As the national leader in oil and natural gas production, Texas is leading the United States to energy independence. A February 2019 report states crude oil production reached 1.26 billion barrels in 2017, almost breaking the 1973 record, according to figures from the Railroad Commission of Texas. The record-breaking 2018 production occurred despite a 40% decline in oil prices during the fourth quarter.

What's happening in Texas is not an overnight success, though. It's more like 153 years of progress that began when the first oil well in Texas was drilled in 1866. That was soon followed by the first major discovery in 1894, and then by Spindletop in 1901, making the Lone Star State the new oil center of the United States. And here we are almost 120 years later with Texas' output last year exceeding 1.5 billion barrels.

Texans are living in a new Golden Age of cheap, reliable, plentiful energy. But as concerns about climate change drive some parts of the United States to craft energy policies that shift away from traditional forms of energy such as oil and gas, what role will renewables like wind and solar play? A roundtable forum was held in February with three of Akin Gump Strauss Hauer & Feld's top energy attorneys in Houston about the future of renewable energy.

Can you describe your practice areas, please? 

David Sweeney: I am about as close to the dirt as you can get. I'm a traditional oil and gas lawyer who became something more akin to a corporate lawyer, but, at heart, I wear cowboy boots with my suits.

Matt Kapinos: My practice focuses on representing energy and infrastructure clients in a wide range of matters; I work with sponsors, owners and joint ventures in all aspects of midstream, downstream, LNG, and generation, including renewable energy, projects.

Andy Lehman: I'm an unalloyed mergers and acquisitions lawyer, largely in the energy industry, with an ancillary focus on advising on structured equity transactions as well.

Andy, can you talk about to what extent, if it all, the growth of renewable energy generation has had on your practice during the last year and, if so, what do you anticipate in the upcoming year?

AL: In terms of the past 12 months, I think that the overall impact has been the manifestation of the leading edge of a reduction of allocation of capital towards more traditional oil and gas investments and a corresponding reallocation of capital to more renewables-focused investments. Over the next 18 to 24 months, I expect financial sponsors and private equity groups that have traditionally been more focused on oil and gas activities will substantially increase their focus on investment theses with a connection to renewable space.

Matt, how do you feel about this?

MK: The main impact that I see is the place that renewable generation has in the conversation. As a new source of generation, renewable energy is considered alongside every other form of generation and no longer a novel choice when deciding what to build. It is really only renewable or natural gas generation that is considered viable sources of new generation. At the end of 2019 we saw a lot activity focused on taking advantage of (what we thought were) the expiring production tax credit for wind projects and the investment tax credit step down for solar projects. A significant amount of this activity took advantage of IRS safe harbor rules and 2020 will see the continued development and financing of those projects. It's important to note that, while the tax credits made these projects very attractive, it is also important to note that renewable energy in many ways is now cost-competitive with many of the traditional forms of generation. The traditional sources of fuel for generation will still play a big role, but right now if you're building new generation, you're either doing renewables or natural gas.

The dominance of environmental, social and governance or ESG considerations also really came to the forefront over the last year. There's a lot of activism going on, both on the governmental and investor activism level. Early in January we saw a big announcement from a major private equity firm that ESG considerations will influence their decision-making and that is really significant. I think this will continue to feed the trend of companies really starting to address how to better their ESG scores. So, if you're building new generation, you're definitely not doing coal, so it means that you're going to increase your flow of capital, either directly or indirectly, into projects that will not hurt your ESG score, whether that's using solar to replace older generation, entering into a corporate power purchase agreement or PPA, or simply planting more trees and making environmentally friendly buildings. Everyone is thinking of new ways to be more mindful of the evaluation of ESG considerations

David, on the upstream side, what impact, if any, have you felt from renewable energy generation?

DS: I think Andy said it about right. In the last 12-18 months, there have been some interesting rumblings. From the fund side, we've heard about a few players who were built specifically for hydrocarbons, who have started to venture out into renewables. That's interesting because I don't think that's necessarily why LPs placed money with those funds. More to the point, I think the cash flow profile and return profile of a renewables project is quite different than a traditional E&P project. My understanding is that overall returns tend to be lower than the types of "lease-and-flip" returns that really sparked the private equity rush into E&P. Further to that point, I haven't seen a lot of traditional E&P and midstream-focused funds originating deals, though there has been a lot of noise about it. From the perspective of the larger strategics—think the majors and "super independents"—I think there has been a greater tendency to push themselves as "energy" companies and not "oil and gas" companies. The increased focus on ESG, as Matt said, has really just accelerated this tendency. Whether this is a louder version of lip service or a road they end up going down in a big way remains to be seen. But, across the board, I think there is still a large focus on E&P projects, even if there has been more talk about renewables than there has been in the past.

