Keywords: Energy Independence, Security Act
2007, EISA, Section 526, synthetic fuel, US Air Force, Henry
Waxman, Tom Davis, Department of Defense, WTO, greenhouse gas
Originally published March 4, 2008
A little known provision of the Energy Independence and
Security Act of 2007 (EISA) is increasingly being seen as
making sales of fuel to the federal government far more
complex, creating potential trade conflicts, and boosting
certain technologies at the expense of others.
EISA Section 526 states that: "No Federal agency shall
enter into a contract for procurement of an alternative or
synthetic fuel, including a fuel produced from nonconventional
petroleum sources, for any mobility-related use, other than for
research or testing, unless the contract specifies that the
lifecycle greenhouse gas emissions associated with the
production and combustion of the fuel supplied under the
contract must, on an ongoing basis, be less than or equal to
such emissions from the equivalent conventional fuel produced
from conventional petroleum sources."
Section 526 apparently was included in EISA because the US
Air Force has been considering various coal-to-liquid
proposals. House Oversight Committee Chairman Henry Waxman and
Ranking Member Tom Davis already have asked the Department of
Defense how it intends to comply with respect to coal-to-liquid
fuel, fuels from tar sands, and other alternative or synthetic
fuels. The effects on federal procurement are clear, and
government contractors will have to watch closely as
regulations are established in this area. In order to implement
Section 526, the government will have to develop uniform
standards and contract language through a public rulemaking
process. Any such requirements could end up being quite
demanding because, as noted in the Waxman/Davis letter, the
government will be buying from many refiners of petroleum
products that use inputs from a variety of sources. The
rulemaking will be critical for industry in both expressing its
views regarding implementation and understanding any final
standards or contract language adopted by the government.
While Section 526 is neutral on its face as to the country
of origin of synthetic fuels, the provisions would have a
direct, and arguably disproportionate, effect on producers of
fuel from tar sands and nonconventional crude oil reserves,
such as Canada and Venezuela. Thus, there may be an issue as to
whether Section 526 violates the WTO Government Procurement
Agreement or other WTO rules. The Canadian government has
already publicly warned top-ranking US officials to avoid an
"expansive interpretation" of the provision that
could block government purchases of fuels derived from
Canada's tar sands reserves.
At the same time, the federal government has an extensive
program of loan guarantees, grants, tax credits and other
inducements for investments in non-traditional energy sources.
Section 526 raises the awkward possibility that the US may
provide loan guarantees or direct funding to projects whose
output its agencies cannot purchase.
In addition, Congress directed EPA to perform a similar
analysis of life cycle greenhouse gas emissions from
biofuels—including all stages of fuel and feedstock
production and distribution, from feedstock generation or
extraction (taking into account significant emissions from land
use changes) through the distribution and delivery and use of
the finished fuel to the ultimate consumer. This too may be a
tough exercise, particularly if international land use is
considered, and may influence implementation of Section 526 as
well as the selection of technologies and feedstocks in the
Section 526 raises many difficult issues for federal
procurement, energy producers, energy suppliers, international
trade relations, and the financing of major new projects. Its
implications should concern all participants in US energy
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The Supreme Court of Texas recently held that a liquidated damages provision in a contract for renewable energy was unenforceable because it operated as a penalty without having any reasonable relationship to actual damages.
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
The Mintz Levin Energy & Clean Technology practice group worked on over 45 transactions in 2013 and helped energy and clean technology clients on a wide range of matters, including financing transactions, joint ventures and other arrangements with investors and global corporations from the United States, China, Russia, Europe, India and Japan.