Energy & utilities sector


Financier Worldwide Magazine

September 2016 Issue

September 2016 Issue

The energy & utilities sector has witnessed extensive change over the past few years, with the regulatory environment, growth in distributed generation, new forms of competition and changes in customer behaviour all having a major impact on how the sector plans and delivers its key electric, gas, oil and water services. These developments are intensifying change and increasing the challenges companies face as they operate in a radically different energy & utilities landscape.

FW: Could you provide an overview of some of the key trends and developments which have taken place in the energy & utilities space over the past 12 months? In your opinion, how have companies operating in this sector performed?

Arent: The major driving forces over the past 12 months have been oil & gas prices, renewable energy prices and the Paris Agreement. In the power sector, while reliability remains a critical focus, we are seeing increased integration of renewables globally, at increasingly competitive, if not lowest cost points. We have been and are working with several leading utilities, technology companies and ISOs on studies that advance the state of technology and state of the art of operational and market structures to accommodate increasing amounts of flexibility in both generation and demand.

Monastyrskaya: Domestically in the US, the key legislative developments include five-year extensions of the Investment Tax Credits (ITCs) and the Production Tax Credits (PTCs), the main subsidies for solar and wind, and passing of the Clean Power Act. Although the implementation of the Clean Power Act is currently stayed by the US Supreme Court pending current legal challenges in the US Court of Appeals for the District of Columbia, the EPA has recently issued the optional Clean Energy Incentive Program (CEIP), encouraging early investments in zero emission renewable generation, so the industry is already preparing for the Clean Power Act. Globally, the major development was of course the signing of the Paris Climate Agreement by 195 countries. In terms of economic developments, we note continued improvement in cost competitiveness of renewables – in particular, continuously falling prices of photovoltaics (PV) solar and onshore wind.

de la Flor: Over the last 12 months the energy sector has seen low oil prices which have been followed by lower natural gas prices. Market trends point towards an abundant oil & gas supply – including LNG – in the short and medium term, and together with the EU context of moderated demand growth, the pressure to lower energy prices has increased. Simultaneously, the development of renewable generation has pushed down wholesale electricity prices which have further complicated the energy sector for traditional energy utilities. Although we are starting to see coal being pushed out of the energy mix – in the UK, for example – cheap coal is still displacing gas in many places across Europe. All in all, traditional energy & utilities, along with oil & gas assets, have been performing under challenging conditions.

Larson: The past 12 months has been dominated by the realisation among exploration and production companies and their service providers that ‘lower for longer’ might be here to stay. In other words, energy companies have had to make tough choices about right-sizing their balance sheets and capital budgets within the bounds of a much lower commodity price environment. The utility space has faced similar commodity-price driven challenges, but, across the sectors, the general story has been a consistent one of companies having to make difficult choices in an unfavourable commodity price environment.

Camp: On the electric side, the impact of increasing grid parity of wind and solar is an important trend in the US. Consequently, commissions from coast to coast are looking at distributed energy resources (DER), especially renewable DER. The examination of DER includes increasing acceptance of solar installations and looking at the impact energy storage has on DER. Importantly, as most noticeably seen in New York and California, commissions are grappling with DER’s impact on the historical rate recovery mechanisms.

The past 12 months has been dominated by the realisation among exploration and production companies and their service providers that ‘lower for longer’ might be here to stay.
— Adam Larson

FW: In what ways have energy prices impacted the market? How have energy companies responded?

Camp: A shift in energy prices has impacted the market on both the gas and electric side. On the gas side, the near month natural gas contract dropped by 50 percent from July 2015 to March 2016. Weather conditions forced producers to sell their molecules below production and aggregation costs, causing some to file for Chapter 11 bankruptcy. While the market exited withdrawal season with record storage inventories in March, the supply glut slowly disappeared. Eventually, the market showed promising growth – producers halted E&P, allowing the market to reset itself. As a result, those who filed for bankruptcy are an active participant. On the electric side, shale gas has had a tremendous impact on maintaining stable prices. Notably, wind resources have competed against gas generation, and won. In a lot of ways, the energy companies – even those with a large fossil-based fleet – are taking advantage of diversifying their portfolio.

de la Flor: In Europe, wholesale energy prices have decreased mainly for two reasons: firstly, low oil & gas prices and, secondly, the development of renewables. These two factors, together with weak economic growth, increasing energy efficiency gains and coal displacing gas for power generation, are leaving gas-fired power plants with low utilisation rates. Energy companies are reacting to the low energy prices scenario by diversifying their investments, closing or selling non-profitable installations, improving operational efficiency, setting up new companies to differentiate profitable assets from those under difficulties, moving towards sustainable energy business, and adopting new strategies in order to guarantee themselves a relevant role in the drastic upcoming transformation of the EU energy sector.

