Starting in the late 1970s, government regulatory restructuring of the U.S. power market took the industry from one dominated by large, integrated utilities to a more competitive marketplace. As a result, the wholesale generation industry has been operating on a competitive basis in much of the U.S., allowing IPPs the opportunity to build the majority of new power plants in the U.S. over the last three decades. EIF’s investment professionals believe that this environment will continue to provide excellent investment opportunities, similar to those experienced during the Firm’s past 23 years in operation.
The U.S. electric power sector represents approximately 25% of the world’s generating capacity and accounts for 2.5% of the U.S. GDP. As such, it is one of the largest and most capital intensive sectors of the U.S. economy, with end-user annual sales of greater than $300 billion and book valuation of approximately
$750 billion. There are more than 17,000 power generating facilities with capacity totaling 995 GW.
From January 2006 through May 2009, 159 GW or approximately 16% of total power generation capacity asset sales were completed in response to earnings per share optimization, capital constraints, and shifting core business strategies among industry participants.
Peak demand in the U.S. is expected to grow at a compounded average growth rate of 1.8% through 2012, requiring billions in investment capital. Moreover, through 2016, 135 GW of additional demand is expected, while only 77 GW of new generation capacity is under development - leading to a potential 43% shortfall and ever tightening reserve margins. By 2030, an additional 263 GW of new generating capacity is expected to be needed in the U.S. (an increase of 26% over current capacity), which will require billions of investment capital.
The U.S. has over 160,000 miles of high-voltage transmission lines, many of which have not been properly maintained or upgraded over the last several decades. Further, the transmission system was not originally developed to accommodate today’s competitive power markets that have created surprising inefficiencies between adjacent systems. The total number of high-voltage (≥ 230 kilowatts) transmission miles is projected to increase by almost 10% or approximately 16,000 circuit miles over the next eight years, requiring hundreds of billions of dollars of capital investment.
Furthermore, the transmission grid needs to be expanded to connect new renewable generation to load centers (populated regions). Remotely located wind, geothermal, solar, and other renewable facilities require significant transmission links that are often built over challenging terrain.
Volatile fossil fuel prices, heightened public concern for environmental issues, increased political emphasis on domestic energy security, recent state and regional carbon control initiatives, and the expectation of federal carbon control legislation have all prompted significant interest in the development and construction of renewable electric generation projects. Renewable energy programs and federal and state tax incentives will be the primary drivers behind this growth.
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