proposal for a Directive on Single Use Plastic Products that if adopted will restrict and increase the costs of marketing different categories of single use plastic products and fishing gear containing plastic.  Many plastics, such as polypropylene, are produced from petroleum derivatives.  The proposal is one of the main measures that the Commission announced in its Strategy for Plastics in a Circular Economy and is mainly intended to address plastic marine litter in oceans and seas.

Under the Strategy for Plastics in a Circular Economy, the European Chemicals Agency is also considering the restriction of microplastic particles intentionally added to preparations, such as cosmetics, and the use of oxo-degradable plastics.  In addition, the Commission is contemplating measures for microplastics not intentionally added but generated during the use of products, such as tires and textiles.

Separately, the European Commission recently proposed the adoption of a Member State contribution to the EU budget of 0.80 Euro per kilogram of plastic packaging waste that is not recycled, which could raise around 7 billion Euro a year.

Single Use Plastic Products

The proposal claims to focus on the ten most found single use plastic products that wash up on European beaches as well as fishing gear, which together represent around 70% of marine litter items by count.  It targets single use plastic products even if they are recyclable.  Its scope includes food containers; cups for beverages; cotton bud sticks; cutlery, plates, stirrers, and straws; sticks for balloons; balloons; packets and wrappers, beverage containers; bottles; tobacco product filters; wet wipes and sanitary towels; lightweight plastic carrier bags; and fishing gear.

The proposal defines plastic as “material consisting of a polymer [as defined in the EU REACH Regulation] to which additives or other substances may have been added, and which can function as a main structural component of final products, with the exception of natural polymers that have not been chemically modified.”  This definition is intended to cover polymer-based rubber items and bio-based and biodegradable plastics independently of whether they are derived from biomass and/or intended to biodegrade over time.

The proposal tries to encourage a circular economy by defining a “single use plastic product” as a product “made wholly or partly from plastic and that is not conceived, designed or placed on the market to accomplish, within its life span, multiple trips or rotations by being returned to the producer for refill or re-use for the same purpose for which it was conceived.”

Different Requirements and Bans for Different Categories of Products

The proposed Directive would impose different types of measures on different categories of single use plastic products.  The Commission claims that this differentiated approach takes into account whether there are alternative materials available, the added value of EU action, and its complementarity with the actions of the Member States.  In effect, the legal basis of the proposal (i.e., Article 192(1) of the Treaty on the Function of the European Union) does not prevent Member States from imposing additional or stricter requirements provided that they can be justified as necessary and proportionate.

The proposal would:

  1. Ban the placing on the EU/EEA market of plastic cotton bud sticks, cutlery, plates, straws, beverage stirrers, and sticks to be attached or to support balloons.
  2. Impose a 90% separate collection target for waste of plastic bottles, by means of deposit-refund schemes, or separate collection targets for relevant extended producer responsibility schemes.
  3. Impose extended producer responsibility schemes for fishing gear containing plastic and plastic food containers, packets and wrappers of food intended for immediate consumption, beverage containers, cups for beverages, tobacco products with filers, wet wipes, balloons, and lightweight plastic carrier bags. Producers of single use plastic products would have to pay for the collection, transport and treatment of their waste as well as for the cost of clean up litter and of public awareness campaigns.  This extended producer responsibility would be in addition to the obligations that the EU Packaging and Packaging Waste Directive already imposes on producers of plastic packaging.
  4. Ban the marketing of beverage containers with caps and lids that do not comply with specific environmental design requirements. In particular, the caps and lids would have to remain attached to the container during its intended use.  These design requirements would be further detailed through harmonized technical standards developed under an European Commission mandate.
  5. Impose marking requirements on sanitary towels, tampons, tampon applicators, wet wipes and balloons. These products would have to bear a mark informing consumers of the product’s appropriate waste disposal options, the negative environmental impacts of littering or other inappropriate waste disposal, and/or the presence of plastics in the product.
  6. Require Member States to take measures to reduce significantly the consumption of plastic food containers and cups. Those measures may include national consumption reduction targets, prohibiting the free supply of the products, or requiring the availability of reusable alternatives at point of sale.  A Directive on Reducing the Consumption of Lightweight Plastic Carriers Bags imposes on Member States similar reduction consumption targets with respect to lightweight plastic carrier bags.
  7. Require Member States to adopt environmental awareness raising measures for fishing gear containing plastic and plastic food containers, packets and wrappers, beverage containers, cups, tobacco products with filters, wet wipes, balloons, lightweight plastic carrier bags, and sanitary towels, tampons and tampon applicators. Member States would have to ensure that consumers are informed of the available re-use systems and waste management options for the products and the impact of littering and other inappropriate disposal.