Monastyrskaya: The US market continues to benefit from low gas prices, a consistent trend since 2008 that was brought on by fracking. As a result, we see an increase in natural gas-fired power projects being proposed, and the projects continue to attract project financing. However, some markets see a reduction of commercial banks’ appetite to provide merchant financing, due to banks’ overexposure to the market, such as PJM. At the same time, improvement in cost competitiveness of solar and wind results in lower PPA prices – not only in the US, but also in Latin America, as demonstrated by a recent power auction in Mexico. For now, the two trends of low gas prices and falling prices for renewables are continuing in parallel, with both gas-fired plants and renewables attracting financing. Analysts predict we may see a change in 2017, when gas prices are forecasted to increase.

Arent: Low natural gas prices and falling prices for utility-scale renewable energy systems like wind and solar have provided utilities with more options for providing clean and affordable energy that consumers and governments are demanding. It is not surprising that utilities and power system operators are responding by incorporating these more economically and environmentally sound options for electricity generation. In the transport sector, we have seen reduced energy prices and slight changes in consumer purchasing and driving behaviour, but equally poignant is the increase in demand for hybrid electric vehicles and electric vehicles in the US, Europe, China and other markets. Technology advances in storage, for example, are beginning to gain momentum as the markets grow; and many anticipate increasingly attractive solutions in both vehicles and power systems, incorporating electric storage in the coming years.

Larson: After a long period of virtually unprecedented expansion, particularly in the United States, energy companies have had to pivot to an environment where cost controls, balance sheet discipline and asset quality are much more important than just accumulating reserves. Companies that were aggressively leveraged even when energy prices were higher have understandably been on the leading edge of restructuring efforts across the industry. Some of those companies have restructured quickly and are now emerging with simplified capital structures and the ability to pursue acquisition strategies as and when the market rebounds. For the rest of the industry, the focus has been on capital discipline, de-levering and trying to weather the commodity-price storm.

FW: How would you describe the ways in which energy policies and political agendas are shaping the market for energy & utilities companies?

Monastyrskaya: Policies shape the energy market by creating incentives for industry players through laws and regulations, and by changing consumer perceptions of how the energy market should look in the future. Extensions of tax credits allowed more projects to benefit from tax equity investments. States are providing incentives for investment in renewables. The New York PSC recently approved the Clean Energy Standard, requiring all of the state’s load-serving entities to get 50 percent of their power from renewables by 2030. The Massachusetts legislature passed an energy bill directing the big utilities to procure 1.6 GW of offshore wind capacity by 2027. The Georgia PSC has approved IRP including 1,050MW of new large renewables capacity in utility-scale solar. In addition to these direct incentives, industry discussions educating consumers regarding green energy further provide a boost to the sector.

de la Flor: The energy sector is deeply influenced by energy policies and regulations. As an example, the decarbonisation process is having a huge impact on the energy sector and it is purely driven by energy and climate policies. While energy sector stakeholders might understand these policies and regulations, it is also true that energy & utilities companies require a stable and predictable regulatory framework in order to invest. The regulatory development process should be transparent, inclusive for all relevant stakeholders, and changes should be duly justified. When approving new regulations, it is essential to guarantee that retroactive changes will be avoided in order to protect the investment climate and attract investments.

Arent: Both market forces and policy drivers are shaping the energy and utility landscape right now. Globally, we see a strong commitment out of Paris for accelerated use of clean energy, particularly renewables, which are projected by the IEA to overtake coal and become the largest power source by 2030. In the US, with low natural gas and oil prices, US markets for coal are shrinking. And we see that playing out with a string of bankruptcies among major mining companies and announced coal based power generator retirements. Renewable energy power contracts have become increasingly attractive in most markets globally with solar and wind purchase agreements below US 5 cents/kWhr. These lower cost power generating options are challenging the economics of nuclear power, even for older generating plants.

Larson: For companies focused on fossil-fuel-based production and power generation, the key energy policies and agendas are the slow but steady push toward more rigorous environmental standards across most major economies. To date, most efforts at global energy accords have been underwhelming – with Paris perhaps marking a shift towards more dramatic progress. However, the European Union and the United States, both at the state and national level, and to some extent China, have continued to increase standards around vehicle fuel economy standards, coal emissions standards and similar regulations. The expectation that these trends will continue, with the background possibility of more comprehensive energy reforms, has had a significant effect on capital allocation decisions, especially when it comes to power plant decommissioning and similar long-term investment decisions.

