As North American industrial activity and other physical commerce continued to recover from the lows of the COVID-19 pandemic, U.S. power consumption rose to a record high of 4,045 billion kilowatt-hours (kWh) in 2022, up from 3,941 billion kWh in 2021. Increased consumption can also be attributed to the continuation of extreme climate and weather events, which stressed grid resilience and drove spikes in consumption throughout the year. While sales (up 3.6% from 2021) and retail electricity prices (averaging 12.3 cents per kWh, up 11% from 2021) also reached record highs in 2022 across industry sectors, so too did costs, primarily due to rising domestic natural gas prices. Natural gas price increases were driven by economic growth in Asia and constraints on Russian natural gas exports to Europe, resulting in surging international demand for U.S. LNG exports.
After losing ground in the power generation mix for the first time in recent history in 2021, natural gas fueled 38% of U.S. electricity generation in 2022, up 1% from 2021. Coal-fired electricity generation fell from 23% to 20%, while generation from renewable power sources (primarily solar and wind) increased from 20% to 22%. The increase in natural gas-fired generation came despite a continued increase in the cost of natural gas delivered to U.S. power plants in 2021, which is estimated to have averaged $7.00, up from $5.20/MMBtu in 2021 (which was already more than double the average price in 2020), and can largely be attributed to the declining use of coal in domestic power generation. In 2022 alone, 11,778MW of coal-fired power generation was retired (with no replacement generation brought online), and that trend is expected to continue, with the EIA anticipating that 23% of all coal-fired power generation in use today will be retired by 2030. The trend of increased power generation from renewable sources continued in 2022, and is anticipated to continue moving forward, despite headwinds from supply chain disruptions, trade policy uncertainty and inflationary pressures. In the first 8 months of 2022, U.S. power generators brought an additional 5.7 gigawatts (GW) of utility-scale wind capacity and 7.5GW of utility-scale solar capacity online, and this growth is expected to accelerate rapidly as in 2023 as a result of new tax and other incentives discussed below.
In August, the Senate passed the Inflation Reduction Act of 2022 (IRA), which is expected to accelerate the growth of renewable power generation in the U.S. through a variety of climate-related financial incentives including investment, production and other tax credits designed to drive investment across a number of renewable energy production sectors. Key features of the IRA include (i) extensions of the production and investment tax credits (PTCs and ITCs) for wind and solar, along with newly available tax credit step-ups if certain (A) prevailing wage and apprenticeship, (B) historic energy community and/or (C) domestic content conditions are satisfied, (ii) the creation of technology neutral PTCs and ITCs that will replace their wind and solar predecessors for projects beginning construction after 2024, (iii) extension and increase of the carbon capture and sequestration tax credit and (iv) a new tax credit for the production of clean hydrogen. The general impression amongst industry participants continues to be that the incentives provided in the IRA will have a dramatic positive effect on capital flows to the renewable energy sector, accelerating the growth of utility scale wind and solar production, while also kickstarting a period of rapid growth in carbon capture technology deployment and hydrogen production.
While the commodity environment and economic growth featured in 2022 provided favorable operating conditions for North American utilities and power generators, project development supply chain uncertainty, rising interest rates, and a lack of confidence in the long-term prospects of certain generation sources resulted in a somewhat depressed and unevenly distributed deal environment. Overall, total deal value in 2022 was down 29% from 2021, with 39% of the total deal value being accounted for by two transactions. 2022 was in a sense a tale of two halves, with pricey gas utility acquisitions dominating the early months of the year, and renewable acquisitions dominating the remainder, ultimately accounting for 71% of the 2022 total deal value, up from 32% in 2021. 2022 also featured a resurgence of the strategic buyer, with strategics accounting for 64% of the total deal value, likely as a result of rising interest rates increasing the borrowing costs of private equity participants.
Two primary trends underlined 2022 deal activity in the sector. First, market participants regained confidence in the longevity of the natural gas utility industry as a result of the previously discussed increased demand and the IEA providing consistent guidance that it expects natural gas demand and prices to remain high for the foreseeable future. Second, in what was an already rapidly growing sector driven largely by environmental, social and governance (ESG) initiatives, the IRA addressed investor concerns that government incentives may be transitory, which dramatically expanded the range of renewable project opportunities that can provide the economic returns sufficient to drive investment.
There were several notable transactions in 2022 in the power and utilities sector. In the largest deal of the year, South Jersey Industries, Inc. (SJI), a New Jersey based gas utility with a smaller clean energy development division, announced in February that the Infrastructure Investments Fund (IIF), would be taking it private for $36.00 per share in cash, reflecting an enterprise value of approximately $8.1 billion. IIF highlighted the strength and stability of SJI’s retail gas business and long track record of clean energy investments as driving features behind the deal.
Another notable transaction was the acquisition by RWE Renewables Americas, LLC (RWE) of Con Edison Clean Energy Businesses, Inc. (ConEd) for $6.8 billion, announced in October. RWE, which is the subsidiary of a German multinational energy company, emphasized ConEd’s diverse portfolio of renewable and sustainable energy infrastructure projects, and desire to enter the rapidly growing U.S. renewable generation market. RWE’s sentiment was shared by other multinational corporations, with foreign headquartered strategics acting as purchasers in four out of the seven billion-dollar acquisitions in the power and utilities space in 2022, all in the renewables sector.
With the exception of the aforementioned SJI take-private, each billion-dollar acquisition in the power and utilities sector involved renewable energy businesses. Archaea Energy Inc., a waste to gas renewable natural gas producer, was acquired by BP p.l.c. for $4.8 billion; Great River Hydro, LLC, a New England-based hydropower generator, was acquired by Hydro-Quebec International, Inc. for $2 billion; Total Energies SE purchased a 50% stake in Clearway Energy Group, a Houston-based developer, operator and asset manager of utility-scale wind and solar generation assets for $1.6 billion; NextEra Energy Resources, LLC purchased a portfolio of landfill gas-to-electric facilities from Energy Power Partners Fund I LP and North American Sustainable Energy Fund LP for $1.1 billion; and finally, Scout Clean Energy, LLC, a utility-scale wind and solar generation asset developer was purchased by Brookfield Asset Management Inc. for $1 billion.
In 2023, while the rising interest rate environment will certainly be a concern for utilities and their budgets, refinancing risk is expected to be manageable. We expect that the overarching challenges for North American utilities and power generators will remain balancing already elevated consumer rates stressed by an inflationary and high commodity price environment with (i) the heightened capital expenditure requirements driven by grid reliability and resiliency demands and (ii) the need to finance aggressive growth in clean energy asset portfolios in order to meet publicly stated ESG targets. Given the aforementioned ESG targets, and substantial clean energy incentives featured in the IRA, we expect that clean energy M&A will again dominate the deal landscape in 2023, with strategics continuing to play an integral role in driving deal activity on the expectation that interest rates will remain elevated for the foreseeable future.
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