As electricity demand from the tech sector and manufacturing skyrockets, utilities are facing a stark reality: We’re going to need a bigger fleet.
And the pressure to add new generation quickly — and without imposing unrealistic costs on consumers — has the industry thinking about deal-making.
“There is a noticeable acceleration,” said Pavel Molchanov, an investment strategy analyst focusing on the utility sector for Raymond James. “You can go back as far as you want and there have always been mergers and acquisitions in the electric power industry. But it is certainly accelerated by the universal recognition that the next decade and beyond will be a time of growth in electric power.”
Already this year, several power producers have reached into the market to vastly expand their gas fleets. Houston-based NRG, for example, said it would add 18 gas-fired power plants to nearly double the size of its current fleet in a $12 billion cash-and-stock deal with LS Power Equity Advisors. That came just months after NRG purchased six gas plants capable of producing 738 megawatts from Rockland Capital.
Texas-based Vistra announced just days later its own deal to secure seven gas generators totalling 2,600 MW of capacity across five states from Lotus Infrastructure Partners.
“We believe natural gas fired generation will continue to play an ever-increasing role in the reliability, affordability, and flexibility of U.S. power grids for years to come,” said Vistra CEO Jim Burke in a statement on the $1.9 billion deal. He added that the “attractive portfolio” of new gas assets would allow Vistra to meet growing power demand.
In January, Baltimore-based Constellation said it would acquire Calpine Corp. in a $16.4 billion transaction, combining Constellation’s nation-leading nuclear fleet with Calpine’s fleet of 79 power generators that total some 27,000 MW of power. Canadian company Capital Power in April purchased two gas plants from LS Power for $2.2 billion, making it one of five North American independent power producers to have more than 10,000 MW of natural gas capacity.
Earlier this month, TXNM, the parent company of New Mexico’s largest utility, announced its acquisition by private equity firm Blackstone. The move, CEO Pat Collawn said, is designed to use an infusion of private capital to help TXNM build a lot more capacity without forcing customer bills to rise significantly.
The operations may all have different details, but they share a common goal: getting as much reliable power on the grid as quickly as possible. And with supply chains for generation of all kinds, but especially gas, running behind schedule, Morningstar utilities analyst Travis Miller said that’s forcing utilities to look anywhere they can.
“Utilities that need to serve load right away are going to have to do it with existing assets, whether it’s theirs or someone else’s,” Miller said. “The recent moves are an attempt to be one of the first available suppliers for any kind of new load.”
Utilities are facing unprecedented demand growth. A May report from consulting firm ICF projects that U.S. electricity demand will grow 25 percent by 2030 and 78 percent by 2050, compared with 2023 numbers. Meeting that, ICF said, would require utilities to double the pace of new generation.
Other estimates have similarly said that data centers, electrification and onshoring of manufacturing could cause demand to rise at rates not seen in decades.
While some utilities are looking to extend the life of their aging fossil fuel assets, many have had retirement plans in place for years. Building new plants is increasingly expensive and time-consuming as parts suppliers ramp up a supply chain that just years ago was in decline.
According to Wood Mackenzie, it can take until 2030 for new gas plants to come online thanks to delays in the market. The analysts predict that about 890 gigawatts of new gas-fired generation will be added between 2025 and 2040, with nearly half of that in the U.S. and China.
A May analysis by research firm Enverus notes that amid the “sharp resurgence” of merger and acquisition action in the gas market, the per-megawatt cost of acquiring gas plants on the market has been running well above the $0.5 million average between 2021 and 2024.
Yet the report found they’re still cheaper than the estimated $2 million to $3 million it can cost to build each megawatt of new gas capacity.
‘AI euphoria’
That can be encouraging news to utilities already facing upward pressure on rates from the costs of maintaining infrastructure amid extreme weather and meeting new demand. Nationally, federal data shows that the average electricity price will rise 13 percent between 2022 and 2025, outpacing inflation. ICF says that nationally, rates could jump 15 percent to 40 percent between 2025 and 2030, depending on the market.
A February report from consulting firm Deloitte said the growing need for capital combined with already rising utility rates means that regulated utilities are “facing growing limitations” through the traditional method of raising funds. Retail electricity prices, Deloitte wrote, increased nearly 23 percent from 2019 to 2024 and utility requests for rate increases hit record highs between 2020 and 2024.
That could make regulators skeptical of further rate increases. That, in turn, means that utilities are eyeing “alternative funding avenues” such as mergers and acquisitions or infusions of private capital.
Between 2016 and 2024, Deloitte found, the average annual investment in the power sector by private capital was up 113 percent compared with the previous eight-year period.
The TXNM deal — which will see Blackstone invest $400 million in the short term while the sale is reviewed by regulators — is just the latest sign that Wall Street sees the electricity market as a growth sector. Earlier this year, private equity firm KKR acquired a stake in American Electric Power.
On the renewables side, the climate investing arm of asset firm TPG made a $2.2 billion purchase of Altus Power, the largest commercial-scale solar owner in the U.S. In February, the U.K.’s National Grid divested its 3,100 MW of U.S. renewables in a sale to Brookfield Renewable Partners.
Raymond James’ Molchanov said that the “AI euphoria” that has accelerated across the tech sector has reshaped the financial picture for the power sector in just a few short years.
“All generation assets have greater value than they did five years ago, or even three years ago,” he said. “We understand that power demand is in growth mode for the next decade and beyond, and that means the entire category of assets, regardless of the type of generation, is a lot more in vogue.”