Camp: At the federal level, the extension of PTC and ITC has clearly impacted continued solar and wind development. With nearly 40 states looking at net energy metering (NEM) for solar, the state policy decisions will have a tremendous impact in the near future. The solar market has already seen where a state commission dials back the benefits and increases the fixed costs, the market can come to a grinding halt, as happened in Nevada. Compared to California, which for the time being has left its NEM policy substantially unchanged after a recent proceeding, the market continues to be robust without additional incentives. Energy policy on DER, and determining their true costs and benefits, will have a direct impact on the energy market. I expect that to vary from state to state, unless and until a federal energy policy driver occurs.

Low natural gas prices and falling prices for utility-scale renewable energy systems like wind and solar have provided utilities with more options for providing clean and affordable energy that consumers and governments are demanding.
— Douglas J. Arent

FW: In the global energy & utilities context, what have been the most significant legislative and regulatory developments to emerge over the past 12 months or so? How have these impacted the sector in general?

Larson: The UN’s Paris Agreement, with its ambitious goals of mitigating global greenhouse gas emissions, is clearly the standout regulatory development over the last 12 months. That being said, the Paris Agreement is still in the ratification process and, assuming that occurs, the framework will not take effect until 2020 at the earliest. So, while change is potentially coming, the effects have yet to be felt by the industry and there is great uncertainty in terms of how meaningful the Paris accords, and similar efforts, will actually be, when individual countries ratify and implement the agreement.

Camp: The somewhat unexpected extension of the PTC and ITC has been of tremendous impact to the wind and solar industry. Due to low power prices and EPA rules, such as the Mercury and Air Toxics Standards (MATS), utilities which still own generation assets in deregulated markets are struggling to compete in the market. Without legislation to subsidise nuclear plants that are losing money, utilities are claiming to have a loss of employment, tax revenues and reliability issues within the state’s grid. If successful, this could send mixed signals to investors wanting to invest in what is supposed to be a deregulated market – in which market participants can fairly compete. If utilities which operate regulated and unregulated assets within the same territory receive special financial treatment, it will result in less competition in the market and in the long-term at the cost of rate payers.

de la Flor: In December 2015, a global agreement was reached at the COP21 to fight climate change and decarbonise our economy. Although non-binding in nature, the COP21 deal shows the way for an energy system with lower greenhouse gas emissions. Once ratified, the deal will surely be a cornerstone for additional legislation and regulation at both an EU and national level. Energy companies will be even more forced to incorporate sustainability as a fundamental pillar in their business activities, otherwise they will be left out of the market by existing and future regulations. Energy companies will have to adapt to these changes and new opportunities will also arise for the gas business. The outcome of COP21 was technology neutral. If it is done in the proper way, then natural gas can be part of the solution, as it offers tremendous opportunities to reduce emissions in a cost-effective way.

Arent: The COP21 accords from December 2015 top the list of recent developments shaping the global energy and utilities industries. We have 190 countries making unprecedented commitments to cut carbon emissions and slow the pace of global warming. Those commitments are not exclusively about energy, but energy will almost certainly be part of the equation. If you look at the US, the Environmental Protection Agency estimates that electricity production accounts for about 30 percent of our greenhouse gas emissions – more than transportation, more than industry. Because of that, it is difficult to conceive of pathways to decarbonisation that do not include the electricity sector.

FW: What security and supply issues are impacting the ability of companies and governments to satisfy long-term demand for the services provided by the energy & utilities sector?

de la Flor: Within the gas sector, EU gas demand is experiencing little recovery and domestic production is falling. This increases the level of external dependency for gas imports in the long term. In order to ensure security of supply for the following decades, EU policy passes for diversification of origins and routes, as well as for the revision of current regulations on security of gas supply measures, expected by the end of the year. The EU has also fixed as one of its priorities to achieve a truly integrated energy market where energy can flow freely across the borders. This will increase optionality and supply competition, enhancing security of supply and competitiveness for the benefit of all EU consumers. Moreover, the EU is developing an LNG strategy which promotes additional LNG imports and highlights the importance of gas interconnections to allow all EU Member States access to LNG.

Arent: Companies and governments are intimately aware of the critical role energy plays in their economic health. Cyber security is of increasing priority as we move forward with more sensors, IT enabled and managed infrastructure. Similarly, financial viability is of high concern in many locations. Traditional business models continue to be challenged, particularly in the US. Emerging models offer multiple actors business opportunities that hopefully address one of the chronic issues of the sector: what are successful business models in a changing environment with increased distributed resources and energy efficiency, but also increased interest in energy services and value-based offers? Finally, geopolitical concerns remain a central issue related to security of supply and the critical role energy plays in most, if not all, economies.

