The power industry has conducted a complex dance of consolidation and division over the past few decades in response to technological disruption, regulatory trends and financial shifts.
Recent years have brought about a new wave of consolidation and utility bankers have been busy ushering companies into new larger footprints through buying complementary assets rather than embarking on broad new competition-based construction and infrastructure investment programs. Constellation is now part of Exelon, and Duke Energy is adding further to its portfolio with the acquisition of Progress Energy, the two highest-profile deals in a spate of transactions all the more surprising for the tightness in financial markets since the 2008 crisis.
There are limited options for investors interested in the kind of reliable returns over lengthy periods that investment in most utility projects and assets represent; with rates on cash or Treasury holdings at zero or less, the appeal of traditionally sleepy utility dealmaking is self-evident.
Whether and how that appeal makes its way into actual transactions and reformed power markets to support economic growth in the US over the long term will in large part be up to the bankers, regulators, lawyers and corporate officials set to attend Platts’ Sixth Utility M&A Conference in New York City on June 25-26. The conference, for which Breaking Energy is a sponsor, will parse transaction drivers and trends before diving into the specifics of risks and strategies for handling an industry on the verge of once again transforming itself.
Find out more about the conference and register for one of the remaining attendance spots here.
Regulatory change is a permanent feature of energy markets, Federal Energy Regulatory Commission Chairman Jon Wellinghoff told Breaking Energy earlier this year. While that has certainly been true of the past two decades as a sweep of free-markets deregulation was halted in the wake of Enron’s bankruptcy and collapse, which still looms over the sector and casts its shadow in the form of disputed market approaches and uncertainty for investors on policy affecting long-term investment returns.
The expected presence of a host of lawyers at the Platts conference in New York is no surprise, as energy remains one of the most heavily regulated sectors in the US, an offspring of the social guarantee for universal access and a sustained regulatory emphasis on reliability over efficiency.
With the power grid aging and the power plants that supply it bracing for the potential closure of thousands of megawatts of coal-fired power plants because of recently confirmed but long-anticipated environmental rules, the tradeoffs between reliability of power delivery and the cost of duplicative infrastructure are once again at the heart of discussions over new transactions.
In a “stakeholder society” like that championed by investors, localities and public interest groups, bankers need more than a spreadsheet to do a deal. They also need political insight and a roadmap that can chart the impacts of events as widespread as accidents like Fukushima and the latest iteration of financial crisis in Europe.
The US understanding of the key role of electricity production and provision to broader economic health and security has limited the role of international players in North American power sector M&A, but the industry faces the same pressures to globalize that other regions have already encountered.
Recent acquisitions of European power production and transmission assets by Asian companies have been echoed by early-stage partnerships in the US, but the gap between available cash in Asia and the Persian Gulf with infrastructure investment needs in the US has not been closed. The shadow of stimulus funding for renewable energy generation continues to play a role, but even ambitious stimulus funding would have trouble meeting the $75 billion annual investment shortfall identified by the American Society of Civil Engineers.
What that capacity will look like, and the deals that will be done to stitch together a new shape for the US utility sector remain unknown, with the usual daunting complexity of details creating the ultimate “fluid” situation for investors, regulators and companies.
With the need for more capacity increasingly self-evident, it will be apparent to a growing crowd of investors that betting the trend on a more-active utility space could be a winning strategy. Resolution of some of the uncertainty in global markets could propel the industry out of the waiting game many players have adopted as a default stance in recent years, and the attendees at the Platts conference in New York hope to be prepared when the game ultimately changes.
For coverage of the Platts 6th Utility M&A Conference June 25-26, check in with @Aolenergy and @PlattsConf on Twitter. Join our conference-focused conversations on our LinkedIn group and find our reporters at the conference.
