Energy & utilities sector


Financier Worldwide Magazine

September 2017 Issue

The pace of change in the energy & utilities sector has continued to accelerate in 2017, with a fundamental transformation of the world’s energy and industrial systems under way. Chief among the changes have been alterations to the regulatory landscape, decarbonisation targets, low commodity prices, cheaper and more competitive renewables, and an uptick in industry consolidation and M&A. While the energy & utilities sector is still in the process of reinventing itself and adapting to a dynamic new environment, the future promises innovation and opportunity.

FW: In your opinion, what key trends and developments have dominated the energy & utilities space over the last year or so?

Keough: Despite some measure of stability in commodity prices, with a narrower, less volatile band of prices, and the currency premium, Canadian energy & utilities companies are still reluctant to spend capital on new projects. The minimum level of capital spend and little new exploration & production (E&P) means that the existing resource base is likely to continue to dwindle. The surviving energy companies have already put in place rigorous and unprecedented internal cost controls and continue to ‘right-size’ their organisations. Large-scale consolidation and internal restructurings are still works in progress, as other more cost-sensitive models are being explored, for example, outsourcing, partnerships and joint projects, among others. Generally, the market is still in the process of reinventing itself and adapting to the new environment. We have seen a shift in some areas of the market from large multinationals to medium-sized and smaller local companies focused on the optimisation of their existing developments and high value assets, among other things, through the search for innovation.

de la Flor: The Paris Agreement came into force in November 2016 and more than 150 governments have now put forward their proposed contributions. Momentum has continued into 2017, where the pace of change has continued to accelerate. A fundamental transformation of the world’s energy and industrial systems is under way. A decarbonised, decentralised and digitalised energy system is developing. Renewables are quickly becoming cheaper and more competitive. The emerging trend is clear and renewables will likely take over in many aspects. Furthermore, we are seeing large utilities increasingly utilising renewables for future expansion plans. In Europe, the key question is how to prepare the energy market for the energy system of the future.

Benitez: Alterations to the regulatory landscape, the continued low commodity price environment and the uptick in industry consolidation and M&A, relative to prior years, have been dominant factors over the past 12 months. The regulatory regime has continued to evolve, most notably following the Trump administration’s rollback of numerous regulations in the US, including in relation to the Clean Power Plan and the Paris Agreement. The persistence of the low commodity price environment has continued to command attention to financial discipline and de-levering. Also, given the ‘lower for longer’ price environment and the re-emergence of a substantial number of industry participants with right-sized balance sheets, many companies are in a better position to engage in M&A activity, relative to years past, and leadership is considering consolidation as a way to achieve scale and coveted cost synergies.

Hassan: The energy sector remains a dynamic environment. There are many themes from previous years that are continuing to play out, such as the ending of subsidies for certain technologies that have fallen out of favour and restructurings arising from, among other things, the strained balance sheets of a number of European utilities. Over the past year, the price of energy and the increased emphasis on system flexibility have come to the fore as key trends in the sector.

Alexander: In the US market, the key trends have been the increasing role that renewable generation has played in the market. In fact, for the first time since 1984, more electricity was generated by non-nuclear utility-scale renewables in April and May of 2017 than by nuclear power. Another recent development has been the inability of nuclear power to compete with other forms of power generation under the current energy framework. As a result, several states have or are considering implementing programmes to subsidise nuclear power in a manner that resembles some of the incentives in place for renewable power. For instance, New York and Illinois approved policies employing zero emissions credits (ZECs) for nuclear energy. ZECs are credits that would be given to nuclear plants that are similar to the renewable energy credits received by wind and solar projects. Likewise, several states are considering measures to modify existing renewable portfolio standards to include nuclear energy. This is further evidenced by the scrapping of two half-finished reactors in the state of South Carolina, which is causing concern for the future of the only other two reactors under construction in the US.

Through the middle of 2017, 14 states and the District of Columbia have enacted policies to encourage community solar with the trend increasing.
— Todd Alexander

FW: Could you provide an insight into how current energy prices are affecting the market, and how energy companies are responding?

de la Flor: Current energy prices are characterised by more volatility. Wind and solar continue to impact electricity prices. These renewable energy sources will soon reach grid parity across most nations in the world; they will most likely become the lowest cost generation resource, even without subsidies, as we have seen in the last two auctions in Spain to allocate newly installed capacity. Natural gas is also growing; according to the International Energy Agency (IEA), natural gas consumption will grow at an annual rate of 1.6 percent between 2016 and 2022. Natural gas is placing itself as a good ‘enabler’ for renewables integration, as well as a cost-efficient substitute for more polluting fuels, such as coal and oil.