Larson: In the nearer term, access to domestic oil & gas supplies will continue to be the key differentiator with respect to countries’ approaches to energy security. Countries with significant domestic supplies are able to dedicate resources to domestic infrastructure build-out with a much greater degree of confidence than those that lack these resources. In that respect, the emergence of unconventional resources, coupled with hydraulic fracturing and similar completions technologies in the United States, has changed US views on the importance of international resources – particularly LNG – from the Middle East, Australia and elsewhere. Other countries, China in particular, are similarly seeking to enhance their domestic energy supplies by adapting unconventional technologies that have been pioneered in the United States.

Camp: One of the biggest challenges facing the natural gas industry is developing and paying for the infrastructure needed to connect the bountiful supply of shale gas with markets. There has been a fundamental shift in the type of entity that is now funding natural gas infrastructure projects. As the deregulated natural gas market has matured, we have seen a shift away from local distribution companies (LDCs) signing up for projects, and are now seeing producers with years’ worth of natural gas taking on that role. However, with the decline of energy prices over the past 18 months, the anticipated revenue stream of these producers has caused several to file for bankruptcy. As a result, several of the announced infrastructure projects that would get supply to markets have been delayed or cancelled, leaving the market with ample supplies of gas in the ground but no way to get it to growing markets.

Monastyrskaya: It would be interesting to see the extent to which recent political crises in Europe and Brexit may affect the energy and utilities sector worldwide. It is possible that in the future that may be characterised by geopolitical rivalry and frequent political tensions, growing protectionism on a national level is foreseeable, which potentially may disrupt the focus of the world on reducing carbon emissions. It is not clear, however, the extent to which this protectionist trend will stop the momentum of renewables. With respect to the US, of course, one cannot help but ponder what may be a ‘Trump effect’ on the energy markets, given, first, the promise by the current Republican party presidential nominee to repeal the Clean Power Act if he is elected and, second, his complete lack of understanding of energy markets.

Energy companies will be even more forced to incorporate sustainability as a fundamental pillar in their business activities, otherwise they will be left out of the market by existing and future regulations.
— Francisco de la Flor

FW: Could you provide an insight into the evolving market dynamics between traditional, fossil fuels and clean, alternative energy? What is the outlook for this energy balance?

Arent: The trend toward cleaner energy, often referred to as the Clean Energy Revolution, is well underway. Across a range of renewable energy and energy efficiency technologies including LED bulbs, solar photovoltaics, wind power and electric vehicles, we have been seeing adoption surge over the past several years as prices have fallen. In 2015, wind and solar PV accounted for about 77 percent of new power generation capacity around the world. Low natural gas prices are also a key driver. As for the outlook, according to the analysis of the emissions targets in the nationally determined commitments to the Paris Agreement, renewables will have the highest growth rate in the coming decades, and the energy balance between traditional fossil fuels and clean, renewable energy is anticipated to trend strongly toward 50 percent total energy, implying significant growth in clean energy, while traditional fossil energy will grow slightly, mostly in non-OECD countries.

Larson: According to the US Energy Administration Bureau, approximately 67 percent of the electricity generated in the United States in 2015 was from coal, natural gas and petroleum. Of the remaining 33 percent, 20 percent was from nuclear sources and 6 percent was from hydroelectric sources, leaving only about 7 percent for solar, wind and all other renewable sources. While renewable energy technologies will continue to improve, driving down costs and driving up their share of the total energy mix, there is a staggeringly long way to go. To that end, absent a fundamental technological breakthrough, while the energy balance will likely continue to tilt in favour of renewable sources, fossil fuels will remain the backbone of the energy economy for the foreseeable future.

Monastyrskaya: While coal has fallen out of favour as a fuel, the process of change in energy balance is long-term. Power plants’ operations span many decades, so the change in fuel mix is not going to happen quickly. Analysts believe that the world is shifting toward renewables, away from oil, gas and coal. Bloomberg recently predicted that gas will never see its golden age and will be replaced by renewables by 2031 as a primary source of electricity generation. The momentum toward renewables is assisted not only by governmental subsidies, falling costs and favourable laws, but also by an increased public awareness of climate change and the need to decarbonise. There is also a major focus on developing exponential technologies to resolve intermittent issues of renewable energy, and the impact of such technologies is hard to estimate. Laws, changing social awareness and new technologies create enormous momentum for renewables.

