Power and Gas M&A Symposium
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- Interactive Strategic Issues Discussion:
What Would Yogi Berra Say?
- February 14, 2017
Discussion Outline
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- Changing Supply and Demand Mix
Technology Innovation
Changing Regulatory Compact
Adaptive Utility Strategies
Impact of a New Administration
Changing Supply and Demand Mix
New natural gas, wind, and solar-powered generation represent the majority of capacity added since 2005 and projected additions through 2025. In the same time frame, coal- and oil-fired generation will have declined and will continue to decline at a historic pace.
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- Capacity Outlook
- Changing Supply and Demand Mix
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- NOTES:
*Charts reflect SNL/NERC data for actual capacity and EIA data for future capacity.Future capacity is based on both actual planned/under construction projects and unplanned additions/retirements according to EIAs AEO 2017 reference case
SOURCES:
SNL Financial; EIA; ScottMadden analysis
- Different EIA forecasts show little variation in new renewables and natural gas combined cycle capacity additions through 2025.
- Net Additions: +12.9 GWs
Duck Curve
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- 2013 California Independent System Operator (CAISO) produces analysis showing how renewable resources would impact grid conditions
Iconic duck curve is born, predicting as variable generation grows so too will the midday trough of load served by conventional supply
ScottMadden analyzed average hourly production data from CAISO from January 2011 through June 2016 to understand: Is it what most people think it is?
- Changing Supply and Demand Mix
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- The California Duck Curve Chart
- SOURCE:
CAISO
- Net Load March 31
Duck Curve Is Real and Growing Faster than Expected
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- Lowest March Daytime Net Load, 20112016
- SOURCES:
CAISO; ScottMadden analysis
- Changing Supply and Demand Mix
Net Loads Shrinking and Ramps Increasing (20112015)
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- Daily Daytime Minimum Net Load
- SOURCES:
CAISO; ScottMadden analysis
- Changing Supply and Demand Mix
- Daily Late-Day Three-Hour Ramp
Most Severe on the Weekends
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- Average Net Load by Day of the Week, 2015
- SOURCES:
CAISO; ScottMadden analysis
- Changing Supply and Demand Mix
Driven by Utility-Scale Solar, Not Distributed Resources
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- California and Hawaii Average System Load, 20112015
- SOURCES:
SNL Financial; ScottMadden analysis
- Changing Supply and Demand Mix
Duck Curve Key Takeaways
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- Operational data suggests that projections of the duck curve effect in California are real and in some cases occurring sooner than expected
Lower net loads than forecast
Increasing ramps throughout the year
Most severe on the weekends
Multiple seasons, not just spring months
Driven by utility-scale solar in California, not rooftop solar
Understanding the unique causes and behavior can help inform mitigation strategies
Mitigation strategies should recognize differing behavior depending on the day of the week and the time of the year
Operational challenge associated with utility-scale solar present the potential for more targeted utility-scale solutions
But, if you have a distributed solar issue like Hawaii, you will need a solution targeted to distributed resourcesLack of distributed solar does not make you immune: The duck curve may migrate to other regions sooner than expected
States to watch in the near term include: Arizona, Georgia, Nevada, North Carolina and Texas
Each of these states are forecasted to have >3,000 MWs of utility-scale solar by the end of 2021
- Changing Supply and Demand Mix
Declining Demand Growth
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- Reading the Headlines: Whered the Load Growth Go?
U.S. MWH sales growth was only 1.7% cumulatively from 2005 to 2015
Industry consensus forecasts continued sales growth decline
Opinions of causes vary de-industrialization, slow GDP growth, slowing population growth, efficiency
The good news: revenues per MWh have grown
- Changing Supply and Demand Mix
Declining Demand Growth (Contd)
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- Identifying the Culprit: Industrial Did It
The reason is not de-industrializationor declining numbers of industrial customers; in fact, industrial customer count has grown
Instead, the industrial mix has changed to less energy-intensive industries: highly energy-intensive industries
Growth Sightings: All Regions Are Not Created Equal
Regions with significant oil and gas resources (e.g., around TX, OK, ND) averaged >0.5% annual sales growth since 2008
36 states averaged negative or no annual sales growth since 2008
- Changing Supply and Demand Mix
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- Weighted Electric Retail Sales CAGR (2008 to 2014)
Technology Innovation
Distributed Energy Resources
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- Decentralized Generation (DG) Grew by 40% in 2015
Solar Photovoltaic (PV) capacity is 2.7 times all other DG combined; 1.7% of total generation
How much: Year-end 2015 DG totaled nearly 18.2 GWs, nearly tripling since 2010
Where: Top five statesCA, NJ, AZ, MA, and FLare nearly half of DG. CA is 31%
- Technology Innovation
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- DG as % of Total Nameplate Capacity within State
- NOTES:
The grid-synchronized category includes commercial and industrial generators less than 1 MW in capacity that are grid connected and grid synchronized. The C&I standby category includes commercial and industrial generators less than 1 MW in capacity that are not connected nor synchronized to the grid. The net metered category refers to residential, commercial, and industrial generators that are less than 2 MWs in capacity and maintain a net-metering agreement with the local utility. Due to the nature of the data, it is possible some systems may be double counted. Figures are from 2015, the most recent data available.
