Converging events in the U.S. power market have created unprecedented investment opportunities in both the near and long term. The world’s largest and most diverse energy market represented 2.5% of the U.S. gross domestic product in 2005 with approximately $269 billion in annual revenues and over $650 billion in assets responsible for total net summer generating capacity of 978 GW. Demand growth is forecasted to increase 2% per annum through 2030, with an additional 350 GW of new capacity needed to meet that demand growth. This represents a 36% increase to existing capacity.
Over 84 GW of generation asset sales have been announced and completed from the beginning of 2004 through July 2006. Deregulation is separating the traditional generation and transmission functions out of the integrated utility and has resulted in the sale/spin-off of many of those assets. Retirements of older, less efficient plants, combined with demand growth in select regions of the U.S., will create a continuing need for new plant construction and investment. Coupled with a contraction in the strategic and financial investor universe, which has caused further downward pressure on valuations, these factors have created significant private equity opportunities to earn above average returns in the energy/power sector.
Deregulation is moving the industry from one comprised of local and regional monopolies to an industry of choice and competition. For the first time, electric and gas utilities are being forced, or are choosing, to separate generation, distribution, and transmission assets. End-users are able to select gas and electric suppliers in much the same way that consumers can select a long distance carrier for their telecommunication needs. Utilities now find themselves struggling to cope with the surging electricity demand of the digital and internet-based new economy. Energy companies are recapitalizing balance sheets to address tighter accounting rules. These factors have triggered a number of profound changes in the utility and power generation industries. Most notably, strategic investors are focusing on debt reduction as a way to address rating agency concerns and to increase earnings per share. Therefore, these investors are selling generation assets with long-term contracts that provide predictable cash flow at low valuations. These changes create numerous opportunities for skilled management, owners of power assets, and private equity funds. Energy Investors Funds seeks to take advantage of this industry transformation and reinvention.
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