Benitez: Low prices have triggered a wave of industry restructurings over the past two years, and this wave has continued in 2017. Fifty-eight percent of all US debt restructuring activity in the first half of 2017 originated from the energy and utilities industry. E&P producers have responded by utilising creative ways of obtaining financing that do not add leverage to their balance sheets, such as drilling participation arrangements – commonly called ‘drillcos’. In a drillco, an outside investor will agree to fund capital costs to drill and complete wells in exchange for an interest in the acreage required to produce from such wells, though this interest often reverts to the producer upon certain return thresholds being met. This investor often funds a portion of the producer’s costs, which allows producers to increase production without having to utilise their cash reserves.

Alexander: Power prices in the US have remained relatively low. In the renewables sector, we have seen developers and independent producers continue to pursue cost cutting measures in order to lower their prices even further. In the gas-fired power markets, we are seeing it become increasingly difficult for developers to raise equity for new projects. Most of the new gas-fired capacity in the US is financed partly on the expected receipt of capacity payments. These capacity payments have been declining in PJM, from approximately $100 per MW-day last year to approximately $76 per MW-day this year. PJM has been the most vibrant market for new gas-fired plants in the US.

Hassan: Current energy prices are historically low. The oil price remains low and refuses to settle to a new benchmark. Wholesale power prices also remain low, partly as a consequence of the oil & gas price, partly due to continued investment in generation with low marginal costs, such as renewables, and partly due to changes in electricity supply and demand patterns. Meanwhile, the government has threatened a price cap to deal with perceived high retail prices. The industry explains the apparent disparity by pointing to costs that arise, separate to the wholesale prices, including increased network charges, the increasing costs of subsidising low carbon generation and the cost of ensuring system security through the capacity market. The appointment of Dieter Helm, reportedly a ‘critic of renewable power’, to lead the recently announced cost of energy review is telling in this respect.

Keough: The current energy prices are resulting in little or no capital investment, continued consolidation and restructuring, with survival in mind. Commodity prices also define the political, legal and regulatory landscape and overall regulatory competitiveness of Canadian jurisdictions. Overall, the energy environment is still volatile and highly dependent on the price of the day, which is hardly inviting to any strategic and long-term decisions. Given their links to the energy sector, the utility companies are experiencing the domino effect of what is going on in the energy marketplace, as their capital budgets have been materially reduced, from an annual spend of over a billion per year just a short time ago to only a fraction of that amount in the current environment.

FW: How are energy policies and the overall geopolitical landscape influencing boardroom thinking among energy & utilities companies?

Benitez: Continually shifting energy policies and a schizophrenic geopolitical landscape have forced boards to adapt quickly to the flavour of the moment, and the cycle times for reacting, planning and executing have gotten compressed. The interrelation between coal and natural gas is a prime example. While the Trump administration has sought to reverse the prior administration’s war on coal, the reality of low natural gas prices, among other things, has blunted the incentive for utilities to invest in coal-fired power plants. However, concerns related to the geological impact of fracking and potential restrictions thereon have the potential to impact natural gas supplies, which could ultimately leave the door open for alternative fuel sources, such as coal.

Keough: In the current Canadian political and regulatory landscape, it is increasingly difficult to permit and build key infrastructure projects and newly elected provincial governments are not making it easier for major initiatives to be completed. There is a clear need for all levels of government to ensure that their overall energy policies allow Canada to maintain a competitive edge and attract the significant capital investment that is needed, before it goes elsewhere. Unfortunately, that is not the case. Current government policy, for example, carbon tax, emission caps, escalated coal phase out, certain renewable energy incentives, and so on, could potentially distort the playing field, increase project costs and result in delays.

Hassan: The energy policy landscape is stubbornly volatile and lacks consistency over even medium term timeframes. While president Trump’s decision to withdraw from the Paris Accord does not directly affect UK policy, it creates a mood in which backtracking away from previous commitments is considered politically acceptable. Uncertainties in the policy landscape translate into uncertainty in the boardroom, driving decisions with short-term returns or those that have some specific arrangement to facilitate investment decisions.

de la Flor: From a European policy perspective, the Clean Energy Partnership (CEP) is bringing a revolution and a new energy market design, which will have a significant impact on energy & utilities companies not only from the electricity sector. This is the main energy policy development that will affect the market in the mid-term. It would not be strange to see CEOs and some other senior officers from large energy companies meeting with EU policymakers to discuss the CEP. The CEP is not only bringing an electricity market design, but is also targeting a reduction of CO2 emissions, an increase in renewables and in energy efficiency by 2030. With regard to the overall geopolitical landscape, Russia and the US are probably the main factors for the European energy market.

