The year 2014 will be remembered as the year the United States took action to reduce carbon emissions, improve climate, and preserve our way of life. President Obama recently announced an agreement with China to cut carbon emissions – this is a significant accomplishment, many years in the making, brought about in part by the US’ very public effort to curb carbon emissions – the walk is now matching the talk. The President’s Clean Power Plan (CPP) issued by EPA provides the cover and support for the US’ commitment to reducing carbon emissions. Absent CPP, it is not clear that other countries would have accepted the serious intent of the US to control carbon emissions.
While there are many ways for the US and impacted parties to comply with section 111(d) of the Clean Air Act (Clean Power Plan) one key opportunity is through mergers and acquisitions (M&A).
The utilities M&A market is heating up. It is poised to grow strongly in the next couple of years. In addition to shopping for higher equity returns by purchasing assets in more generous states or investing in projects requiring federal rather than state regulatory oversight, utilities are looking at assets that could help them comply with CPP at a lower cost. In some instances, with proper due diligence, utilities can find M&A assets that enable them to comply with CPP state implementation plans at a lower cost than investing in service area mitigation strategies.
The US utilities sector experienced a flurry of deals in the past year; the Exelon/Pepco and Wisconsin/Integrys Energy mergers; Fortis (Canadian) purchase of Central Hudson Gas & Electric earlier this year; National Grid divesting its New Hampshire electric business; NextEra’s purchase of Hawaiian Electric; and New Jersey-based Public Service Enterprise Group (PSEG) looking for potential M&A partners. Utilities are now shopping for value.
In addition to direct investment in service area energy efficiency, demand management and renewable energy, utilities should look at different power plant dispatch algorithms and M&A opportunities. You will see examples in the newsletter of utilities taking advantage of such opportunities. The lowest cost and most effective means complying with CPP might be outside of your service area. Working with state regulators, you can help ensure the strategies required are most cost-effective and produce fair and reasonable returns to shareholders.