MK: Just to jump on David's point, we're starting to help some of our upstream clients look at and execute renewable projects and try to diversify as energy companies and include renewables as part of their portfolios and that is something that we just didn't see even five years ago.

Diving deeper into the topic, how has the upstream industry adapted to the growth of renewable power generation, and to what extent is the upstream industry looking for ways to increase the use of renewable power in the oil patch?

DS: Watchful vigilance. From the strategic player perspective, I don't know that the ultimate approach has been fundamentally different than what we've seen in the past. At the end of the day, companies are economic animals, and renewables have to stand economically toe-to-toe with returns from an oil and gas project in order for renewables to really matter in the grand scheme to strategics. Assuming this is going to happen, I'm ultimately curious whether it's done through taxes or other laws, or whether it just becomes the case. I don't know that built-to-sell PE-backed independents, really have a view on it. They were generally formed for one purpose, which generally does not involve any meaningful focus on renewables. Funds, as I noted earlier, are where it really gets interesting. I have heard quite a bit of noise about funds that I always thought of as being focused on E&P, and whose limited partners, I'd be willing to bet, signed up for E&P-like returns, branching out into renewables. Fine, but take this with a grain of salt because it's coming from a lawyer. I have always understood the return profile for a renewables project, regardless of the portion of the capital stack that you inhabit, to be very different than the return profile for a lease-and-flip E&P project. Not that those types of returns are currently easy to come by, but one wonders if we're not trying to put a square peg into a round hole. What would be really fascinating to me would be a comparison of the returns for different segments of a renewables project to the conventional, long-life, low-decline E&P Projects of North America onshore yesteryear.

Andy, how are the oil field services funds and companies reacting to this greater emphasis on renewables, and have you seen, possibly as a consequence, capital deployed differently by traditional oil and gas oil field services companies?

AL: I'm going to address the question through the lens of the energy industry more broadly. Putting the industry's buyer populations in two buckets, we can talk about strategic buyers and we can talk about private equity sponsors. With respect to private equity sponsors, over the past 12-18 months, there's been a very pronounced movement toward allocating capital to deploy toward renewables activities. Some of those renewables activities have been more traditional renewables projects, while others have focused on potential investments in companies that provide services ancillary to the renewables infrastructure that currently exists. For example, one premier oil and gas-focused fund recently initiated a fundraise in which roughly half of the capital sought will be devoted to traditional oil and gas focused investments, such as oil field services or potentially upstream activities. The other half is sought to deploy in investments in companies focused on services that are ancillary to renewables and energy efficiency. On the strategic side, different companies, to different degrees, have started to build out their operations with a greater focus on renewable fuel and power. For example, a major multinational energy company traditionally more focused on oil and gas has announced it was planning to deploy up to a billion dollars a year in terms of renewable projects over the next five years. And in Texas, I think you have an interesting dynamic with respect to strategics because you can break down the population strategics into two sub-groups. Those that are the oil and gas independents, which will only pursue traditional oil and gas activities with any renewable activity simply being ancillary to their operations, and those that have a larger scale that may branch more actively and aggressively into renewables activities, seeking to transition themselves from being just an oil and gas concern to basically being a power concern, which has, I believe, actually been the stated desire of the aforementioned company.

Matt, what is the current state of play for renewable projects in operation under development in Texas, and are you seeing a shift in the types of companies that are starting to invest in renewables in Texas?

MK: If you look at the way states approach things, Texas has done it maybe the way Texas has always done it. Texans saw an industry developing and then looked for ways to maximize its efficiency and profitability. If you look at three of the states that can influence the country, California, New York and Texas, each has their own way of encouraging the development of renewable energy. As an example, Texas looked at where all the wind was, looked at where the demand was, realized there was no way to get any wind electricity to the population that needed it and encouraged growth by establishing Competitive Renewable Energy Zones.