The proposal also grants environmental NGOs a right of legal redress.  These NGOs may challenge in national courts decisions, actions or omissions of Member State authorities concerning the marketing ban, environmental design requirements, marking requirements and extended producer responsibility schemes mentioned above.  Individuals and other groups would also have a right of legal redress if they can show that they have a sufficient interest, or they maintain the impairment of a right where the relevant Member State requires this as a precondition.  This is probably the first time that an EU Directive imposing environmental requirements on products explicitly grants environmental NGOs a right to request compliance with the Directive’s requirements in national courts.

Next Steps

The European Parliament and Council must now consider the proposal for its adoption through the so-called “ordinary legislative procedure.”  Through that procedure the Parliament and Council may modify the proposal, including  to impose stricter requirements or to subject additional categories of plastic products to the proposal’s different requirements and bans.

Typically, the ordinary legislation procedure takes at least 16 months and may be extended to up to three years.  Nevertheless, the Parliament and Council may try to adopt the proposal before the EU parliamentary elections in May 2019.

Covington CleanEquity Conversations: AI and IoT – Benefits, Risks, and the Role of Regulation

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference.  Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported during the conference’s final plenary session key takeaways from the three breakout group discussions.  Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.

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AI and IoT –  Benefits, Risks, and the Role of Regulation

  • Rapid evolution and proliferation of artificial intelligence and the Internet of Things holds tremendous promise for dramatic, transformational efficiency gains in nearly every industry.
  • At the same time these technologies present risks of massive employment disruption, losses of privacy and yielding of human free will to decisions made by algorithms and machines.

In a session led by Covington’s Corporate Partner Simon Amies, conference participants examined these propositions and then considered two questions:  Where should regulation step in?  Can regulation be effective to manage the risks without diminishing the benefits?

The Benefits

There was universal agreement that evolution and proliferation in AI and the Internet of Things have the potential to bring transformational efficiency gains across virtually all sectors of industry.  AI has already transformed business models in the technology sector through the deployment of sophisticated algorithms to process vast quantities of data, and machine learning and automation are already being utilized on a large scale in other areas of industry, revolutionizing processes and delivering significant efficiency gains.

A number of the presenting companies noted that artificial intelligence already plays a pivotal role in their businesses, with some utilizing the technology at the heart of their business model — one company uses its machine learning system to manage and optimize grid operations — and others use AI as a tool to enhance research and refine product development.  One participant flagged the fundamental change to supply chain dynamics and manufacturing processes with the emergence of the smart factory in the Industry 4.0 model, leading to increased efficiency, reduced costs and maximization of resources.  Mass-customisation of lower-cost goods manufactured to order in close proximity to the market bring reduced shipping costs and lead times.

The Risks

But as often happens with the adoption of disruptive technology, new and often unforeseen risks and challenges emerge.

One participant noted concerns surrounding access to, control and ownership of personal data in the field of healthcare with the focus on development of personalized and precision medicines.  Another flagged how personal data could be used by employers to make hiring decisions or by insurers to price auto or life policies, but without explicit consent from the individuals.

One participant pointed to the safety and security concerns of having automated intelligent systems replace humans at the controls of cars and other machines and equipment.  In the case of the autonomous vehicle, who is responsible in the event of an accident where the system makes a conscious decision which turns out to be the wrong one, causing a fatality?  Another participant identified the risks of malicious attackers disrupting or asserting control of systems run by AI and IoT, whether on an industrial scale or on a micro level seeking to take advantage of one individual.

The threat of AI and IoT to jobs was also highlighted.  Many jobs that have kept the workforce occupied for generations could become redundant almost overnight as businesses look to adopt technologies that bring gains in efficiency and productivity and at the same time reduce labour costs.  The labour market is predicted to encounter massive change of a scale not seen since the Industrial Revolution which will have consequent effects on wealth inequality and potentially global stability. While governments and policy makers are likely to take steps to protect jobs, there will be increasing demand for skilled technicians capable of supporting digital capabilities.

The Role of Regulation

The discussion then focused on the two key questions of (a) where should regulation step in and (b) can regulation be effective to manage the risks without diminishing the benefits?

The first observation was that against the backdrop of recent high profile data breaches and the imminent deadline for implementation of the EU’s General Data Protection Regulation, regulation is appropriate and has an important role in managing the risks presented by AI and IoT.  Data privacy legislation has continually evolved since the emergence of the internet, adapting and reacting to the challenges associated with mass collection, use and storage of personal data to ensure privacy, security and transparency.  Privacy laws already apply to AI systems that process personal data, which means new systems need to be designed adhering to these standards where applicable.

One participant commented that it should not be left to the law-makers to ensure risks are adequately legislated against. There is also a role for participants in the market, particularly large corporations, to ensure responsible and fair practices are followed through the adoption of codes of best practice reflecting key ethical principles.  It was noted that Microsoft had established six ethical principles to guide the development and use of artificial intelligence — AI systems should be fair, reliable and safe, private and secure, inclusive, transparent, and accountable.[1]

In discussing the risks of autonomous vehicles, one participant noted that current product liability laws would apply, meaning that claims may exist where loss is caused by a vehicle that is found to be defective or unsafe.  It is likely that these laws will evolve to clarify where responsibility lies, and manufacturers and insurers will look to law-makers to set down standards on how autonomous systems that control driverless vehicles should operate in specific situations rather than make these decisions for themselves.

