The once-sleepy power generation sector is back in the spotlight thanks to the U.S. tech boom. Here’s what investors need to know.
Power generation’s wake-up call
The Voya Private Credit Infrastructure team has been an active power generation investor for over 25 years. We’ve deployed client capital across a wide range of generation technologies, primary fuel types, locations, and regulatory environments.
Over the past few years, growing demand for clean power, significant emissions reduction targets, and generous tax incentives have also encouraged an enormous wave of renewable generation and storage development across the U.S., in which many of our clients are materially invested.
Power generation is a fascinating part of the energy industry. It resides at the intersection of multiple commodity markets, and both contributes to and depends on major macroeconomic variables—all while subject to continuous technological change.
Yet, apart from renewables, power has spent several years as something of a financial markets backwater. Slow-growth electric utilities seem boring alongside the Magnificent Seven, cryptocurrency ETFs, or whatever flavors-of-the-month the equity markets might otherwise offer.
Power demand growth in the U.S. has been flat for decades. ESG policies made it challenging to attract investor capital for non-renewable thermal generation. Independent power producers owning fossil-fuel generation lost the equity market’s interest to such an extent that some took themselves private. So even though we enjoy thinking, talking and writing about power markets, our affection for the topic has not exactly won us invitations to flashy cocktail parties.
But recently, the winds of public opinion have changed. The financial press has been jammed with news, commentaries and think-pieces on artificial intelligence development—and the significant power resources necessary to support its deployment. The capital markets are looking beyond AI’s potential impact on corporate America to the “building blocks” that make AI possible in the first place: chip manufacturers, data centers—and, suddenly, power.
Tech industry missionaries are insistent that power capacity is a primary constraint on AI’s growth and widespread application. Our inboxes are burgeoning with consultants highlighting parabolic power demand growth and investment bank conference calls on how to play the theme. It feels like this is power generation’s wake-up call.
For this Energy & Infrastructure Insight, we will draw from our project financing experience to explain this renewed interest in power. After touching on recent market price signals, we cover some basics on how power is sourced and priced. We then move on to prevailing issues affecting supply and demand to explain the drivers of higher power prices and the concerns about supply adequacy.
Voya underwrote its first infrastructure transaction in 1990 and, since then, the energy & infrastructure team has remained a core pillar of our investment grade private credit offering. We manage a circa $13 billion portfolio that focuses on single or multi-asset secured financings through a traditional project finance structure, plus investments in corporations whose business models have infrastructure characteristics. Since Voya began classifying deals into infrastructure, corporate, and ABF in 2002, the infrastructure team has maintained a zero credit loss rate—successfully preserving principal through commodity cycles, financial crashes, geopolitical shocks, and the pandemic, while also generating competitive returns. The team has deep sector experience across the energy and infrastructure landscape developed over multiple decades of transaction underwriting. It is our pleasure to distill that expertise into this series of educational insights for our current and prospective clients. |