We continue to witness an increasing focus on environmental consciousness within developed areas of the world.
— William J. Benitez

FW: Have there been any recent legal or regulatory changes that are likely to have a major impact on this sector? How should companies go about tackling the challenges posed by regulatory uncertainty?

Hassan: In reality, the major legal and regulatory changes took place in the UK a few years ago when electricity market reforms were initiated and first implemented through investment contracts. These facilitated large investments, such as the world’s largest infrastructure project – Hinkley Point C. Since then, there have been countless legal and regulatory changes, and while many of them represent a change of direction, companies have had to deal with regulatory interventions by working within the framework prescribed by the Electricity Market Reform (EMR) programme. The resulting mish-mash of rules and interventions can be hard to navigate for the uninitiated. In the absence of a change of government, which would seem to remain on the cards until Brexit finally plays out, there seems little appetite for a wholesale reconfiguring of the sector to bring clarity and consistency to the framework.

Alexander: One regulatory change in the US has been the move to Time-of-Use pricing (TUC) in several states. Two recent examples include Hawaii and California, both states with relatively high rates of solar generation. The Hawaii policy has received some criticism as it offers the lowest electricity prices during the middle of the day when solar generation is at its peak, lowering incentives for solar development. Through the middle of 2017, 14 states and the District of Columbia have enacted policies to encourage community solar with the trend increasing. While only 102 MW of community solar have been developed as of 2016, as much as 1.5 GW is expected by 2020. One state making big changes is Illinois, whose community solar policies will go into effect in 2018 with the goal of procuring 400 MW of solar by 2030. The Suniva bankruptcy case involves a US-based solar panel manufacturer, which declared bankruptcy in April. Shortly after, Suniva filed a petition under the 1974 Trade Act claiming that imported solar panels had caused “significant harm” to American solar manufacturing and asking for tariffs to be placed on imported solar panels. Suniva alleges that foreign manufacturers had shifted production from China to other countries in order to avoid anti-dumping duties on Chinese imports. If the requested tariffs are approved, estimates are that solar installations would be cut roughly in half.

de la Flor: The CEP was published by the European Commission in November 2016 and is now being discussed in the European Parliament and Council for later approval. The CEP is made up of nine legislative proposals and seven non-legislative documents, covering energy efficiency, renewable energy, electricity market redesign, governance rules for the Energy Union, energy security and eco-design. Additionally, the Commission outlines how it wishes to support innovation in the clean energy sector, and how to accelerate building renovation. The initiative set the framework to allow citizens to benefit from decentralised energy production. The CEP has been at the forefront of the recent regulatory changes affecting the energy sector. Energy utilities should understand the importance of contributing to the EU regulatory development from the beginning, following the legislative process, assessing the possible implications and thinking of a strategic way to contribute within a time period of at least two to five years.

Keough: The Canadian federal government is conducting a public consultation on system-wide changes to the environmental assessment process, National Energy Board framework and environmental requirements, which could significantly change the regulatory landscape by the end of 2017. The resultant uncertainty and potential added timelines and legal risks to regulatory processes are not good for project development initiatives. On a positive note, the Supreme Court of Canada has recently released a number of important decisions on the duty to consult with indigenous peoples, which has provided clarity that the regulatory review process will be a fundamental element of consultation. There are also concerning trends on the utility side, for example, the scope of the utility asset disposition line of decisions, which continues to expand, with a review of utilisation rates of newly built operational assets on the horizon. The resultant risks of stranded assets and decreasing rates of return are also of concern.

Benitez: The Trump administration’s focus on creating energy independence and establishing a minimalist regulatory regime has resulted in a number of changes that could have a substantial long-term impact, including approving permits for the controversial Keystone XL and Dakota Access pipeline systems and withdrawing from the Paris climate accord. These changes signal that, at least for the next three and a half years, energy and utility industry participants can generally expect a lower level of federal scrutiny, relative to prior regimes. On the other hand, environmental groups and citizens have pressured local governments to enact restrictions, such as fracking bans, that can often impact such participants in a very meaningful way regardless of who is in the White House.