- Decentralized Generation by Use and State
2015:
Top 5 = 45.26% of total DG
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- Distributed Energy Resources by State and Type
- DG making headway; solar PV dominating
3 main types
PV (73%)
Internal combustion standby at C&I sites
Grid-synchronized generation at C&I sites
DG expansion drivers
Favorable policies (NJ, NY, MA)
Favorable (solar) resources (CA, AZ)
Declining PV costs
High residential electricity prices
- Technology Innovation
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- Top States for Cumulative Installed Decentralized Generation
(2014 and 2015)
- U.S. Decentralized Generation by Use and Resource Type
(Year-End 2015)
- Internal Combustion
- Combustion Turbine
- Hydroelectric
- Storage
- 2014:
Top 5 = 54.48% of total DG
Energy Storage
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- Energy storage is growing but its penetration remains modest compared with traditional power supply resources
Storage can play different roles depending upon scale and discharge duration making classification difficult
Storage is a hybrid, part G, part T, part BTM
- Key to its value proposition is the ability to stack these roles without double-counting, e.g.,
Capacity
Variable supply smoothing
Ancillary services
- Technology Innovation
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- SOURCE:
DOE/ERPI Energy Storage Handbook in Collaboration with NRECA, February, 2015
- Trans. congestion relief
Peak load shaving
Dist. voltage support
Electric Vehicles: Convergence of IoT, Autonomy, Ride-Sharing
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- Technology Innovation
- Big Money and Increasing Interest Coming out of the Shadows
- EV development now focused on autonomy, sharing (utilization), and charging infrastructure
With $2 to $3 gasoline and average passenger car age of over 11 years (compare 8.5 years in the mid-1990s), EV adoption will be a slow process
- SOURCES:
Inside EVs; EDTA; industry news
- But Enthusiasm May Need to Be Tempered
Changing Regulatory Compact
State vs. Federal Jurisdiction
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- Making a Marketand Adjusting Itand Adjusting It
FERC restructured the power industry in 1996 with Order 888 to unleash market forces and drive down prices
Over time, pure wholesale electricity markets have been adjusted
Price caps and minimum offer price rules
Administratively drawn demand curves
Capacity markets/capacity performance products
PJM has proposed a change in capacity auction design
Remove subsidized resources/commensurate load
Devise price administratively (nudges price upward)
Replace subsidized resources
States Are Pushing to Manage Outcomes
Expanding and incentivizing renewables and distributed energy resources
Suppressing price increases and spikes for state residents and businesses
Encouraging generation development and retention of existing power plants
Implementing their own environmental/carbon policies
- Changing Regulatory Compact
State vs. Federal Jurisdiction Recent Battlegrounds
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- Changing Regulatory Compact
State vs. Federal Jurisdiction (Contd)
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- A Delicate, but Uncertain, Balance
Recent Supreme Court decisions have been narrowly tailored to avoid categorically affording federal or state primacy
States can have measures to encourage new or clean generation
But these must be untethered from wholesale market participation
So what the hell does untethered mean?
This makes the so called bright line between state and federal jurisdiction hard to see. This uncertainty could lengthen lead time and increase risk and related costs for generation investment
The Energy & Commerce Subcommittee of the House Energy & Commerce Committee has begun hearings to examine the Federal Power Act in light of the evolution and jurisdictional conflicts in the organized wholesale electric markets
- Changing Regulatory Compact
REV vs. California and a Continuum of Approaches
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- Changing Regulatory Compact
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- NOTES:
*Includes four states with statewide DG compensation rules other than net metering.
