Once rules become final, compliance with the EPA’s Clean Power Plan (CPP) will provide some very interesting opportunities to states, energy service providers, and power generators. When viewed in retrospect, government regulations have always driven innovation and new business opportunities. This is when being a bit ahead of the market pays dividends.
Many generation owners and YieldCo’s - companies formed to own generation assets to produce predictable cash flows, similar to Real Estate Investment Trusts (REITs) - are busy valuing their portfolios and beginning to place their bets, given the predictability of CPP implementation. Balancing asset portfolios is more uncertain and more important now than ever before. Low natural gas prices and pending carbon regulations, coupled with an aging electricity infrastructure and need for new generation and transmission & distribution system investments to meet demand growth, produce abounding opportunities. For investors looking to divest their portfolio of coal, there are investors looking to buy coal generation. Meeting CPP requirements will take time. Investors looking to sell have a pessimistic view of the earnings potential from owning coal generation and see opportunities in cleaner and more sustainable energy supply resources. Others believe CPP compliance will take some time and that natural gas prices will not remain low forever. Coal generation will then once again be in the money. Even if this is short lived, it will likely be long enough to recoup investments and required returns, while technology continues to improve and innovations are brought to market.
One thing is certain: carbon regulations are imminent. Flexibility and adaptability are crucial in today’s market. The energy industry is very capital intensive, and project development takes time. Committing too soon to investment and asset strategies can be just as problematic as waiting too long to commit. The best approach is balancing the need to comply with regulations by placing near-term bets with a longer-term view of the industry and markets. Watch the bigger players and follow the money. Yield Co’s like NextEra Energy Partners, NRG Yield, Brookfield Renewable Energy Partners, TerraForm Power, and others are placing their bets.
In this newsletter issue, we report on companies and states taking a wait and see approach and some still wanting to fight the EPA in the courts, and some looking to play out their strategies now rather than wait. Time will determine whose bets pay off. Once thing is certain: change is in the wind.
Paul A. DeCotis