FW: With regard to current energy security and supply issues, what steps are being taken to ensure that companies have the ability to satisfy long-term demand and deliver energy security, affordability and sustainability?

de la Flor: Energy companies rely on large energy suppliers to satisfy their long-term demand. Energy policies and regulations, such as the expected revised EU regulation on security of gas supply, are promoting higher diversification of suppliers and origins as a way to increase security of supply. LNG is certainly playing a major role in energy security; it can be seen in countries such as Lithuania and Poland, where LNG brings more supply competition against traditional, dominant Russian gas supplies. When it comes to energy affordability, the most sought after solution is to develop liquid and competitive energy markets, with a high level of supply diversification and supply competition and where energy can flow freely across the borders without barriers. This is the best recipe to ensure competitive and affordable energy prices.

Keough: The focus on long-term energy security is significantly diminished. Many energy players in Canada are concerned about day-to-day survival as opposed to any sort of long-term security, which has become a casualty of the current economic environment. Companies have been deferring their E&P programmes for years and they will need to eventually catch up in that department to bring their resource levels to a healthy margin. The steps that need to be taken by the federal and provincial governments, in the context of clear, consistent and long-term energy policies, need to be fully aligned with our partners in the US and Europe.

Benitez: At a macro level, Trump’s ‘America First’ energy policies are ostensibly aimed at securing energy independence. While it remains to be seen whether these efforts will bear fruit, there are several market innovations that have already aided this cause and will continue to do so. Two such innovations are the continuous improvements with regard to drilling and fracking technology and alternative energy sources, including battery storage and solar efficiencies. Not only have these innovations benefited the US in its long-term goal to become energy independent, they have provided the energy and utility industry with important mechanisms to improve efficiency and ultimately drive down cost.

Hassan: The chimeric energy ‘trilemma’ of security, affordability and sustainability remains the touchstone of all policy proposals. The electricity market programme introduced three measures to drive the three aspects. For the UK’s electricity security, we have the capacity market auctions, supplemented by ad hoc measures and infrastructure projects such as cross-border interconnectors. For sustainability, we have the contracts for difference regime, which is currently through allocation round two, and anticipated allocation round three, looking to catalyse a new wave of renewables investment. For affordability, we have the levy control framework which, in broad terms, monitors and places controls on the amounts in consumer bills that relate to the funding of the other two limbs of the trilemma.

According to the IEA, the renewable power forecast is expected to grow by 36 percent between 2015 and 2021, making it the fastest-growing source of electricity.
— Francisco de la Flor

FW: Could you outline the evolving balance between traditional fossil fuels and clean alternative energy? Are energy & utilities companies proactively addressing environmental concerns arising from their operations?

Alexander: According to the Energy Information Administration (EIA), more than 60 percent of all utility-scale electricity generating capacity that came online in 2016 was from wind and solar technologies. Solar, not including distributed solar, specifically was the top new source of generating capacity. Between March 2016 and March 2017, wind generation increased by 16 percent, and solar generation increased by 65 percent. On the other hand, no new coal plants were added in 2016. Natural gas is still an important piece of the market and came in second behind solar for added generation in 2016.

Hassan: We hear more and more frequently in the press how, on certain days or over certain periods, renewables are displacing fossil fuel generation. That trend looks unlikely to reverse in the short term. Most energy & utilities companies would like to do even more to further the trend and address environmental concerns, provided that these are also sound for the future financial health of their organisation. In practice, even for thermal plant investment, environmental considerations have become a paramount consideration for most utilities in the UK. They have also had to deal with the consequences of the changes to the system, including the increasing difficulties in predicting prices and balancing the system.

Benitez: It remains a slow but ever-increasing rate of evolution, as clean alternative energy sources make progress toward cost-efficiency and scale, and industry participants diversify their portfolios. Alternative sources will continue to be pursued and developed, but the importance of fossil fuels is not going to dissipate anytime soon given the incredible amount of investment that has been, and continues to be, made across the value chain. That being said, and notwithstanding the interference that some might attribute to the Trump administration’s policies, we continue to witness an increasing focus on environmental consciousness within developed areas of the world.