Camp: On the electric side, it is dangerous to prognosticate, but we expect to see a continued rapid decline in coal supplanted in large part by wind and natural gas. My crystal ball on nuclear is very dark. There will continue to be a correlation between gas resources and wind and solar resources, until a significant increase in new, and significantly more nuanced, direct load control, better TOU rates, better and more tailored demand response occurs. I purposely left out energy storage as I believe we can do a lot more flattening of the load duration curve with demand response, price related demand shaping mechanisms, if we simply harness the increased information and visibility that modern grids increasingly have. If energy storage halves in cost and then halves again, the energy balance between fossil and renewables tips significantly in renewables’ favour.

de la Flor: At EU level, the ambition remains clear: to ensure an energy transition to a decarbonised and sustainable society. Both the political ambition and the actual outlook for future energy consumption point towards an increasing uptake of renewable energy and alternative fuels. The EU Commission aims for at least 27 percent of total EU energy consumption to come from renewables by 2030. Furthermore, EU energy efficiency targets will also have a great impact on traditional fossil fuel demand. All the above, together with the COP21 agreement and the reform of the ETS, the EU will continue pushing the energy sector towards higher decarbonisation and sustainability. Therefore, the balance is expected to continue evolving from fossil fuels on one side to renewable on the other, unless technologies, such as carbon capture and storage, are commercially developed to ensure that fossil fuels can also be a low-carbon source of energy.

FW: In your opinion, are energy and utilities companies taking sufficiently robust action to address the environmental concerns which often arise from their operations?

de la Flor: First of all it is important to underline that energy companies should be complying with all environmental legislations and regulations which are applicable to them. Furthermore, the energy sector is fully aware of consumers’ concerns about the environment and climate change. That is why many energy companies with strong corporate social responsibility programmes have decided to go beyond the existing environmental regulations and apply, on a voluntary basis, additional sustainability measures according to international sustainability indexes, such as the Dow Jones Sustainability Index and the Global 100 index, among others. Furthermore, corporate governance is also being improved in order to better engage with local communities, take note of the environmental concerns, and increase local acceptance for new energy projects and operations.

Monastyrskaya: Energy and utilities companies have well-developed programmes to comply with applicable environmental legal requirements. Whether one considers this sufficient to address the environmental concerns arising from these operations depends on how one assesses such impacts. There is considerable debate on this point across a wide-spectrum of environmental issues and impacts. As legal requirements become more stringent, such companies have little choice but to respond, either by installing more advanced pollution controls, becoming more energy efficient or switching to cleaner sources of energy. As profit-driven enterprises, energy and utility companies are vigorously engaged in the legislative and regulatory processes that define the nature of their legal obligations, including most prominently their obligations with respect to climate change.

Camp: Historically for IOUs, environmental concerns were a cost/benefit analysis for any action beyond an environmental mandate, and therefore rarely, if ever, did utilities go above and beyond anything the law or regulation imposed. Generally, utilities have looked at environmental concerns as a ‘compliance’ issue, not an area where they could generate goodwill and customer confidence by going above and beyond the minimum requirements. Increasingly, some IOUs are suggesting new environmental programmes but, as always, rate recovery is key. It will be interesting to see where the public clamour will be for the next four years and the willingness of regulators for cost recovery if a utility wants to aggressively address environmental concerns beyond what the law requires.

Arent: Leading companies are and have been planning and making investments that go beyond environmental compliance and take into account broader environmental concerns, particularly carbon emissions. Many larger companies have made planning decisions with some sort of carbon pricing for multiple years. Prudency appears to be firmly established, but an official carbon price or clear set of economic penalties has been called for by many in industry and other stakeholders.

Larson: Energy and utility companies are keenly aware of the environmental concerns arising from their operations and spend significant resources evaluating their impacts. In light of the global economy’s continued reliance on fossil fuels, and in absence of a cost efficient alternative, change in the sources from which we derive energy will come more slowly than some constituencies would like, but most in the energy industry recognise that environmental stewardship is both a social imperative and a critical part of sustaining their businesses over the longer term.

The momentum toward renewables is assisted not only by governmental subsidies, falling costs and favourable laws, but also by an increased public awareness of climate change and the need to decarbonise.
— Tatiana Monastyrskaya

FW: What other risks and challenges are currently causing energy and utilities companies to ponder their operational strategies?

Monastyrskaya: A change in paradigm and recognition that a centralised grid may not be the right model, given developments in distributed generation and micro grids, and that shift has to happen to a decentralised model, allowing consumers to sell the power back to the grid, is a major upcoming change that US utilities have to grapple with. Further, the inflow of capital over the past few years has enabled many companies to enter the solar industry, making the market highly competitive and making it harder to earn good returns. More short-term challenges include an anticipated oversupply of PV installations, as demand from China is expected to drop significantly in the second half of 2016, and, of course, grappling with the effects of the Abengoa and SunEdison bankruptcies that are still looming over the solar industry.