It was noted that the adoption of standards and regulations for AI and IoT would need to be consistent and coordinated on a global level.  International policy-makers such as the Organisation for Economic Co-operation and Development will need to develop standards that will be accepted universally.  With an increasingly fierce arms-race developing between developed nations to be the economic leader in AI and IoT, this will be challenging.

The final point tackled by the group was the need for employment laws to evolve to recognize the changes in employment practices that are likely to flow from the move to automated systems.  Current employment laws are based around the model of employers employing workers at specific worksites, whereas people are increasingly engaged through remote, part-time or project-based work.  As jobs are displaced through adoption of AI and IoT, new skilled roles will be created to develop, monitor and manage the new systems.  Governments will have an important role in ensuring that the education curriculum adapts to ensure students acquire the necessary skills required to support digital capabilities.

[1] Microsoft. 2018. The Future Computed – Artificial Intelligence and its role in societyhttps://blogs.microsoft.com/uploads/2018/02/The-Future-Computed_2.8.18.pdf

IoT Update: Will California’s New Autonomous Vehicles Regulations Provide a Roadmap for a National Regulatory Framework on Driverless Cars?

On April 6th, the California Public Utilities Commission (CPUC) issued a Proposed Decision authorizing pilot testing for autonomous vehicles (AVs) in California. This action follows up on the California DMV’s permitting rules for AVs in California, which would have allowed driverless testing and deployment permits to issue as early as April 2 of this year. The DMV’s action was big news when it broke at the end of February; it meant that AVs could be deployed without any human in the vehicle. Now, the CPUC has proposed a pilot to allow the use of driverless test vehicles with passengers inside as soon as this summer.

While shared and electric mobility has already been deployed at scale, the road ahead for autonomy is still evolving. California is working to tackle this third pillar, and prior to the CPUC’s Proposed Decision, companies like Uber and GM Cruise had urged the Commission to move forward to enable the use of AVs for passenger transportation under existing regulatory frameworks. Lyft encouraged the Commission to address AVs in a rulemaking, noting that it “ma[de] little sense” to wait for Congress to act, or to “scramble” to regulate after AVs are already deployed en masse.

But now that the Proposed Decision has been published, stakeholders need to make sense of it.

The Proposed Decision sets up regulatory frameworks for pilots of “drivered” autonomous testing and “driverless” autonomous testing. In each scenario, the Commission sets out a number of significant requirements, such as, among others:

  • Test AVs must have been in DMV-permitted drivered or driverless operation on California public roads for a minimum of 90 days, and companies must include in their 90-day attestation reporting on data such as disengagements, collisions, hours of operation, and operating environment.
  • No fare-splitting for driverless passenger service is permitted (in other words, no ridesharing in driverless cars).
  • A host of data reporting requirements apply, including reporting, within 24 hours, all communications between the passenger and the remote operator, and monthly public reporting of several other metrics (e.g., vehicle miles traveled (VMT), wait time, etc.).

The tech community has expressed concerns about the CPUC’s draft regulations. In a comment letter filed on April 26th, a group of coalitions representing a large number of multinational technology and automotive companies expressed concerns about CPUC’s Proposed Decision. The coalitions argued that companies should be permitted to charge a fare during pilot testing; that data requirements were overly intrusive; that fare-splitting prevents shared mobility; that the applicability of driver requirements were overly broad; and that data requirements would cause unnecessary delay and pose a risk to privacy and confidentiality.

There will no doubt be further opportunity to refine the CPUC’s longer-term approach to AVs and the regulatory frameworks at play. As part of the CPUC’s Proposed Decision, the Commission has indicated that its Transportation Enforcement Branch will hold a workshop to allow AV stakeholders to better understand the Proposed Decision and to interface with CPUC and DMV staff. And the rulemaking itself (which takes on a broad range of “Passenger Carriers, Ridesharing, and New Online-Enabled Transportation Services” issues) promises additional opportunities for engagement beyond this Proposed Decision. For example, in its April 27 Scoping Memo, which outlines the next steps of the same proceeding, the Commission signaled its intent to consider the possibility of designating an entirely new regulatory category — so-called “Autonomous Vehicle Carriers” (AVC) — to deal with outstanding AVs issues. AV companies have commented that it would be appropriate to simply regulate AVs within the existing categories: Transportation Network Companies (TNCs) or Charter-Party Carriers (TCPs).

Twenty-two states have enacted legislation related to autonomous vehicles, but California’s intensive regulatory development of a new testing regime has the potential to set the tone for a national discussion around implementation. Other states have focused on specific issues, such as definition-setting, data generation and cybersecurity rules, and truck platooning standards. In Arizona and Nevada, autonomous vehicle operators remain free to test without a driver. Meanwhile, in Washington, D.C., the possibility of preemptive federal legislation still looms; and the Department of Transportation continues to provide guidance and seek stakeholder comment.