Keough: The balance is gradually shifting toward renewable energy, with multiple coal phase out programmes and parallel renewable incentives offered by both federal and provincial governments. However, it is important to ensure that the change in the Canadian energy mix is properly structured and does not result in excessive costs, protracted litigation or other negative consequences. On the environmental end, there is a strong need for increased efficiencies and technological innovation to comply with tougher environmental requirements and reduce the overall environmental footprint of energy facilities. Companies no longer have a choice but to address the environmental issues at all levels of their operations, with a particular focus on end-of-life liabilities, which have become critical given the aging infrastructure and the number of entities entering the insolvency process.

de la Flor: All energy sources have a bigger or smaller role in the energy mix. According to the IEA, the renewable power forecast is expected to grow by 36 percent between 2015 and 2021, making it the fastest-growing source of electricity. Companies such as Google, Amazon and Ikea are now being supplied with 100 percent renewable electricity. The future energy mix will have more variable renewable energy (VRES) but the other energy technologies will also have their share of the market. Natural gas and LNG contribute to decarbonising the economy, also when being used as fuel for the transportation sector, for example, maritime transport and heavy-duty vehicles. Switching from coal to gas could immediately reduce CO2 emissions by 50 percent and could simultaneously improve air quality by reducing emissions of NOx, SOx and other particles.

FW: In what ways are energy & utilities companies embracing advancing technology? Are you aware of any disruptive, game-changing innovations on the horizon?

Benitez: On the power side, grid modernisation is a fascinating area, particularly when one considers this modernisation in the historical context. Nowadays, as innovations related to solar, electric cars, microgrids and storage are becoming mainstream, distribution systems have been forced to adopt enhanced technologies and market-based business models. Storage, in particular, comes to mind as a technology that could be particularly disruptive when you consider its potential, among other things, as a replacement for fossil fuel peaker plants. Overall, the adaptations that these innovations have driven are generating new business models and revenue sources for utilities, though there is a healthy learning curve associated with them.

Keough: All energy market players have fully embraced advancing technology, in particular, as the key requirement to succeed in the current oil price environment. The values of innovation have been embraced by all segments of the market, small and large, as more projects are converted from pilot to commercial. In the oil and gas context, it is the use of innovative technologies to increase well productivity, cogeneration, carbon capture and storage and production of bio-fuels,  satellites and drones to survey and inspect pipelines, use of polymer materials for pipeline construction to improve corrosion resistance and prevent spills, and so on. On the utility side, there is a focus on energy efficiency and grid initiatives, including energy storage, renewable and distributed generation, smart metering and other advanced technologies.

de la Flor: Energy and utility companies are adapting their energy mix, adding more renewable energy to their portfolios and also pushing for more energy efficiency, even if this might be seen as a paradox. The main issue with electricity is storage. Some people are expecting an immediate breakthrough, but most probably it will remain very expensive for a long period. Today, storing energy in the form of gas costs of around €2 per MWh gas, while the cost of storing electricity is €3000 per MWh. A game changing technology could be power-to-gas, which converts renewable electricity into hydrogen or synthetic methane to be injected and stored into the gas system.

Hassan: As was recently noted by a number of former CEOs of major energy companies, namely Ian Marchant, formerly of SSE, Steve Holliday, formerly of National Grid and Volker Beckers, formerly of RWE NPower, technology poses an existential threat to the current utility model. New players could sidestep or leapfrog existing utilities as disruptive technologies allow more agile players to compete with the behemoths of the sector. Whether this analysis is accurate is difficult to prove, but a precautionary approach would seem sensible, given the experience of companies such as Blockbuster and RIM Blackberry. AI, internet based platforms, lean electricity suppliers with few employees and blockchain are just a few recent disruptive innovations. In the meantime, those with sunk costs, such as large CCGTs and other merchant infrastructure will need to adapt and fight their corner to ensure that the rules of the game do not change too quickly and leave their investments stranded.

Alexander: Battery storage is starting to become a factor. California is the leader with its 1.325 GW procurement target for battery storage by 2020 and multiple large utility-scale deals already signed. Other states have also acted, however. Oregon is aiming for its two dominant electricity providers to have a minimum of 5 MWh of battery storage by 2020, Massachusetts just set a 200 MWh battery storage target for 2020 and New York City has set a 100 MWh target for 2020. Tesla meanwhile just completed a 52 MWh battery storage project in Hawaii coupled with a large solar project. Likewise, Tesla recently announced a partnership to pair a 40 MWh battery storage system with the planned 144 MW Revolution Wind offshore wind project off of Massachusetts. As prices for battery storage continue to decrease, I expect the deployment of utility-scale battery projects to continue to grow. Some are projecting that battery storage prices could be as low as $200 per kilowatt-hour by 2020, half of what they were a few months ago and $160 per-kilowatt-hour or less by 2025.