Camp: On the gas side, as producers scramble to gain access to higher priced markets outside of Appalachia, an incredible amount of capital is being invested in both new and existing infrastructure. Initially, it was a race to Chicago and Michigan where the polar vortex had commanded nearly $50 per decatherm in the cash market and basis markets skyrocketed. Market area prices dropped as winter failed to impress, and with nearly 4.6 billion cubic feet per day (Bcf/d) in exports, the new market area has shifted toward Mexico and LNG. As demand for natural gas grows on a global level, over 25Bcf/d worth of infrastructure is pending application, or is in pre-approval with the Federal Energy Regulatory Commission. At some point, utilities may end up scaling their pricing in order to compete with the broader global market.

Arent: In the utility sector, threats to the traditional business model come from multiple angles. For power, in many cases, energy and utility companies are proving successful at incorporating more variable renewable energy sources like wind and solar by making changes to operational practices. For example, some utilities have found that by expanding balancing areas, they can more easily maintain balance between electricity supply and demand with less reserve generating capacity. Distributed energy, such as residential rooftop solar, is another area where we are seeing a lot of discussion among utilities and power system regulators. Primarily, those discussions revolve around ensuring that costs of maintaining the power system are equitably distributed as the traditional economic model of the utility industry pivots from delivering a commodity good to a service model.

Larson: In light of the attention paid to these areas by regulators, investors and the public at large, a focus on safety and asset retirement costs and risks remains at the forefront of the minds of energy company executives. Making sure that capital budgets realistically account for these costs and that future liabilities are appropriately considered when planning operations has taken on renewed importance, particularly with respect to offshore assets and other highly technical projects.

de la Flor: There are many challenges currently in place. These include the new services and digitalisation in the retail market, decentralisation of the energy production, smart meters, smart grids, ad so on. In terms of energy sources, the lowering of renewable energy production prices will allow solar and wind energy to widely compete on the market without subsidies. New legislation to improve the emissions trading system (ETS), reinforce energy efficiency measures, improve air quality, decarbonise the transportation sector, reduce CO2 emissions and adapt the power market to a higher amount of renewables through new energy market design, is also expected. Political concerns on external dependence and security of energy supply will also need to be overcome.

FW: Could you outline the extent to which technological advances have changed the energy & utilities sector? What, in your opinion, are the key, market-changing innovations?

Larson: Two key technological advances have changed the energy & utilities sectors over the past five to 10 years. The first is the emergence of hydraulic fracturing and unconventional completions in the oil & gas space. These technologies have dramatically reshaped and extended the world’s fossil fuel runway, after a period where many experts were convinced that ‘peak oil’ had already been reached. The second is the continued increase in efficiencies in wind and solar technologies. As wind power in particular continues to be built-out in places like California, it has supplanted other sources of power and significantly altered the power generation mix. While still very expensive to install, once online, wind and solar are competitive with traditional fuels in the right environments and can quickly supplant the need to run coal plants or other generation assets. As the technologies mature, this trend will continue.

Arent: Technology innovation has been a big part of the changes in the energy and utilities sector over the past decade. Some of the major changes include improvements in the efficiency and cost of wind and solar generation, and computing technologies that are enabling the realisation of ‘smart grid’ deployment and differentiated pricing for electricity. And though it remains controversial, hydraulic fracturing and other drilling technologies that allowed us to tap into shale gas reserves were game changers. We see continued potential for technological advances in renewable technologies, and are focused on breakthrough advances to make these technologies the preferred choice.

de la Flor: The wide deployment of shale gas and shale oil has changed the global energy market in recent years and it is still doing so by bringing down oil prices, exporting LNG to other parts of the world and freeing up large amounts of cheap coal which becomes available for the EU market. Moreover, the technological development in the renewables sector has made it possible for this technology to make gains in both efficiency and size, allowing them to soon be able to compete, without need for subsidies, with other traditional generation technologies. Decentralised generation and energy storage are also set to become key market-changers. Different storage technologies are competing to be further developed and dominate the market. While electricity batteries are showing some progress, the huge potential of ‘power-to-gas’ technology, which will allow the use of existing gas infrastructure as ‘giant energy storage’ for synthetic gas, should not be overlooked.

