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Utility deals resume after 18 months of austerity.

Fortnightly Magazine - October 2010

safety-valve provisions to RPS mandates that don’t already have them, with language protecting consumers from costs that exceed a defined figure.

At the same time, however, the U.S. Congress is once again contemplating a national RES, which could remove some of the perennial uncertainty and patchwork policies that have stunted the growth of renewables. But even if such legislation can make it to the finish line during the coming lame-duck session, renewable energy developers still face the near-term challenge of competing in a market seemingly flooded with cheap gas.

“Prices for renewable energy are going down, especially for solar PV. But still, natural gas is a big hurdle to overcome,” Cohen says. “Without a big stimulus it will be a struggle for a lot of renewable energy deals, especially smaller projects.” The same can be said for the developers in the market; the coming down cycle could consolidate the business, with better capitalized players acquiring those that can’t find financing to continue development.

On the other hand, low gas prices—along with declining coal-fired capacity and continued transmission constraints—are setting the stage for a boom in construction of combined-cycle gas turbine (CCGT) power plants, particularly given the long lead time for other base-load construction options, such as nuclear and coal gasification.

“When the economy rebounds, electricity demand likely will be right back where it was before the recession,” Napolitano says. “Many coal plants have fallen out of the queue, and something needs to fill the gap. At today’s prices, that something is CCGT.”

The most recent EIA Annual Energy Outlook anticipates more than 20 GW will be built through 2020, and by some estimates more than half that amount already has begun development. Because they’re so competitive in an environmentally constrained power market, gas-fired projects are well positioned to obtain financing, whether they’re built within the utility rate base or an unregulated portfolio.

“The project financing market has re-opened,” Nastro says. “Liquidity has improved substantially in the capital markets, as project investors seek new and diversified asset classes. And as a result, clean energy is dominating the project debt pipeline.”

M&A Synergy

The same market trends that favor construction of new CCGT plants also make existing gas-fired capacity more attractive; the previous glut of gas-fired power seems likely to disappear in many regions as more coal plants retire and as electricity consumption rises. And indeed, many recent M&A transactions have revolved around existing gas-turbine capacity—including individual plants and also entire portfolios. Examples include Constellation’s offer to acquire the bankrupt Boston Generating; Blackstone’s planned acquisition of Dynegy and subsequent sale of several gas-fired plants to NRG; and Calpine’s $1.65 billion buyout of the former Conectiv generating assets owned by PEPCO.

“We’re seeing acquisitions happen where it’s cheaper to buy than build,” says John McConomy, a lead partner at Pricewaterhouse Coopers LLP. “We’ll see a significant number of merchant plant sales in the next 15 months or so. This is driven by timing. When the economy went bad, commodity prices and industrial demand went down, and the owners of plants that were only five or