- Laissez Faire to Radical Redesign: A Continuum of Responses
Key Questions
As of July 2016, 41 states, plus D.C., and three U.S. territories (American Somoa, U.S. Virgin Islands, and Puerto Rico) have mandatory net metering rules in place, but the state of the debate varies widely.
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- Net Metering
- Changing Regulatory Compact
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- States with net metering policies(41 states + DC + 3 territories)
- States with voluntary utility policies (2 states)
KEY
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- U.S. Territories:
- States with DG compensation rules other than net metering (4 states + 1 territory)
GU
AS
PR
VI
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- SOURCES:
DSIRE (www.dsire.org); SNL Financial; National Conference of State Legislatures (www.NCSL.org); ScottMadden analysis
- Net Metering Rules by State (July 2016)
Adaptive Utility Strategies
Strategy Comparisons
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- Shifting focus back to the core business, increasing grid investments, and testing expanded customer-centric offerings.
- Adaptive Utility Strategies
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- NOTES:
DER means distributed energy resources
SOURCES:
SNL Financial; industry news; investor presentations; company annual reports; EIA; GTM; Rocky Mountain Institute
Mergers and Acquisitions
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- Gas and electric utilities continue to look for opportunistic acquisitions, especially in the rate-regulated utility and pipeline space.
- Adaptive Utility Strategies
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- Many Strategies, One Rationale: Sustainable Growth
17 transactions totaling more than $37 billion announced through late September
In Q2 and Q3, buyers shifted focus to peers in search of geographic adjacencies and economies of scale (Great Plains/Westar) and portfolio diversification (Algonquin/Empire District and NextEra/Oncor)
Southern especially active in 2016
PowerSecure
50% equity stake in Southern Natural Gas Pipeline
Some continue to expand midstream gas capabilities as a core business (Dominion/Questar, DTE Energy/Appalachia) or as a continuation of a convergence play tied to increasing amounts of gas-fired generation and increased midstream participation (Southern)
- Its likely not a coincidence that vertically integrated electric utilities target T&D-only electric or gas utilities as prime acquisition targets. They have only one shot for a large acquisition using their balance sheet capacity, and as such they are likely to pick a utility with the most sustainable business model
-Angie Storozynski, Macquarie Research
Mergers and Acquisitions (Contd)
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- Adaptive Utility Strategies
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- NOTES:
*Includes sales of minority interests, deals announced but not closed, and joint venture investments (e.g., Southern and Kinder Morgans Southern Natural Gas JV); deal value is equity portion of acquisition value, excluding debt assumption. **Not reflected in deal value summary
SOURCES:
SNL Financial; Macquarie Research; UBS; Morgan Stanley; J.P. Morgan; Barclays; ScottMadden analysis
- Expect More of the Same, But What about Interest Rates?
Vertically integrated utilities expected to seek out T&D (electric and/or gas) opportunities to achieve growth while limiting regulatory risk (vs. generation)
Utilities to partner with unconventional energy services and emerging technology developers complementary revenue streams and manages threats
Increasing ratios could threaten earnings accretion and tilt scale toward organic growth strategies
- U.S. Energy Utility and Selected Midstream Sector Deal Value by Announcement Date (Quarter) and by Target Sector Type (in $ Millions)*
Behind-the-Meter: Competition or Cooperation?
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- Adaptive Utility Strategies
Impact of a New Administration
Pundits Greatest Hits
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- Impact of a New Administration
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- House Republicans have warned the Obama administration against rushing through controversial regulations and have threatened to use Congressional Review Act resolutions to nix major rules that are finalized at the end of Obamas term. Given that CRA procedures count back 60 legislative days, such actions potentially imperil a host of rules completed in recent months. Platts (Nov. 23, 2016)
- SOURCES:
Morgan Stanley; Deutsche Bank; UBS; FitchRatings; SNL Financial; Van Ness Feldman
Pundits Greatest Hits (Contd)
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- Impact of a New Administration
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- SOURCES:
Morgan Stanley; Deutsche Bank; UBS; FitchRatings; SNL Financial; Van Ness Feldman
Pundits Greatest Hits (Contd)
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- Impact of a New Administration
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- SOURCES:
Morgan Stanley; Deutsche Bank; UBS; FitchRatings; SNL Financial; Van Ness Feldman
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