Monastyrskaya: One area which attracts attention is battery storage, which would help alleviate the intermittent nature of a solar resource. At issue is whether battery storage will remain largely ‘behind-the-meter’, or if we will see more utility-scale battery storage projects. It will depend on whether such utility-scale battery storage can be financed, meaning such a project would either need to be part of a power plant, with a financeable offtake contract with a creditworthy counterparty, or to have some sort of a capacity contract. Another relevant question will be whether battery manufacturers will be able to provide warranties of the appropriate duration. It is worth noting that there are a number of federal initiatives supporting commercial-scale distributed energy projects and smart grid. In June of this year, the Obama administration announced 33 state and private sector commitments for at least 1.3GW of energy storage projects over the next five years.

Camp: On the electric side, AMI and other sensing equipment is allowing DER to prove its value now, by giving the utility the ability to see to the end of the distribution system. In addition, with the rise of Big Data, DER now receives 35,040 reads per year from an endpoint and has other new low-latency sensing and communication systems throughout the transmission and distribution. The significant advances in renewable technology – whether the dramatic decrease in solar panel cost, or the increase in height for wind turbine technology, which can access winds in areas previously considered marginal – are transforming the utility sector as we speak.

Generally, utilities have looked at environmental concerns as a ‘compliance’ issue, not an area where they could generate goodwill and customer confidence by going above and beyond the minimum requirements.
— Ward Camp

FW: Turning to M&A activity in the sector over the last 12 months, what have been the main factors driving transactions?

Camp: Many of the risks retail electricity suppliers take in the market, along with the competitiveness of being in a commodity market, has led to many mergers of suppliers, or suppliers electing to exit the market. The margins for retail suppliers have tightened, driving the market to fewer but now larger retail suppliers. Many retail suppliers are looking to diversify their service offering in a way to generate newer and better margin service offerings, including demand response and energy efficiency.

Larson: The main factor driving transactions has been distress across the space driven by decreases in commodity prices. Transaction levels have been depressed relative to what was seen during the 2008-2014 commodity boom, but in recent months these have noticeably increased as private equity firms and other sources of long-term capital seek to take advantage of the bottom of the cycle. That said, the fundamental stumbling block to many transactions is the inability to get reasonable levels of debt financing, as banks have focused on managing losses in their existing energy loan portfolios rather than extending new commitments.

Monastyrskaya: In the US, while developers were in no major rush to close financings on their greenfield projects, the attractive regulatory environment for wind and solar has helped maintain Q1 2016 levels of investment in the M&A space. US clean energy M&A investments in Q1 2016 totalled approximately $3.9bn across 39 deals. However, despite the relatively healthy M&A quarter in terms of overall investment value, the number of deals closed contracted considerably from last year’s quarterly average of 79. The largest deals worldwide were distributed across a number of different developed economies, and included yieldco TerraForm Power’s $2bn acquisition of 91 percent of the North American wind portfolio of Invenergy, and Blackstone’s $1.1bn refinancing of its 288MW Meerwind Sud and Ost offshore wind farm phase one in German waters.

Arent: Managing any business prudently through growth and contraction phases is a challenge for any management team. Successful leaders ‘ride through’ and emerge in a position to acquire other assets at attractive prices. We have seen multiple cycles of this over the past decades and anticipate further smart restructuring.

de la Flor: Low oil & gas prices have driven the management of large energy groups to focus on gaining efficiencies and realigning their strategies and business models. In the oil and gas industry we have seen a level of M&A which has been higher in 2016 than in 2015. It should also be noted that we have seen a number of M&A operations in the renewables sectors. Regulated energy assets have also been regular targets with a view to accelerating growth and securing stable revenues.

FW: What levels of distress do you expect in this sector over the months and years ahead? What restructuring and bankruptcy trends are evident?

de la Flor: Looking to the gas sector, gas-fired plants in continental Europe might experience similar challenges than in recent years. A number of older, less flexible or locationally disadvantaged open cycle gas turbines (OCGTs) will probably be closed. However, three important factors could make a difference for the remaining gas-fired plants. Firstly, capacity markets are being implemented across Europe. Secondly, regulatory driven closures of coal and nuclear plants should increase gas plant load factors and margins in the early to mid-2020s. Thirdly, gas plant competitiveness is improving again due to gas oversupply and lower prices. This may be further supported by the EU ETS reform leading to higher EU carbon price signals. Large utilities should pay attention to technological breakthroughs in energy storage, IT, demand side response and renewables production costs which could become ‘game-changers’. They could accelerate significantly the transformation of the energy sector, and consequently, the restructuring of energy companies and utilities.