For now, California companies and regulators have the chance to put pen to paper on a first draft. Given the preponderance of AV companies based in California – including Uber, Lyft, Waymo, and Zoox, not to mention the plethora of technology companies working at the seams of autonomous technology development, such as Nuro, Nauto, and Ridecell — that draft will almost certainly have implications beyond California’s borders.

This post is part of a series of Covington Internet of Things Autonomous Vehicles Updates. Our introductory AV post discussed policy trends in the U.S., Europe, and China. Next up we will be exploring similar AV testing developments in both China and Europe.

FERC Calls For More Comments On Distributed Resource Aggregation

Taking another step toward a comprehensive policy on the participation of electric storage resources and other distributed electric resources (DERs) in wholesale markets run by independent grid operators, FERC has requested additional comments on its proposal regarding aggregating DERs and their potential effects on the bulk power system.  FERC’s request follows up on a technical conference.

Background

As reported on this blog in February, FERC approved a final rule that knocked down barriers to electricity storage resource participation in markets administered by Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs).[1]  Those rules require each RTO to adopt market rules that recognize the physical and operational characteristics of electric storage resources.

FERC had also proposed to require RTOs to allow DER aggregators to participate in the  markets under rules that best accommodate the physical and operational characteristics of the aggregation.  Such rules are important because individual DERs may be too small to participate directly in the organized wholesale electric markets on a stand-alone basis.  However, FERC wanted additional information on aggregator participation before adopting rules and accordingly held a two-day technical conference in April 2018.

The call for comments

The technical conference addressed (1) the participation of DER aggregations in RTO  markets and, (2) the potential effects of DERs on the bulk power system.  FERC’s call for additional comments was issued in two notices.  Each notice generally addresses one of the two topics discussed at the conference and includes specific questions that commenters may address.

 The notice regarding participation of DER aggregations in RTO markets.  This notice requests comments on the following topics and others:

  • Economic dispatch, pricing, and settlement of DER aggregations.
  • How DER aggregations could locate across more than one pricing node.
  • Bidding parameters or other mechanisms needed to represent the physical and operational characteristics of DER aggregations.
  • Operational impact of DER aggregation on facilities regulated by state and local authorities.
  • Coordination among DERs, aggregators, RTOs and distribution utilities at the integration stage and during ongoing operations.
  • Compensation for DERs that can participate in both RTO and retail markets, including an opt-out provision to allow states to require DERs to choose participation in either the RTO market or retail compensation programs, but not both.

The notice regarding potential effects of DERs on the bulk power systemThis notice requests comments on the following topics and others:

  • Collection and availability of data on DER installations.
  • Regional DER penetration levels and potential effects of inaccurate long-term DER forecasting.
  • How DERs can support or enhance bulk power system reliability.
  • Challenges for DER developers and owners to provide DER real-time data.
  • Incorporating DERs in modeling, planning, and operations studies.

The notices were issued April 27, 2018 in separate dockets and comments are due within 60 days of issuance.

 

[1] For brevity, this post will use the term RTO to refer to both RTOs and ISOs.

FERC Reviewing Gas Pipeline Policy

Under the Natural Gas Act (NGA), FERC certificates the construction and operation of pipelines to transport natural gas in interstate commerce if they are “required by the present or future public convenience and necessity.”  For almost two decades, FERC has used a 1999 policy statement’s guidelines to evaluate whether new pipelines meet that statutory standard.  The use of natural gas has been steadily growing, and in 2017 FERC certificated over 2,700 miles of new interstate pipelines, the highest annual level in history.

Now FERC is conducting a top-to-bottom review of the 1999 guidelines and issued a Notice of Inquiry (NOI) requesting public comments on whether and how they should be revised.  The outcome of FERC’s review could have a significant impact on the development and transportation of shale gas, and the availability of new pipeline capacity to serve increasing demand from gas-fired electricity generators and LNG export facilities.

The 1999 policy statement 

The policy statement sets out the analytical steps the Commission takes in evaluating a new pipeline application.  If the applicant has existing pipeline customers, the threshold issue is that the project must be able to proceed without subsidies from those customers.  This usually means that the project would be incrementally priced.

FERC then conducts what it calls an “economic test” by balancing evidence of the new pipeline’s public benefits against its adverse effects.  FERC determines whether there are any adverse effects on (1) the existing customers of the pipeline proposing the project, (2) existing pipelines in the market and their captive customers, or (3) landowners and communities affected by the new pipeline’s route.  If there are, the Commission may identify conditions that it could impose on the certificate that would minimize or eliminate the adverse impacts.

