2016 was a big year for the power sector and, despite some uncertainty around the new Trump administration, that momentum is likely to carry forward into the new year, according to market participants.

“Last year was a banner year in the power and utility sector,” says Jeremy Fago, U.S. power and utilities deals leader at PwC.

PwC calculated a total deal value of $156.6 billion for 2016 compared with $67 billion in 2015. At that level, last year’s deal volume exceeded the value of power sector deals in each of the past three years.

The trends responsible for the rising volume of deals stretch back as far as 2013 and have several strains, said Fago.

One is the changing makeup of the nation’s generation mix, which is being driven by tighter emission rules, such as the Mercury and Air Toxics Standards, and by the falling price of natural gas brought about by the hydraulic fracturing of tight shale plays. Both have had the effect of making natural gas-fired generation cheap relative to coal and nuclear power. That has led to a reshuffling of generation portfolios and a need for new infrastructure, such as natural gas pipelines.

The other trend is low load growth. Demand for electric power fell after the 2008-2009 financial crisis and has been slow to recover across most of the country. Regulated utilities looking to boost earnings have been looking for new, stable sources of income, such as gas pipelines, or have been shedding generation assets in deregulated markets.

Running alongside both of trends is the proliferation of renewable resources, which is driving a need for infrastructure such as new or upgraded transmission lines.

In the third quarter, pipeline and transmission infrastructure dominated deal volume and value, Fago says, and 95% of those deals were “mega deals” valued at $1 billion of more.

The biggest of the third-quarter deals was Enbridge’s acquisition of Spectra for $47 billion. Among the other third-quarter deals, was Southern Co.’s acquisition of Southern Natural Gas Co. from Kinder Morgan for $2.7 billion and DTE Energy’s acquisition of Appalachia Gas Gathering System and of 55% of Stonewall Gas Gathering System for $1.3 billion.

The value and volume of deals dropped in the fourth quarter, but the overall trend held up, although there was a shift to generation asset deals, which accounted for seven of the 10 deals in the fourth quarter. Among those deals was an agreement by Helix Generation, an affiliate of LS Power, to buy 3,950 MW of assets from TransCanada for $2.2 billion and ArcLight capital Partners’ acquisition of TransCanada’s 584 MW portfolio of New England hydroelectric plants for $1.1 billion.

Looking into 2017, Fago says he expects to see infrastructure and generation asset deals continue to be a theme, but with potential deal makers keeping a close eye on rising interest rates, potential tax reform and environmental policies.

“We don’t see fundamental changes to those underlying themes in 2017,” says Fago, but there are likely to be changes in the capital markets and that uncertainty could lead to a pause in activity.

The Federal Reserve Board has already raised interest rates once and has said it could raise them three more times. There is also talk of tax reform in Washington. “We are keeping a watchful eye on the policies of the new administration,” says Fago.

The big question will be, “What do the capital markets look like and whether or not that will change the valuation and velocity of deals?”

The bankers’ view

That question was taken up recently in a webinar hosted by Chadbourne & Parke. There has been a lot of talk about what the new administration might do to renewable energy incentives such as the production tax credit. The availability of the PTC has been a driving force in the renewable energy market, particularly for wind power.

That market took a step down in 2016 with $11 billion of tax equity deal compared with $14 billion in 2015, John Eber, managing director and head of energy investment at J.P. Morgan, said during the webinar.

Eber attributed the decline to an uptick in utility scale solar projects in 2015 that was not replicated last year. One possible explanation for the increase in large solar project, Eber said, could be that project sponsors were eager to get their projects to market before the possible expiration of the tax incentive, which were extended at the eleventh hour in 2015.

Neither Eber nor Jack Cargas, managing director at Bank of America Merrill Lynch, see any pull back in the tax equity market in anticipation of changes from the Trump administration, and said they expect the market to “function normally” in the midst of debates about tax reform.

It is pretty hard to predict what might happen with tax reform, said Eber, but the magnitude and timing are important aspects of any potential change. Though he said it is unlikely that any potential reforms would take effect in 2017.

But a change in tax rates could have an effect on the tax equity market. A lower corporate tax rate would lessen the value of tax credits like the PTC and the investment tax credit.

If that were to happen, it could prompt changes in project finance structures. For instance, participants looking to mitigate the impact of a tax rate change, could elect to make greater use of the depreciation bonus, said Eber.

Eber also noted that a lot of wind turbines were put into “safe harbor” in order to qualify a project for the PTC before it began to step down at the end of 2016.

The construction start date determines the eligibility of a project for the PTC. Under Internal Revenue Service guidelines, spending 5% of total project costs can count for the start of construction. A project must then enter service within four years from the start of construction to maintain eligibility for the PTC.

Eber estimates of the number of safe harbor turbines are sizeable, in the range of 30 GW to 58 GW or 40 GW to 70 GW, depending on the source. In either case, he says it portends a “healthy active market” for the next several years.

There was also a decline in bank financed project finance deals in 2016. Last year saw a total of $35 billion of deals compared with $60 billion in 2015. That steep decline is accounted for by the large liquefied natural gas deals in the market in 2015 that were not there in 2016, said Timothy Chin, managing director and head of power infrastructure and project finance at BNP Paribas Securities. What’s left without the LNG deals, said Chin, is renewables deals, especially solar projects, which tend to be smaller.

Looking into 2017, “It is a pretty good bet that liquidity will tick up,” said Ralph Cho, co-head of power for North America at Investec. He expects South Korean banks to take a more active role in the North American project finance market and says that international commercial banks coming back into project finance.

The project bond market, which is mostly restricted to investment grade companies, saw an increase in deals in 2016 with about 12, compared with about six in 2015, said John Anderson, managing director and head of North American corporate finance at Manulife/John Hancock.

Anderson sees a good deal flow for 2017 with five deals already in the pipeline. But when it comes to the effect the Trump administration will have on the market, he said it is “like a box of chocolates. We’ll have to see what floats to the top.”