New swaps definition provides needed exemptions for energy industry

By Dorothy Davis

In 2010 Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act with the primary goal of re-regulating the financial system with stronger consumer protections and greater transparency. But the act's broadly written rules also inadvertently folded in an array of day-to-day transactions carried out by the U.S. energy industry, which frequently uses derivative contracts that are not easily standardized.

Of major concern to energy companies was the possible inclusion of physically deliverable forward contracts as swaps and being designated as swaps dealers if the notional value of their transactions fell into ranges as low as $100 million annually.

Energy companies often enter into long- and short-term physical transactions to buy and sell electricity, natural gas and other fuels to serve customer needs, and sometimes use financial hedges to manage volatile prices, outlines Reuters.

After two years of deliberation, federal regulators have at last approved a definition for swaps under the Dodd-Frank Wall Street Reform and Consumer Protection Agency, which includes crucial exemptions for many energy companies.

The two agencies overseeing the implementation of the new rules - the Commodity Futures Trading Commission and the Securities Exchange Commission - approved the rule on Wednesday, setting in motion more than 20 separate regulations that were waiting only on a definition for swaps.

The financial instruments are intended to help control the risks facing companies by exchanging two distinct streams of revenue. However, there were some worries that certain contracts allowing energy companies to purchase fuel in response to changing consumer demand could fall under the definition, potentially raising costs around the country.

Risk magazine notes that the CFTC ultimately proved receptive to concerns from the energy industry about unnecessarily raising costs in a sector that relied on swaps contracts for legitimate hedging, both with the definition of swaps and the inclusion of an end-user exemption to clearing requirements.

Businesses meeting the newly revised definition of a swap dealers will have 60 days to register after the final rule is published.

Are renewables worth it?

It ain’t easy being green. That once gently sung lament of a childhood icon has taken on a whole new meaning for me. Sifting through hundreds of pages of power related content a week for PennEnergy.com; it’s not difficult to recognize that renewable energy is a hot topic. What is rarely publicly addressed is just how expensive and difficult renewables are to currently utilize.

The administrative and public push for lean, green energy is growing stronger every day, but the viability of renewables as a reliable and economically sound resource has not kept up. Don’t get me wrong; I’m sold on implementing renewables. I truly believe they are an invaluable part of revitalizing industry and responsible power production/consumption- when and if they can be executed properly.

Quick, what is the first image that comes to mind when you hear the words renewable energy?

I would wager the picture you most likely summoned is of a towering wind turbine in a vast open area beset by a gorgeously hued expanse of sky. Pretty, right? Pretty expensive, noisy, and erratic many would argue.

It seems most of us are buying more into an image than a real renewable plan. Renewable energy can be fantastic, but as things stand they are still quite cost prohibitive and difficult to implement effectively. I want to see renewables grow. In fact, I’m certain doing so will bolster manufacturing sectors, offer new opportunities to displaced workers and strengthen our economy. Not to mention all of the obvious environmental benefits. Promising stuff, but as of today the cost to produce and distribute power from those sources still woefully outweighs the returns. Those are not just opinions either, they’re facts. Math is quirky that way in its total disregards for people’s opinions.

While renewable power sources have been steadily improving, problems remain with consistency and cost versus output; yet billions of dollars continue to be funneled into large-scale projects utilizing these under developed resources. Seems a little horse before cart in my humble opinion.

As things stand most hydrocarbons still beat out renewable energy resources by at least four to one in cost, implementation and output. So why the rush to implement such massive renewable projects that cannot reasonably offer sound financial or production returns? Especially when these large, fast tracked projects may end up costing us more as significant improvements to existing technologies are made. Even the best of us fall victim to a bit of pomp and circumstance at times.

So is the vigorous pursuit of green energy really worth it? Yes and here is why I think so-

Renewables seem to have reached the awkward teenage stage of their development; full of potential and requiring incredible investments of time and resources with seemingly little initial return. If we stick with it though, make the right choices and focus on developing its strengths we will in fact find ourselves one day looking at a mature well-rounded set of clean resources that will have a tremendous amount to offer the world.

Instead of throwing money at an ideal we should be investing in creating and implementing truly functional energy resources. Research and development are vital. A lot more should be going toward finding out how to get the most out of renewable resources before we dot every open expanse with expansive biomass factories, wind farms and solar panels.

In the meantime there are still jobs to be had, smaller scale opportunities offering sounder returns and the sort of contentment that comes with the knowledge that the good being developed is for the long term and not simply an industry trend to garner funding.

We also need to get a grip on the real role renewables will play in our energy future. I don’t know who keeps pushing the idea that green energy is the white knight that has been charged with slaying the hydrocarbon dragon, but its time to put the fairy tales aside and get back to reality.

As already mentioned Renewables at this stage of the game simply cannot offer what hydrocarbons can. Worse yet the rumors of it being able too have been wildly exaggerated. Energy independence and sustainability is a complicated issue that will require sophisticated and balanced solutions. Most experts actually point toward a strategic energy mix and the development of hybrid technologies as the road to success, not the blind championing of any set of resources over another.

Renewables can be developed into reliable energy providers and hydrocarbons can in fact be utilized responsibly with enough innovation, investment and patient dedication.

See, its cake. Now all we have to do is solve that pesky power infrastructure and distribution issue…