Where there are residual adverse impacts, an applicant must show a project’s public benefits that are proportional to the project’s adverse impacts.  Examples of public benefits are meeting unserved demand, eliminating bottlenecks, access to new supplies, lower costs to consumers, providing new interconnects that improve the interstate grid, providing competitive alternatives, increasing electric reliability, or advancing clean air objectives.

Applying the guidelines to certificate applications over the years, FERC has shown flexibility.  For example, the NOI notes that as evidence of unserved demand, applicants have most often presented precedent agreements with prospective customers for long-term firm service, and the Commission has accepted those customer commitments as the principal factor in demonstrating project need.

A pipeline application for certification also triggers environmental review under the National Environmental Policy Act (NEPA).  FERC’s review addresses impacts on various environmental resources, including geology, soils, groundwater, surface water, wetlands, aquatic resources, vegetation, wildlife, special status species, cultural resources, land use, recreation, aesthetics, socioeconomics, air quality, climate change, noise, and reliability and safety.

Because the NEPA review typically takes longer than the review of the non-environmental aspects of a proposed project, FERC often initiates its study of environmental impacts at the applicant’s request during the pre-filing stage.  Coordinating with other agencies whose approval is required and ensuring that their concerns and those of stakeholders are adequately addressed can extend the time needed to complete the NEPA review process.

The NOI observes that over the past decade there has been a marked increase in the involvement of federally recognized tribes, affected landowners, and environmental organizations in proposed natural gas project proceedings.  Their concerns have primarily focused on the need for new projects, alternatives, cumulative impacts, and the effects related to the production and consumption of natural gas, particularly the contribution of GHG emissions to global climate change.

The NOI

The NOI notes that in the 19 years since the policy statement was issued, there has been  unprecedented change in the dynamics of the natural gas market.  Among the changes are: (1) a revolution in natural gas production technology leading to dramatic increases in production and areas of production; (2) customers routinely committing to long-term precedent agreements for firm service during the formative stage of projects; (3) increased use of natural gas for electric generation; (4) increased concerns of landowners and communities potentially affected by proposed projects; and (5) increased interest in environmental impacts.

FERC wants comments on potential modifications to its approach for determining whether a proposed project is required by the public convenience and necessity, and has identified four general areas of examination:

Reliance on precedent agreements to demonstrate need for a proposed project.  Recent changes in the gas industry whereby producers are contracting for increasing amounts of pipeline capacity, as well as an increasing number of shippers affiliated with pipeline companies, have raised questions as to whether precedent agreements remain an appropriate indicator of need and whether FERC should examine additional information in evaluating the need for proposed pipelines.

Potential exercise of eminent domain and landowner interests.  After FERC authorizes a project, the project sponsor can assert the right of eminent domain for outstanding lands it could not acquire through a negotiated easement.  Should FERC consider adjusting its consideration of the potential exercise of eminent domain in reviewing project applications, and if so, how?

Evaluation of alternatives and environmental effects under NEPA and the NGA.   There has been increased stakeholder interest regarding the alternatives to a project that the Commission evaluates in its public interest determination, how the FERC addresses climate change, and the evolving science behind GHG emissions and climate change.

Efficiency and effectiveness of the Commission’s certificate processes. FERC wants to improve the transparency, timing, and predictability of its certification process.

With respect to each of these areas, the NOI asks specific questions for commenters to address.  Comments on the NOI are due June 25, 2018.

Coming Up: FERC Conference on Storage Resources in PJM

In its recent landmark Order No. 841, FERC directed Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs) to remove barriers to participation by electric storage resources in their wholesale electricity markets.  The expectation is that each RTO/ISO will adopt rules that recognize and compensate physical and operational characteristics of storage resources, including battery storage, boosting their role in the nation’s electricity grid.  Against this policy backdrop, FERC recently issued two orders addressing issues affecting electric storage resources’ participation in one RTO’s regulation service market.

PJM, the RTO operating in the mid-Atlantic region, principally Virginia, Maryland, Delaware, Pennsylvania, New Jersey and Ohio, says its rules are procuring too many dynamic resources such as storage and are causing operational problems.  PJM made market software changes and proposed tariff revisions to address the issues.  Storage entities opposed these changes, claiming discriminatory treatment.  FERC rejected the tariff revisions and directed its staff to hold a technical conference to address the issues raised.  The upcoming technical conference will address the nuts-and-bolts challenges to integrating storage resources into regulation markets in a non-discriminatory manner and its outcome could have implications beyond the PJM market.

Below we summarize some of the complex technical issues presented by participation of  storage resources in PJM’s regulation services market.

Regulation service

As a balancing authority, PJM manages the supply and demand of electricity by economically dispatching generation to meet its load and the scheduled interchange with other balancing authorities.  Real-time imbalances between supply and demand result in an Area Control Error, or ACE, which is the difference between scheduled and actual flows across interconnections with other balancing authorities.  Regulation service is purchased to maintain or return the ACE to zero.

