Post-Debt Deal Energy Reforms

In late May, after tense negotiations over their parties’ top priorities, President Joe Biden and House Speaker Kevin McCarthy reached a deal to raise the U.S. debt limit, culminating in the passage of the Fiscal Responsibility Act of 2023 (FRA). While the deal yielded modest permitting reforms championed by Republicans, their proposals to curtail tax incentives in the Inflation Reduction Act (IRA) were not up for negotiation. Meanwhile, Democrats pushed interregional electric transmission reform but only secured a study on interregional power transfer capabilities.

One lesson learned is that early engagement on mutual policy priorities is vital. For example, research performed in 2021 helped motivate and shape the permitting portion of the debt deal. The deal incorporated an amended version of the Building United States Infrastructure through Limited Delays and Efficient Reviews (BUILDER) Act of 2021, which the next Congress folded into Republicans’ Lower Energy Costs Act (H.R. 1) legislation that passed the House in March of this year. This became a foundation for negotiations.

Democrats’ 2023 BIG WIRES Act on interregional transmission aimed for bipartisan appeal and factored into debt limit negotiations despite being in early stages of political uptake. Both cases demonstrate how standalone legislation, either as a sign of partisan priorities or bipartisan alignment, need not have any chance of passing on its own to increase the likelihood that its provisions will pass in another vehicle.

Any further reforms will require bipartisan motivation and procedural means. There is clear momentum behind interregional transmission reform and, to a lesser extent, the unfinished business of permitting reform. If both parties focus on economic and environmental results, another deal could be in the works.

Debt Deal Impact

A key question now is: What impact will these modest permitting reforms have, and will they create an appetite for further reform? The FRA updates the National Environmental Policy Act (NEPA), including:

1. Imposing agency review timelines and page limits. While this will accelerate processes up front, it will not necessarily improve their quality—which is key to mitigating legal risk. NEPA delays result from the need to produce documents that withstand litigation risk. Shorter deadlines may undermine the ability of decisions to hold up in court and induce lengthier trials with court orders for additional documentation. This is why mandated timelines should be avoided and judicial risk mitigation prioritized.
2. Designating lead agencies to oversee reviews and encourage use of a single environmental report. While productive, this may do little more than codify existing best practices. Poor interagency coordination and schedule discipline is a recurring problem. The deal should help mitigate duplicative assessments, as projects currently go through multiple water impact assessments and biological opinions to comply with a variety of environmental laws. NEPA has considerable value as a consolidation vehicle for compliance with the Clean Water Act, the Endangered Species Act and other laws.
3. Expanding NEPA exclusions. The new law modestly expands the use of categorical exclusions. These should be made more consistent by using objective criteria in cases of minimal environmental impact rather than subjective criteria like political preferences. The law also redefines “major federal actions,” which could exempt projects that receive only modest federal funding.
4. Streamlining and expanding programmatic reviews. Programmatic reviews assess environmental impacts of proposed action with a broad scale, such as programs, plans and policies. The reform guarantees programmatic reviews for five years without additional review, which could expedite approvals for similar projects within a given environmental impact area.

The deal did not limit timeframes for judicial review and injunctive relief, which often drive extensive agency delays and mostly burden clean energy projects. Industry groups consider such reform imperative and think that, while the deal was an important start, more permitting reform is needed. Republicans’ judicial review push fell short in the debt deal over differences with Democrats on community engagement; however, there were signs of convergence upon recognizing that proactive community involvement—especially when paired with reducing opportunities to torpedo projects at the last minute—reduces judicial risk and enhances community buy-in.

While the debt deal did not substantively change transmission policy, it did signify a shift in bipartisan buy-in on interregional transmission regulation reform. The deal gives the North American Electric Reliability Corporation (NERC) 18 months to submit an interregional transmission study to the Federal Energy Regulatory Commission (FERC), which would then take public comment on the study and submit conclusions and policy recommendations to Congress.

Some reform proponents lamented that enough study has been done—a fair argument. Nevertheless, given political constraints, the study is progress. It signals fresh bipartisan commitment to unlocking the reliability benefits of interregional transmission and addresses a chronic blind spot in NERC’s existing reliability assessments, which typically focus on generation rather than transmission capacity. The provision does not preclude FERC from moving forward on other reforms and, if anything, would eventually propel them. FERC Chair Willie Phillips indicated as much regarding a pending proceeding to establish minimum interregional transfer capabilities.

