DTE Energy and Exelon Corp deny having any immediate plans to sell or spin off non-utility assets despite anonymous reports to Bloomberg, with a spokesperson for DTE calling the Bloomberg reports "market speculation" and Exelon indicating the company had reviewed the pros and cons of divestiture only as part of a routine review.
Lack of confirmation notwithstanding, current market conditions could push regulated utilities to spin off generation assets to manage risk in the face of a transition to renewable energy, according to The Brattle Group Principal Johannes Pfeifenberger.
While regulatory restructuring triggered the last to two waves of divestitures in the energy industry, cost-competitive renewable energy could trigger a new cycle of restructuring if renewables continue to outcompete coal and even low-priced natural gas, Pfeifenberger said.
DTE Energy and Exelon won't confirm Bloomberg reports that they're considering sales of non-utility assets, but that doesn't mean they — or other companies — won't consider doing so in the future, Pfeifenberger said.
Industries typically cycle through periods of mergers and divestitures, Pfeifenberger said, and renewable energy could trigger a new wave of divestitures among utility companies, which for the last decade have sought to concentrate assets within the companies where they're best positioned to perform.
In states that have restructured utilities to promote competition among power generators, utilities have found that it's often advantageous to move generation assets into separate entities not subject to the same requirements — or certainties — that come with regulatory oversight. Running a regulated utility simply requires a different skillset than operating in a more competitive marketplace, Pfeifenberger said. As a result, the majority of utilities on the East Coast, in Illinois, Ohio, Texas and in parts of California, have already moved toward the divestiture of competitive generation assets.
Renewable energy could trigger a new wave of divestiture by intensifying competition between generation options.
"Regulated markets have become more volatile with renewables coming in and eating away some of the competitive margins," Pfeifenberger said. "The last coal plants might have to be shut down or find a new owner who can operate them more cost effectively, and I think some of the gas plants that are owned by regulated companies but operated as a merchant asset, might be better off owned by a company focused on merchant generation ... Renewables being able to compete despite low gas prices has created a new dynamic that might ultimately cause some vertically integrated utilities to rethink their generation options."
Compared to regulated utilities, competitive generators have more experience with risk management and financial hedges, Pfeifenberger said. They also have access to financial tools not available to regulated companies that must open their books to review by the public.
"If you look at merchant generation and how it's being financed, there is so much financial engineering going on that just doesn't exist in a regulated setting," Pfeifenberger said. "That of course does lower the cost, which makes it easier to compete in a competitive environment ... Operating in a competitive market where you could get low-cost financing — that's your competitive advantage."