When the ACE indicates an imbalance, a dispatch signal is sent to each regulation resource to raise or lower its output to correct the imbalance.  PJM sends two different types of signals.  One, called RegA, is used to dispatch slower, sustained-output resources, such as steam and combustion resources. A faster signal, called RegD, is used to dispatch faster, dynamic resources, such as battery storage.

PJM experienced problems in its dispatch of resources to supply regulation service and proposed tariff changes to FERC.  Also, PJM took some dispatch actions on its own to alter the dispatch of storage resources.

Tariff order

PJM proposed changes to its tariff to address the following stated problems in its regulation market:

  • The algorithm it uses to establish the tradeoff between RegA and RegD resources to place them on a comparable basis for market clearing purposes was stated to be inflating the procurement of RegD service.[1]
  • The performance, or “mileage,” component of the market settlement equation was stated to result in a higher financial signal for new RegD market entry, contributing to an over-procurement of those resources.[2]

PJM proposed changes to its tariff to address these problems, among them were adopting a different algorithm that determines the tradeoff between RegA and RegD resources and removing the mileage component from the settlement equation.

Storage entities opposed the removal of the mileage component from the settlement equation. The storage entities argued that the proposal violates FERC policy and is unduly discriminatory.  In Order No. 755, FERC required, among other things, that regulation service compensation should be based on the actual service provided and include a performance payment that reflects the quantity of regulation service when following the dispatch signal.   Protests asserted that PJM’s proposal ignores the actual performance of regulation resources, and that under the new algorithm RegD resources will always be under-compensated.

FERC agreed and rejected PJM’s tariff proposal because it does not comply with the requirement of Order No. 755 to compensate all regulation resources based on the quantity of regulation service provided.  FERC found that the proposal does not account for actual mileage in settlement and does not accurately reflect the contribution of RegD resources when they operate.  Because PJM stated that it proposed reforms are interdependent and a change in one area will impact other areas, FERC did not address other aspects of the proposal.

Complaint order

PJM originally designed the RegD dispatch signal to be “unconditionally energy neutral,” within a 15-minute period; in other words, 7.5 minutes of input followed by 7.5 minutes of output.  According to PJM, however, this feature of the signal was causing operational problems.  Because it always signals RegD resources to maintain power balance over a 15-minute interval regardless of the direction PJM needs regulation resources to  move, the signal sometimes causes the RegA and RegD signals to work against each other, i.e., signaling the two types of resources to move in opposite directions, thus impeding efficient regulation control.  According to PJM, at times, hundreds of megawatts of RegD resources were performing in a way that respected their energy neutrality but inhibited PJM’s ability to control the ACE.

To address this issue, PJM had made the following unilateral changes in its dispatch practices over the last few years:

  • Revised a business manual such that the algorithm used to establish the tradeoff between RegA and RegD resources caps the amount of RegD resources that could be procured at 40 percent of the total (down from 62 percent under current rules) and at 26.2 percent during certain hours.
  • Revised its regulation signal software so that the RegA and RegD signals move together in the direction that minimizes ACE and that the RegD signal is “conditionally neutral” over a 30-minute period (instead of 15 minutes). Under “conditional” neutrality, managing ACE is the first priority and neutrality for energy-limited resources such as storage is honored only when system conditions permit.

Storage resource entities filed complaints against PJM’s revisions, arguing that both changes are unduly discriminatory against RegD resources and that both must be submitted for Commission review because they significantly affect the terms of service and thus must be included in a tariff accepted by the Commission rather than in business practice manuals.

With respect to the signal software revisions, storage resources argued that the original energy-neutral signal respected RegD resources’ limited-energy characteristics.  Since the revisions, those resources have been directed to operate outside of their design parameters, making responding to the dispatch signal more difficult and resulting in performance issues, reduced compensation, and adverse impacts on equipment.

FERC found that both the algorithm used to establish the tradeoff between RegA and RegD resources and the parameters of the signals to regulation resources significantly affect the rates, terms, and conditions of regulation service and thus should be included in the PJM tariff .  However, the Commission did not direct PJM to submit a compliance filing but instead directed staff to convene a technical conference to address the issues raised in the complaints.

Technical conference

In the complaint order, FERC says the technical conference should address the issues raised in the complaints, and, given the related issues raised in the tariff case, the conference should also examine PJM’s two-signal regulation market design with respect to the requirements of FERC’s compensation policy.  FERC directed staff to request data and information from PJM and the complainants prior to the technical conference to help inform the discussion,

FERC will issue a separate notice establishing dates and technical conference details.  The conference will be convened under Docket EL17-64 and EL17-65.

[1] PJM purchases regulation service in a bid-based auction market.

[2] A performance payment reflects the quantity of regulation service, or work done, when following the dispatch signal. It is sometimes referred to as “mileage” as it is based on the MW changes from both increasing and deceasing generation.

