Power companies, investors see plenty of pathways to finance energy transition

With no shortage of capital chasing the nation's energy transition, power and utility executives at the S&P Global Market Intelligence Power and Gas M&A Symposium said balancing system needs and investor expectations is complex but necessary.

"We're living the challenges that I think the country is going to face as we try to transition and balance affordability for electricity along with reliability and emissions," Vistra Corp. CEO Curtis Morgan said at the March 30 event in New York.

The Irving, Texas-headquartered power provider plans to add about 5,000 MW of solar and battery storage to its project pipeline by 2026. Vistra, which also owns the 2,460-MW Comanche Peak nuclear plant in Texas, is targeting net-zero carbon emissions by 2050 and has announced the retirement of the majority of its coal fleet.

During an executive roundtable, Morgan said decarbonizing the economy is "an honorable endeavor" but will be challenging and "an expensive proposition."

Antonio Smyth, senior vice president of grid solutions at American Electric Power Co. Inc., pointed out that about $8 billion of the Ohio-headquartered investor-owned utility's $38 billion capital plan is focused on regulated renewables, with most of the remaining funds earmarked for its wires business.

"The system needs to evolve, not only from a generation perspective but from a wires perspective as well," Smyth said.

American Electric Power plans to add more than 16,500 MW of renewable capacity from 2021 to 2030, with about 10,000 MW proposed through 2025.

"From a sustainability and climate perspective, from a reliability perspective, there is a cost to not doing this and it's likely very, very large," Smyth said. "We need to get the pace right."

Ben Wilson, chief strategy and external affairs officer at London-headquartered National Grid PLC, said the company, which has electric and natural gas utility operations in the U.S. Northeast and New York, sees strong potential in offshore wind and eventually hydrogen.

"Once we get above that 20 GW of offshore wind in New York, we are going to need hydrogen," Wilson said. "Otherwise, the economics of that offshore wind is not going to stack up. We see our offshore wind in the future being used off-peak to make green hydrogen."

Mitsubishi Power Americas Inc. is working on projects throughout the U.S. that showcase the potential for green and blue hydrogen, according to company President and CEO Bill Newsom.

"We'll start that hydrogen economy in the next five years," Newsom said.

Opportunities for growth

As the sector transitions, companies with exposure to competitive markets and unregulated generation are off-loading assets in pursuit of more predictable returns.

AEP launched a process Feb. 24 to sell all or a portion of subsidiary AEP Renewables' 1,600-MW competitive contracted renewables portfolio, while Public Service Enterprise Group Inc. unloaded its fossil fuel-powered generating portfolio to ArcLight Capital Partners LLC in two transactions that closed in February.

Morgan signaled Vistra would likely stay on the sidelines of such asset sales.

"There are opportunities for us, but they are very different," Morgan said. "We're not interested in adding a lot of fossil fuels to our portfolio, which is what has been predominantly spun off or sold."

But the logic behind these transactions, particularly for regulated utilities, is clear, according to Morgan: "Get out of the low-multiple business and put money into the high-multiple business. It's not rocket science."

Vistra plans to grow its renewables footprint by placing solar and batteries at power plant sites with existing transmission.

"From an M&A standpoint right now, the development platforms on the renewable front are white-hot, they're expensive and we're not interested in them," Morgan said.

Private money, consolidation

George Bilicic, vice chairman and global head of power, energy and infrastructure investment banking at Lazard Ltd., said on a separate panel that utilities represent "the best way to invest in the energy transition on a risk-adjusted basis."

Bilicic and other investment bankers signaled they expect one large take-private transaction by a group of infrastructure funds in the utility and power space in 2022, though Morgan does not think Vistra will be the candidate.

"We're just too big. No one can write the single check," Morgan said. "There is some industrial logic around it at the end of the day to be a private entity. But I've been in private equity and it's no panacea. You still have to create value the old-fashioned way. It's not like you go over there and everything turns to gold."

Whether driven by activism or the search for growth, the sector is expected to see more consolidation, with bankers indicating that smaller companies are not necessarily more vulnerable than larger ones.

"There is plenty of dedicated capital to keep this space growing and thriving," Jeffrey Holzschuh, chairman of the institutional securities and global power and utility groups at Morgan Stanley, said during a panel discussion on the M&A landscape. "There [are] 40 publicly traded utilities right now, down from a couple hundred. There will be less."

Joseph Sauvage, vice chairman and global head of the power group at Citigroup Inc., said that while "scale may be valuable ... well-run companies are going to end up fine."

"It's very hard to think about a major strategic initiative or change of control of a company during times of high volatility," said Raymond Wood, managing director and head of the global natural resources group at Bank of America Securities.

Still, Wood said the firm does not "necessarily think M&A is going to be frozen because of volatility in Europe or commodity prices."

"It's actually going to be relatively active," Holzschuh predicted. "It's just not going to be whole company into whole company."

Sauvage said most companies are now highly receptive to looking at their business as a portfolio of assets.

"I think you're going to see companies continue to simplify their business models," Sauvage said.

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