This incentive-focused approach worked in Texas and, as a result, companies are making economic choices and Texans are figuring out ways to develop renewable generation smartly and efficiently. I think in other ways, you're starting to see to Andy's point earlier, companies looking for ways to get involved in and then maximize their value from renewable energy sources. For example, if I'm an oil field services company, I understand how to deploy people in remote parts of Texas to do a service and do it well. I've been managing deployment of services in the oil field, but what if, instead, I did that on a wind, or solar or other infrastructure project. Also, to Andy's point, you're seeing the large multinational traditional energy (or oil and gas) companies redefine what it means to be an energy company. It's not just moving oil and gas around the globe or building power plants. It's trading in renewables, building renewables, investing in renewables, buying carbon offsets or entering into corporate PPAs. Corporate PPAs are a great example of the redeployment of capital. Companies are able to gain long-term cost certainty over their energy costs while providing capital directly to an owner or developer of a renewable energy facility. To me the major theme is that there is just a shift in what it means to be an energy company.

One of the things that hasn't been discussed is government incentivization of renewable projects in Texas. To what extent is federal government incentivization, or even state government incentivization, a factor?

MK: I'll jump on that first. I think 10 or 15 years ago the renewable projects were largely happening because of the tax credits, because wind had a production tax credit, solar had an investment tax credit and there was a decision made by the government to jumpstart an industry. And in 2019, the wind production tax credit was set to expire before it was unexpectedly renewed, which means a project that starts construction in 2020 will now get the benefit of the production tax credit. The extension was a bit of a surprise because the solar investment tax credit was not modified at all. In many parts of the country, a study of the levelized cost of energy shows that wind energy is the most economical choice for new generation. With solar, the investment tax credit is also stepping down, and, yet, solar projects are still being development. Why? Because the industry can generally stand on its own without the benefit of the incentive. This is of course a bit of a chicken and egg question as to whether or not the industry would have become competitive without the benefit of the incentives, but regardless in Texas, I feel, just to my earlier point, if it makes sense and it's economical, then they're going to do it, especially since we have a lot of flat land that's windy or sunny. All this aside, I do think you'll start to see tax credits as the tool used to spur the development of renewable projects—especially as a tool to spur decarbonization.

On the state level, certainly in the places like New York and California, there is more of an aggressive form of encouragement that leads to the development of renewable energy that focuses on policies that put practical limits on the development of non-renewable generation, which in turn requires all new generation to be renewable in nature. The problem with this is that the wind still doesn't blow as often during the day, nor does the sun shine at night and the grid still needs the lights to work every time we flip a switch. Although we don't have this concern in Texas, as ERCOT is a fully merchant market (meaning there is not an incumbent utility with a guaranteed franchise on generating electricity), state public utility commissions will continue to play a huge role by allowing utilities to pass on the costs of renewable projects to the ratepayers so long as the commission deems such costs "reasonable and prudent." This will be especially interesting to watch in states where the commissioners are elected and how they pursue policies when electric bills significantly increase.

We've had the PTC in place since 1992, or 28 years. What happens when it expires and there are no Sen. Chuck Grassley's around to renew the subsidy for one more go-round?

MK: Not to be redundant, but I think projects that make sense will still get built. In the middle of last year most of the major wind balance of plant contractors were reporting that their capacity was fully booked up for projects. Now, obviously some of them will, but this demonstrates that in many places new wind is the better option than any other form of generation. As an example, if you are replacing coal and there are not already gas pipelines accessible and there is a great wind asset, is it more economical to try to get gas to a new power plant or to try and build transmission lines for a wind project? In many cases the answer is to build the wind farm. So if the PTCs really expire, wind projects that are economical will continue to be built, especially in states with regulated utilities.

Also, the wind industry has been saying for 40 years it's cheaper than oil and gas, and coal, but without the subsidies the providers would close shop. My question is: Why should the government be in the business of deciding our energy choices and using our tax money to favor one form of energy over another?

MK: I think that we answered a good portion of that first question already—I think that because of the subsidies or incentives the industry can probably sustain itself now, but to your larger question I think that many feel that the government should have the ability to influence energy policy and perhaps incentive a form of energy over another if that's for the common good. Whether or not it really is for the common good is for another day, but I do think that the United States could use a little bit more federal government intervention in our energy choices. This could not only impact the development of renewable energy, but could help with transmission lines across state lines or pipelines to bring stranded natural gas out of the Marcellus and to the Northeast—all of which could provide greater predictability for companies, investors, and customers in how their money will be spent on developing their energy choices.

Do you feel that there still is a substantial wait-and-see component in terms of industry and state embrace of renewable energy as a viable, ongoing and growing source stream for energy, or do you feel that people are going in whole hog convinced this is going to be the way to do it? 

AL: From my perspective, I think that the wait-and-see period from institutional capital may have, in many respects, passed. As you assess the different institutional investors who've participated in different elements of the energy industry, from renewables to more traditional energy, there are investors who you would have identified as likely one of the last who would have pursued a renewables strategy now actively seeking investment opportunities in the renewables space. Having spoken with a number of them, I think they are pretty confident that the economics of their renewables strategies are going to make sense on a going forward business.