New players could sidestep or leapfrog existing utilities as disruptive technologies allow more agile players to compete with the behemoths of the sector.
— Munir Hassan

FW: How would you describe recent bankruptcy and restructuring trends in this sector? What insights can we gain from recent cases?

de la Flor: In Europe, leading utilities, such as E.ON, Engie and RWE have seen their share prices half over the last five years. In stark contrast, the share prices of Enel, Iberdrola and EDP have doubled. They have done so largely thanks to their focus on renewables. After the break-up of EON and RWE, which established Uniper and Innogy respectively, industry players believe that more restructuring operations might be required in order to adapt to the accelerating shift toward renewable energy.

Hassan: In the supply market, GB Energy’s collapse in December 2016 brought about the predicted insolvency of a GB retailer. And it is unlikely to be the last, given the pace of change in the retail sector at present. Ofgem triggered the supplier of last resort arrangements and GB Energy’s customers were left on deemed contracts that most would sensibly have switched away from. Insolvencies have also been triggered in the generation sector where some projects have struggled to achieve a viable financial model. Some of these have arisen from the closure of subsidies to solar power, which triggered a wave of financial woes across supply chains that had overcommitted. One insight is perhaps that energy is a long game for the larger players, but a much riskier game for many independents looking for short-term returns that seize the opportunity or cut and run to other sectors or countries if there is an adverse change in conditions.

Keough: As it becomes clear that there is no reasonable likelihood of a fast rebound in commodity prices, high-price producers will struggle to survive and more well-established market players will consider various restructuring and insolvency options. We have seen a general uptick in oil & gas companies undergoing court-monitored restructuring and other insolvency proceedings. The recent case law also indicates that the end-of-life liabilities have become critical with respect to the abandonment and reclamation obligations in the bankruptcy and insolvency context.

Alexander: In the US, the Suniva bankruptcy was quickly followed by SolarWorld, the largest US solar manufacturer, which also joined the Suniva tariff petition. Domestic manufacturers have been continually losing market share, dropping to just 11 percent in 2016 from 17.1 percent in 2015. A lot rests on the outcome of the Suniva/SolarWorld petition. If the requested tariffs are put in place, it will be a big break for domestic solar panel manufacturers, much like the 2012 anti-dumping tariffs placed on Chinese and Taiwanese manufacturers were. However, the proposed tariffs will put a lot of pressure on developers and installers which have grown quickly and have benefited from the continuous declines in solar panel prices.

Benitez: Given the capital-intensive nature of the industry and the ‘lower for longer’ price environment that has eliminated the economic runways for many over-levered participants, we have continued to witness robust restructuring activity in the space, both inside and outside of court. Our expectation is that this trend will continue in the foreseeable future, as long as prices remain near current levels. In terms of case law that has arisen during this most recent restructuring wave, among the most interesting developments were those related to the rejection of midstream contracts under Sabine, which initially sparked fear among many that the ruling would lead to disastrous consequences for midstream operators, vis-à-vis their upstream counterparts. The Sabine decision has had a tangible impact on the ways in which midstream arrangements are negotiated and memorialised.

FW: What are some of the prominent factors driving mergers & acquisitions (M&A) in the energy & utilities sector? What are your expectations for dealmaking activity through 2017 and into 2018?

Keough: The reality of the current marketplace is that many energy companies can no longer survive on their own. At the same time, they are starting to realise that they are worth only what the market is prepared to pay for them. As a result, the delta between the resource evaluations and how buyers view the value of the target will become more reasonable. In the energy context, we have seen a shift from mega-projects to less capital-intensive projects in conventional oil, liquids and natural gas in Northeast British Columbia, Central Alberta and Texas. The Western Canadian Sedimentary Basin, including the Duvernay and Montney plays, are world-class resource opportunities, which will continue to attract investment in the long run.