Covington CleanEquity Conversations

On March 8-9, 2018, a bespoke group of approximately 200 leading entrepreneurs, investors and advisors focused on deploying and commercializing cutting edge technologies gathered in Monte Carlo from across the globe for the 11th annual CleanEquity® Monaco Conference. Complementing other plenary sessions and emerging company presentations, the conference initiated a new feature — Covington CleanEquity Conversations — intended to capture and memorialise the unique thought leadership opportunity presented by the gathering in Monaco. On the first day, conference participants separated into three breakout groups for Chatham House Rule discussions curated by partners from the international law firm Covington & Burling LLP of three critical issues confronting cleantech deployment and commercialisation:

  • AI and IoT – Benefits, Risks, and the Role of Regulation
  • Sustainability – What goals should businesses prioritise and what are the right metrics?
  • Will market driven innovation alone save us from climate change?

On the second day, the Covington team reported during the conference’s final plenary session key takeaways from the three breakout group discussions. Covington and CleanEquity organizer and specialist investment bank, Innovator Capital, are pleased to share brief summaries of the thought leadership developed by the proceedings of conference participants on each of the three topics.


Sustainability -What goals should businesses prioritise and what are the right metrics?

Many global corporations have embraced corporate sustainability and carbon reduction goals. Large equity funds also are examining corporate sustainability practices and using a variety of proprietary or third-party environmental, social and governance or “ESG” ratings to assess corporate progress. But this proliferation of goals and array of often indecipherable ratings systems challenges societal measurement of “sustainability progress.” In a session led by Covington’s Clean Energy Industry Group Chair Andrew Jack, conference participants grappled with the following questions:

  • Do investors need better, more comparable, information about corporate sustainability efforts?
  • What sustainability goals should businesses prioritize?
  • How should sustainability be measured, incentivised and rewarded?

Improving Sustainability Disclosure is Essential

There was strong consensus for the view, from the perspective of both investors and companies, that mere compliance with current government disclosure mandates is insufficient to satisfy investor demands for corporate sustainability disclosures. For example, in the United States, corporations are not legally required to publish sustainability reports. Yet, prompted by investor and other stakeholder needs, at least 82% of the Standard & Poor’s 500 companies publish such reports.

There was equally strong consensus that it is a daunting task for corporate managers to sort through and select among the growing thicket of guidelines and voluntary reporting frameworks. Proliferating disclosure standards promulgated by the Global Reporting Initiative (GRI), Carbon Disclosure Project (CDP), Sustainability Accounting Standards Board (SASB), Task Force on Climate-Related Financial Disclosures (TCFD) and other organizations provide wide latitude for sustainability disclosures. One participant noted that these standards are so diverse and loose that sustainability reports can say just about anything. Another participant commented that this diverse guidance landscape means that ESG rankings and metrics are not sufficiently comparable and thus are not terribly meaningful. Efforts to winnow the goals and metrics surrounding sustainability reporting to a more discrete core set of comparable measures would be beneficial.

Core Sustainability Goals and Priorities

To aid in this winnowing, participants in this breakout session responded to a brief survey rank ordering five separate sustainability goals by assigning 1 to the highest priority and 5 to the lowest. The survey also prompted participants to offer suggestions for other sustainability goals that businesses should pursue. The group prioritised the five enumerated goals as follows:

Rank Average Score Sustainability Goal
1. 2 Reduction of greenhouse gas emissions
2. 2.38 Reduction of fresh water consumption
3. 2.77 Energy efficiency
4. 3.15 Reduction of solid waste disposal
5. 3.38 Avoided deforestation / reforestation

These results reflect quick responses of a relatively small group of cleantech investors and entrepreneurs and therefore may not be representative of the rank ordering of sustainability goals that would be revealed in a survey of a broader segment of the business community. Moreover, within this small group the conversation revealed a fair amount of debate among priorities. One participant suggested that all five goals were equally important to society. This sentiment was echoed by others who observed that the overall objective of corporate sustainability efforts should be to promote human health and well-being, which necessarily requires the simultaneous pursuit of multiple goals. Some in the group suggested that corporations should be guided by the seventeen Sustainable Development Goals adopted by the United Nations that collectively focus on ending poverty, protecting the planet and ensuring prosperity for all. Other specific goals provided by participants included:

  • reducing inequality within societies through inclusive and equitable quality education
  • affording and strengthening gender equality
  • training and upskilling of workers
  • ubiquitous deploying of IoT devices; and
  • enhancing transparency and accountability regarding corporate actions

Measuring Progress
The group encountered some challenge developing metrics that could assess progress toward the sustainability goals. There was consensus that corporations need to establish reliable, transparent baselines against which to measure change and that metrics surrounding generalized goals such as the U.N. SDGs need to measure quantifiable impacts. For the goal of reducing greenhouse gas emissions, the group discussed the feasibility of using GHG emissions per unit of revenue as a metric. Participants generally regarded this as a reasonable tool, provided that it is used to compare performance of companies within specific sectors. For example, the airline industry has a different level of carbon intensity than the consumer electronics industry. Hence the group thought it could be useful to compare the GHG-intensity performance of one airline versus another airline, or one consumer electronics company versus another. But many in the group thought it would be unfair to measure the GHG-intensity of an airline against a consumer electronics company. Some participants, however, argued that it might be reasonable to compare GHG emissions per unit of revenue across different sectors. They observed that industries that are profitable by outsourcing to society the costs of their negative externalities tend over time to face societal pressure to retrench and compensate society for the negative externalities. In this sense, cross-sector comparability of GHG emissions per unit of revenue could be meaningful to accelerate the reduction, and minimize societal costs, of GHG emissions.