Appetite for Further Reform

Bipartisan political motivation is a function of private alignment and the acceptance of policy options among diverse stakeholders. For example, political statements reveal an appetite for additional permitting reform, as key Republicans have delineated a handshake agreement with the White House to pursue remaining NEPA reforms. Although such statements indicate short-term political agendas, the positions of political influencers better indicate negotiation potential.

Progressives face a future in which additional subsidies and regulations have diminishing climate returns. Even prior to the IRA or the latest Environmental Protection Agency-proposed rules, the greatest catalyst of the clean energy transition was regulatory modernization—especially generator interconnection approvals, transmission planning, and permitting and siting. The historically anti-development environmental movement sits at a crossroads, where its results-oriented members want modernized positions that liberate clean capital deployment. This translates into fascinating center-left politics, with groups like the Institute for Progress, the Progressive Policy Institute and Data for Progress leading permitting reform efforts in the absence of environmental group leadership.

Conservatives have prioritized an energy game plan to boost reliability and contain costs, while a growing subset seek to brand conservative climate leadership to “reduce emissions, not reduce energy choices.” Regulatory reform accomplishes all these objectives and defuses internal tension between the climate right and traditional right over clean subsidies by driving conservative unity on fiscal responsibility and free markets. Conservatives initially balked at interregional transmission reform’s pro-renewables branding; however, when seeing it through a fuel-neutral cost and reliability-focused lens, they warmed to options like examining reliability-based interregional transfer levels and reducing regulatory barriers to merchant transmission projects with voluntary cost allocation.

The tipping point on permitting could come if Democratic influencers buy into the environmental case for responsible permitting reform, such as clarifying “reasonable alternatives” criteria without weakening environmental stringency. Though community engagement in permitting processes has more bipartisan interest than meets the eye, it depends on particulars. While progressives seek to protect environmental justice communities, conservatives seek to protect private landowner property rights. Both camps benefit from proactive education and permitting process input, which improves the quality of participation in stakeholder engagement and reduces the need for risky judicial review.

Industry pessimism that the debt deal hurt chances for deeper transmission reforms is common, but Democrats’ transmission goals remain unsatisfied, and efforts to cultivate Republicans’ transmission agenda were only beginning at the time of negotiations. There are major signs of convergence on key interregional reforms, buttressed by bipartisan statements at FERC.

The timing of potential future legislation will also be more sensitive to electoral politics, given closer proximity to the 2024 election. For Republicans, this could mean an emphasis on climate messaging consistent with Speaker McCarthy’s strategy, which benefited them in the last midterm elections. Democrats will face added pressure to shore up their economic agenda and deliver on clean energy deployment, both of which require regulatory reform. 

Let’s Make a Deal

On balance, Republicans have an appetite for additional permitting reform—especially judicial review— and are warming to the interregional transmission problem statement. Democrats remain hungry for transmission reform, and a substantial number now at least privately support permitting reform (or view it as less threatening than before). Republicans will be more selective on transmission policy instruments than progressives, and vice versa for permitting. But an Overton window is emerging.

It is highly unlikely that tax credit reform would be on the table. But if so, diluting subsidies for mature technologies while enacting permitting and transmission reform would net superior clean energy deployment, reduce emissions, improve public finances and enhance grid reliability.

While a standalone energy package should not be ruled out, other scenarios are more likely. First, permitting and transmission provisions could be folded into future must-pass legislation, such as omnibus appropriations. Second, a grid reliability event may trigger overwhelming calls for reform, with Congress turning to off-the-shelf options to reduce barriers to new generation and power flows. This scenario should not be discounted, given growing bipartisan unrest over grid reliability and heightened reliability risk. Either way, advancing legislation that signals party priorities and/or bipartisan alignment has proven invaluable to seizing sudden legislative opportunities. Beyond opportunities for discrete reforms, there is a chance to reshape the nation’s energy and climate agenda in a pro-market mold. Some progressive influencers have warmed to this notion, especially on permitting. Meanwhile, conservatives sense opportunity to lead by demonstrating how their core energy agenda—cost and reliability—corresponds with a pro-market climate strategy.