Hassan: The diversity of the energy sector plays out in deal activity. At one end, there is a ‘flight to safety’ mindset driving huge transactions in the utilities sector. This was seen in the purchase from National Grid plc of a 61 percent equity interest in its UK gas distribution business to a consortium including Macquarie, Allianz, Hermes, CIC of China, Qatar Investment Authority, Dalmore and Amber. We also see this trend in the offshore transmission sector. There is also significant deal activity around development projects, particularly as these reach major milestones, such as consenting, CFD or capacity market award, financial close or commercial operation. Separately, the need to recycle capital means that the secondary market has been heavily active, with solar and onshore wind portfolios prominently in the mix.

Benitez: We have witnessed enormous demand from private capital sources seeking to invest in energy and utility targets. Part of this demand stems from the overhang related to the slowed M&A period that initially followed the commodity price downturn, while another prominent factor is the large number of new capital sources which view the current price environment as a terrific buying opportunity. As such, there is often tremendous competition for transactions, as capital providers seek to put their dry powder to work. We expect activity through 2017 and 2018 will continue to grow moderately as prices stabilise and sellers accept that lower prices are here to stay for the foreseeable future.

de la Flor: The global utilities and energy infrastructure sector, driven in large part by financial investors, is changing very quickly. The amount of funds involved in energy deals reached a record high of $355bn in 2016, and the trend promises to accelerate. In Europe, unbundling rules have resulted in new value chain segments and new players, which were previously integrated. This is particularly relevant now that investment funds are getting more and more active within the energy sector, positioning themselves along the energy value chain. Investors are attracted by low company valuations in Europe. Market capitalisations of European utilities have decreased from pre-financial crisis all time highs to all time lows, with the basement probably not yet reached.

As it becomes clear that there is no reasonable likelihood of a fast rebound in commodity prices, high-price producers will struggle to survive.
— Loyola Keough

FW: Do you expect to see a more open and competitive energy & utilities market in the years to come? Do companies need to prepare for greater competition from firms outside the sector?

Hassan: It is difficult to generalise. In some segments, competition has become fierce. The electricity retail sector, for example, has seen new suppliers setting up, often speedily through a ‘supplier in a box’ arrangement and bringing new ways of targeting the sector to disrupt the existing market. Similarly, the competition for contracts for differences through allocation round two is expected to drive low-strike prices for new projects. These changes are not new, and the existing diversity in the sector is likely to lead to fewer completely fresh players than previous years. It seems more likely that competition will lead to increasing consolidation than new entries into the market.

Benitez: We do expect to see the market become more open. The US recently lifted the four decade long ban on domestic companies exporting surplus crude oil, which is a step toward more open and competitive markets and one that few would have predicted just a few years ago. We have also seen a number of clients make investments in connection with the energy deregulation efforts in Mexico. As with most efforts to deregulate, the early results have been mixed and there are distinct advantages to the companies operating on their home turf, although opening markets to outsiders and the introduction of new competitors clearly poses a long-term threat that incumbents will need to take into account.

de la Flor: More open and competitive markets are expected in the years to come. This trend is part of EU energy policy and EU regulation will continue to move the market into that direction. The CEP will facilitate the entry of new players into the energy market, and as the energy sector becomes more digitalised, competitors from outside the sector will also begin to compete. New roles, such as aggregators, energy storage operators, data hub managers, prosumers, energy communities and others, will also compete against traditional incumbents. As the energy market becomes more global, players from other continents will also find easier ways to compete in new regions.

Keough: With the increased focus on consolidation and optimisation of existing resources, the energy space has fewer players and the new low price ‘rules of engagement’ further tighten the competitive market. However, the issue of regulatory competitiveness is external to Alberta and Canada as we compete with international jurisdictions for the same pool of energy capital. Our current, less than competitive political and regulatory environment could hamper Canada’s ability to compete internationally, with LNG projects in British Columbia being the prime example.

FW: Looking ahead, what issues and challenges are likely to be high on the boardroom agenda for energy & utilities companies?

Alexander: Battery storage, distributed generation and microgrids are all going to be things to keep in mind moving forward, especially if states push beneficial regulatory policies and investment targets. Some big challenges for renewable energy moving forward, however, will be continued low gas prices and potential tax changes. Natural gas prices in 2016 were the lowest they have been in 20 years. These low prices helped push a new high for the use of natural gas in electricity generation in 2016, a trend that is likely to continue and has had the effect of depressing wholesale power prices in general. Separately, potential changes in the tax code could have a big effect on new electricity generation investment. For example, renewables have benefitted from tax credits and from favourable accelerated and bonus depreciation qualifications.

