It is no secret that the US electricity infrastructure is in large part outdated, often inefficient and hampered by continuing confusion over energy policy direction.
Despite its challenges, the power sector remains a perennial hive of financial activity as development costs remain high, quality assets remain elusive and the mix of financial products required to conduct business grow progressively more complex.
Permitting, paying for and profiting from new electricity infrastructure will be the subject of the Platts Financing US Power summit planned for October 27-28, 2011 in New York City. The conference’s agenda promises a deep dive on finance issues inextricably linked to broader debates about energy policy, environmental issues and approaches to fixing the US economy.
“I’m From The Government, I’m Here To Help”
As debates have swirled in recent months around the outcomes of a number of policy initiatives designed to improve financing for, and access to, perceived clean or renewable forms of electricity generation, the role of the federal government in electricity policy has become a source of contention.
A slow and uneven process of deregulation in energy markets, which might be better called a shift to “financialization” of energy markets, has been underway for the past decade. In hopes of improving transparency and more fairly distributing energy costs, states and regions have moved at varying speeds to embrace energy trading and away from traditional cost-plus financing mechanisms approved by state public utility commissions.
As state PUCs have backed away from the simplistic approach of simply guaranteeing a profit for their incumbent generators, opportunity – and confusion – in the electricity industry has proliferated.
The federal government has waded into more and more of the energy project debates that were traditionally left to state and sometimes regional planning bodies, reflecting the fact that multi-state utility corporations engaging in a nationwide approach to planning are more often unable to address their issues at the state level.
Although it steers away from policy-making, the Federal Energy Regulatory Commission has been a leading proponent of the federal government’s higher profile in electricity markets. The Commission’s Order 1000 is bound to be one of the hot topics of discussion at the upcoming Platts forum; the fiendishly complex document reflects a very simple but transformative change in approach for transmission planning. Without transmission access, new plants, whether fueled by natural gas, coal or renewables, simply cannot be built.
If You Build It, Then What?
Dealmaking in the power sector has begun to pick up again following an evacuation of the merger and acquisition space during and immediately following the financial crisis of 2008. Several major deals are in the works, including mergers at various stages of completion between NStar and Northeast Utilities, Duke Energy and Progress Energy, and Exelon and Constellation.
Deals involving existing assets are the focus of a number of the panels planned for the Platts conference next week, with a wide-ranging set of topics for the speakers to cover. With players from both financing firms like Barclays Capital, the Carlyle Group and Goldman Sachs speaking, there will be a counterpoint to the presence of utilities and project developers like Duke Energy, LS Power and First Wind.
Once the assets are in place and ownership is assured, the challenge of actually making money from operating a plant remains, and electricity firms remain wary of using financial instruments to hedge their exposure to commodity price moves and smooth out returns. The shadow of Enron’s collapse continues to loom over the industry, although the announcement this week that CME Group’s power contracts had hit one billion megawatts of open interest could signal a return to launches of financial instruments that can help guarantee profitability in the increasingly open electricity market.
With jobs the number one priority for the Obama Administration in an election year against the background of a lingering recession with high unemployment rates, the prospects of federal support for new investment in job-creating energy infrastructure has power sector bankers salivating.
The final shape of US government funding or support for new electricity infrastructure remains amorphous, and the record of presidential administrations in prompting clear-eyed new energy policy is not encouraging. But as other sectors are forced by a stagnant economy to cut back, new deals in the power industry could be in the offing, with existing players battling over prized assets and new developments prioritized by politicians desperate for high-profile wins.
For coverage of the Platts 13th Annual Financing US Power conference from October 27-28, visit Breaking Energy at breakingenergy.com and follow us on Twitter @BreakingEnergy. Join our conference-focused conversations on our LinkedIn group and find our reporters at the conference.