Arent: As energy is critical to any well functioning and healthy economy, we anticipate an increasingly active transaction environment over the coming decades. Markets are expected to grow substantially for clean energy, which could lead to growth or possibly creative disruption in supply chains as well. Our research indicates an increasingly dynamic period of growth and restructuring as companies respond to the opportunities created by the Paris Agreement and complementary actions by state, local, municipal and other leaders.

Monastyrskaya: The solar sector has not yet emerged from the SunEdison and Abengoa bankruptcies, with the banks still looking at their level of exposure, and corporate governance and balance sheets remain a major source of investors’ concern. In the wake of low oil prices, upstream E&P and midstream companies are experiencing significant financial difficulties. There are some interesting recent court decisions with respect to contracts to gather, process and transport gas between midstream gatherers and E&P producers. The question is whether the contract is an executory contract and can therefore be rejected by a debtor E&P company in bankruptcy, or it is a covenant running with the land. The jury is still out on the question, and each case will be determined by facts, contractual language and the law governing these contracts, but we will undoubtedly see this question come up as more E&P producers experience financial troubles.

Camp: We expect more M&A involving retail electricity suppliers, especially utility-owned business units. A recent list of the top 10 E&P bankruptcies since the beginning of 2015 included Quicksilver, Samson Resources and Sabine Oil & Gas – which made up more than 50 percent of the $16.1bn of debt left behind. Chesapeake has been on the brink of bankruptcy for quite some time. Ultra Resources has not filed for bankruptcy yet, but recently stopped making payments on the 200,000 decatherm per day capacity they hold on Rockies Express. REX attempted to re-market the capacity in hopes of getting close to the $1 per decatherm that they received back in 2006, but instead had people willing to pay 10 cents. Some believe the pain is now over. With an natural gas futures contract around $3 and oil somewhat stabilised, more wells will get drilled and the market will even out.

Larson: Predicting future levels of distress is a difficult task. That said, the industry is optimistic that, as supply and demand imbalances continue to narrow, the cycle will turn. Global energy fundamentals would seem to support that view, but I suspect that it will be a gradual process, rather than a dramatic turnaround, because of the ability of US producers to quickly ramp up domestic production in response to changes in demand. In respect of bankruptcy trends, many producers continue to have balance sheet challenges, so I expect to continue seeing very meaningful restructuring work throughout the next 12 to 24 months.


Ward Camp is the chief regulatory affairs officer of Edison Energy, where he is responsible for leading regulatory and policy activities and advising clients on governmental and regulatory matters. Mr Camp has held executive roles at Landis +Gyr Energy, USPowerSolutions and Avistar. Previously, he worked extensively with utilities and public utility commissions throughout the US. He can be contacted on +1 (213) 788 4443 or by email:

Francisco de la Flor is director of regulation at Enagás. Since 2002, he has been responsible for the relationship with the national and international/European regulatory authorities, institutions, associations and bodies, dealing with the regulatory development of the gas industry. He has more than 30 years in the natural gas business in different companies and positions. His current main international positions include GIE Board Member, ENTSOG Management Board Member, UN ECE GEG President and IGU PGC B SG3 Leader. He can be contacted on +34 91 709 93 10 or by email:

Adam Larson is a partner in the Houston office of Kirkland & Ellis LLP, where he focuses on the energy and utility sectors. His primary practice areas include mergers and acquisitions, private equity and capital markets. Mr Larson has counselled private equity investors, their portfolio companies and other public and private companies in connection with mergers, acquisitions, dispositions, joint ventures and offerings of equity and debt securities. He can be contacted on +1 (713) 835 3667 or by email:

Douglas J. Arent, Ph.D. MBA is executive director of the Joint Institute for Strategic Energy Analysis at the National Renewable Energy Laboratory (NREL). In addition to his NREL responsibilities, Mr Arent is senior visiting fellow at the Centre for Strategic and International Studies and is a member of the National Research Council Committee to Advise to US Global Change Research Program. He is also a member of the Keystone Energy Board. He can be contacted on +1 (303) 384 7502 or by email:

Tatiana Monastyrskaya represents financial institutions, including investment banks, commercial banks and private equity firms in various types of finance transactions, with an emphasis on project finance. She also represents the US Department of Energy and the US Department of Transportation in connection with energy and infrastructure projects, and private equity sponsors and developers in various tax equity transactions. She can be contacted on +1 (212) 735 3582 or by email:

© Financier Worldwide



Ward Camp

Edison Energy


Francisco de la Flor



Adam Larson

Kirkland & Ellis LLP


Douglas J. Arent



Tatiana Monastyrskaya

Skadden, Arps, Slate, Meagher & Flom LLP

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