Benitez: A number of companies have dedicated substantial resources to cyber security, and this is an area that boards will increasingly focus on, in light of recent developments. Given the sensitive nature of the underlying assets of many industry participants, such as nuclear power providers and utility grids, to name a few, the downside risks of an issue on this front can be severe. Moreover, the recent wave of ransomware attacks that affected millions of users worldwide and, in many cases, shut down critical infrastructure, was a warning to many. Further, the well-publicised hacking efforts by state-sponsored actors such as Russia, China and North Korea ensure that cyber security will be an item on board agendas for the foreseeable future.

de la Flor: Some of the issues which will be high on the agenda of energy & utilities companies are related to the implementation of the COP21 and the national determined contributions of each country. In terms of EU energy policy, energy companies will likely discuss the impact of targets for decarbonisation, energy efficiency, renewables and interconnections for 2030. The revised EU 2050 roadmap is also going to be important, as well as the ETS price, the deployment of alternative fuels, such as CNG or LNG, and the use of gas in the transport sector, the development of biomethane and other new technologies.

Keough: The Canadian energy & utilities sector is resilient, adaptable and focused on getting the job done. The decreased volatility in commodity prices, continued review of the bottom line and strong emphasis on regulatory competitiveness will help Canada compete internationally with other resource-rich jurisdictions around the world. The energy & utilities companies have already learned, or will quickly learn, what they can and cannot do in this constrained and extremely competitive space. At that time, the companies will be prepared to consider capital investment and we could well see some modest growth across the energy market as opposed to current isolated pockets of recovery.

Hassan: Looking at immediate issues and challenges beyond those already discussed, cyber security concerns remain high up the list of energy companies, as does the potentially disruptive impact of new technologies, such as AI, blockchain and others, on existing ways of doing business. On a different vein, the sector has remained largely passive on Brexit, beyond repeating some standard tropes on wanting continued access to the single market and business continuity. As the deadline approaches, businesses will need to consider issues with more granularity and also more specificity to their organisation.


Loyola Keough acts for utility companies, pipelines and project developers, industry associations, gas buyers, producers and banks. He has particular experience in oil, gas, electricity, liquefied natural gas (LNG) and compressed natural gas (CNG) matters. He appears before the National Energy Board (NEB), the Alberta Utilities Commission and the Alberta Energy Regulator, as well as the British Columbia Utilities Commission and the public utilities boards of the Yukon and Northwest Territories. He can be contacted on +1 (403) 298 3429 or by email:

Munir Hassan is head of clean energy at CMS, responsible for the firm’s strategy on conventional and clean power generation transactions and projects. Over the past 20 years, Mr Hassan has advised extensively on numerous power sector M&A transactions, across the whole range of power sector technologies, including, gas, coal, nuclear, offshore and onshore wind, solar and emerging technologies, electricity sector restructurings, fuel supply arrangements, energy networks, trading arrangements and wholesale and retail supply and trading issues. He can be contacted on +44 (0)20 7367 2046 or by email:

Francisco de la Flor is the director of international regulatory affairs at Enagás. Since 2002, he has been responsible for the relationship with the national, international and European regulatory authorities, institutions, associations and bodies, dealing with regulatory developments within the gas industry. He has more than 30 years experience in the natural gas business in different companies and positions. His current 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:

Bill Benitez is a partner in the Houston office of Kirkland & Ellis LLP. His practice concentrates on complex business transactions in the energy industry, including mergers and acquisitions, private equity and venture capital investments, leveraged buyouts, recapitalisations, executive compensation and equity incentive arrangements, and related general corporate counselling. He has worked on transactions in a variety of energy industry segments, including upstream, transportation and midstream, renewables and clean energy and power generation. He can be contacted on +1 (713) 836 3665 or by email:

Todd Alexander’s practice includes representing developers of and lenders to energy-related projects, including solar, wind, hydro, biomass, biofuel, fertiliser, desalinisation and clean coal facilities. He has participated in limited recourse financings in the US, Latin America, Asia and Africa. He has represented both the sellers and purchasers of ownership interests in several power projects and biofuel facilities. He can be contacted on +1 (212) 408 5269 or by email:

© Financier Worldwide



Loyola Keough

Bennett Jones


Munir Hassan

CMS Cameron McKenna Nabarro Olswang LLP


Francisco de la Flor



William J. Benitez

Kirkland & Ellis LLP


Todd Alexander

Norton Rose Fulbright US LLP

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