MK: I agree with Andy, but to provide some realism to the discussion, the embrace of renewable energy is here. With the tax credits stepping down or going way, renewable energy will just now simply need to stand on its own and to be treated like every other project and make sense on a balance sheet before it is built.

One point to make real quick is that there appears to be this theory that if all our power came from renewables it would completely eliminate our use of oil and gas. I think, however, if we were to stop using non-renewable generation overnight (which we can't) it would reduce our hydrocarbon usage by about 20-30%. So you still need hydrocarbons to do a lot of what we need in the world today. And the biggest way to instantaneously reduce carbon emissions is to use more gas fired generation, because it is much cleaner then coal, especially new gas, which can be quickly built and brought on line at fairly reasonable prices. We have a lot of gas and we need to continue to build gas infrastructure to exploit it because right now we cannot support our economy solely on renewable energy alone.

You mentioned infrastructure. There's the notion that a fleet is only as fast as its slowest ship. To what extent do you think infrastructure is holding back progress in terms of the growth of these industries?

MK: Just like natural gas is stranded in some places because of lack of pipeline capacity, wind and solar energy can also be stranded because of insufficient transmission lines. I think it certainly is a big constraint. How do you incentivize the infrastructure to get built? That's a tricky question and it involves not only state regulators, but also requires developers of the transmission lines to be aware of local sensitivities. Everyone wants wind until the transmission lines go through their property! As I mentioned before, the fact that renewable generation is not "on-call" generation provides its own unique infrastructure constraint—how to use renewable generation when we need it, not just when it can be made? Battery technology will be one way to help deal with that issue and that is, potentially, a game changer once the technology matures. However, all of these things cost money and people have to pay for that somehow and some of that is the utility spend, which is the government spend, which increases our power bill, so there's a lot of competing interests there.

DS: At the end of the day, I think the wait-and-see mantra will just continue. Is there margin to be made there? Sure, or so it seems to me. The more relevant question, though, is whether you are going to allocate your marginal dollar to a renewables projects or a traditional oil and gas project. To me, that's the sort of tipping point that we're at or getting close to. I just don't know where that's going. I moderated a panel where a renewables investor who is far smarter than I am effectively said, yeah, the tax equity guys do great on renewables projects, but that's going to change a little bit, and other parts of a renewable investment yield far more modest returns as things currently stand.

MK: I think David's right, especially the way Texas looks at most things. If you're deploying capital, is that the return you're looking for? And if you think you can get that, then you're going to proceed that way. There'll be maybe a little more influence on allowing for a lesser return on some items because you want to cater to external factors like a desire to increase your ESG scores. But I think the projects still need to make sense, now the variables that determine what makes sense, I think that may be expanding.

DS: It's almost unwarranted editorializing, but I really do hope we do not engage in the government picking winners and losers through tax breaks and so forth for renewables because you actually inhibit their true potential, especially if you're able to couple them with storage, because that storage alone is a game changer. I'd buy an electric car if I knew it had actual driving advantages over a gasoline-fueled car. I don't really want to stop in Columbus on my way to Austin to recharge my car versus, at worst, spending five minutes at a gas pump.

MK: I think, to David's point, there are also ways for different hydrocarbon use to go into making the rest of the economy more efficient whether that is using hydrogen for transportation or compressed natural gas for transportation or LNG for shipping fuel, there's all sorts of other uses that, if we focus solely on renewables as the end-all be-all, and we don't have an intelligent discussion about the limitations and possibilities of renewables, then we will not be as effective as we could be in achieving any of our energy or environmental goals. There are lots of possibilities to help make the economy as a whole cleaner, hydrogen powered tankers, renewable diesel, electric cars can all be incremental pieces of the puzzle and I think maybe that's the next portion of transitioning our economy. Being a little smarter and using the available and abundant resources that we currently have to do so.

Matt Kapinos is a partner at Akin Gump Strauss Hauer & Feld, where he routinely advises energy and infrastructure clients on a broad range of transactional matters. Andy Lehman is a partner at the firm, and assists clients with negotiating and closing complex mergers and acquisitions, joint ventures, structured equity transactions and management equity arrangements. David Sweeney is a partner in the firm's Houston office. He has advised on mergers and acquisitions with an aggregate value of over $65 billion, energy finance transactions with an aggregate value of over $3 billion, and operational matters spanning the entire hydrocarbon value chain.