Incentives and Rewards

One participant staked the position that sustainability goals provide their own incentives and rewards, in that they are like Maslow’s hierarchy of needs. Corporations taking a long-term view are motivated to achieve all of the sustainability goals, but some take precedence over others. In this vein basic needs for sustainable clean air, water, and food must be met before the higher needs of social equality can be achieved. Another participant noted — as should be self-evident from the gathering of investors and entrepreneurs at the conference — that climate change presents a tremendous business opportunity that more enterprises should embrace. In this respect, businesses that demonstrate the greatest improvement on disrupting and addressing the problem of free riders on negative externalities should receive the greatest rewards. The discussion concluded by returning to the theme that many sustainability goals are linked together and should be considered holistically, keeping in mind the overall purpose to promote human health and social welfare.

FERC Requires Generators to Provide Primary Frequency Response

FERC has approved a final rule requiring generating facilities that interconnect to the grid to provide primary frequency response.[1]  Primary frequency response actions are needed to stop extraordinary deviations from the grid’s target frequency that could cause grid instability.  The North American Electric Reliability Corporation, the group responsible for grid reliability standards, said that “(f)requency response is among the essential reliability services critical to the reliability of the bulk power system.”  FERC notes declining frequency response performance and the impact the evolving generation resource mix on frequency response.

Background

The reliable operation of the alternating current North American electric grid depends on maintaining a frequency near 60 Hertz (Hz).  Frequency variations, however, can occur due to sudden changes in the balance between load and generation and can cause instability, and possibly load shedding, if the frequency deviates too far from 60 Hz.  Frequency responsive control equipment in a generating facility can sense changes in system frequency and, through turbine-governors, autonomously adjust a generator’s output to help move the system frequency back toward 60 Hz.

The final rule is aimed at two problems. First, there are indications that some generator owners and operators within the Eastern Interconnection disable or otherwise set their controls such that they provide little or no primary frequency response.

Second, synchronous generating facilities with standard governor controls have historically been the predominant sources of frequency response service.  However, those generators are being replaced, in part, with non-synchronous variable energy resources such as wind and solar.  FERC observes that variable energy resources have not typically had primary frequency response capabilities.

The final rule

Newly interconnecting generating facilities are required to install, maintain, and operate equipment capable of providing primary frequency response as a condition of interconnection to the grid.  Accordingly, FERC is modifying the standard interconnection agreements to reflect this requirement.

The final rule adds the following obligations to the standard interconnection agreements:

  • Requires generating facilities to install and operate equipment that can sense changes in system frequency and autonomously adjust the generating facility’s output.
  • Sets minimum uniform operating requirements for primary frequency response and prohibits generating facilities from limiting the provision of primary frequency response, except under certain conditions.
  • Requires generating facilities to respond to frequency deviations immediately and sustain the response at least until system frequency returns to a value within an acceptable deviation range.

The new rule does not require generators to operate with headroom, i.e., operate below their maximum operating capability so that there is additional energy to provide primary frequency response.  In addition, the rule does not mandate that a generator receive compensation for providing primary frequency response.  FERC observes that the cost of installing, maintaining, and operating a governor or equivalent controls is minimal but the rule does not prevent a public utility from requesting compensation.

The new interconnection agreement conditions apply to:

  • Newly interconnecting generating facilities, including distributed energy resources, that execute interconnection agreements on or after the effective date of the final rule; and
  • Generating facilities that already have an executed or filed interconnection agreement but that take any action request that results in an interconnection agreement filed on or after the effective date of the final rule.

The final rule provides exemptions or accommodations for the following types of generation resources:

  • Combined heat and power. Newly interconnecting CHP facilities that are sized to serve on-site load and have no material export capability are exempt from the operating requirements of the rule but must install control equipment capable of providing primary frequency response.
  • Electric storage resources.  Interconnection agreements must include specific accommodations for storage resources and limitations regarding when they will be required to provide primary frequency response, such as identifying an operating range within which storage resources will be required to provide primary frequency response and identifying  circumstances when storage resources will not be required to provide primary frequency response.
  • Nuclear facilities. Nuclear generating facilities are exempt from the final rule due to their unique operating characteristics and the regulatory requirements of  the Nuclear Regulatory Commission.

The final rule is effective 70 days from publication in Federal Register.

[1] This blog reported on the Commission’s proposal as well as its call for additional comments to address certain issues.

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