Marcia Hook and Ty’Meka Reeves-Sobers, partners with global law firm Clifford Chance, assess the changing outlook for energy producers and investors.
Global Finance: How has the outlook for the energy industry shifted under the new US administration?
Marcia Hook: Under the Biden administration, we saw significant investments in the US energy space. The business was booming, there was a lot of excitement from a range of investors, and that was bolstered significantly by the incentives under the IRA [Inflation Reduction Act of 2022] and a number of other favorable economic factors.
Now we are in a place where what will happen with the IRA is unclear, which is undoubtedly one of the major drivers of the boom we saw over the last two years. A lot of people are waiting for the uncertainty to die down; because at the end of the day, the energy industry is one that thrives on certainty.
Investors make investment decisions on the timescale of decades, not years. And these investments are sometimes in the billions of dollars. Right now, we see a lot of folks—both investors in the US and investors abroad—essentially holding and waiting until they have a little bit more certainty on what will happen with the IRA in particular.
Ty’Meka Reeves-Sobers: With the global clients, we’re seeing more requests and inquiries for interpretive guidance. They ask, “What does this mean?” We’re trying to read the tea leaves and find some certainty to add some balance there. It really is a game of wait and see, because every day something new happens, and I find that we’re really just trying to stay on top of it.
GF: Given the demand for new data centers, is it likely the Trump administration will take a few steps back and keep in place some of the measures approved by the prior administration?
Hook: This is an area near and dear to my heart because it’s at the intersection of power and data centers. There’s a huge projected growth in energy demand, and a lot of that is attributable to data centers. It becomes a practical question: “How do you put that much power on the system this quickly?” And realistically, would the administration take direct, adverse actions against renewable energy?
From a practical perspective, even if the administration were to try and do that, renewables may be the most realistic way to meet that demand in the needed time frame.
There’s a lot of excitement about, for example, SMRs [small modular reactors] and other types of nuclear units coming back online, potentially. But the permitting timeline and the deployment timeline for that is more like the end of this decade at best. So realistically, renewables are still the best answer. Solar is the fastest to deploy. People in the renewable space are still very bullish.
To be clear, there probably does have to be an all-of-the-above approach. We will need more gas-fired facilities as well. I’m not saying that those projects are not part of the solution; but certainly, even if the administration were to strip away all of the renewables credits, I don’t know that we’d see all of these projects just evaporate. There’s still the need, and they’re still the fastest solution.
Reeves-Sobers: It’s going to be a toolbox of solutions. It’s not going to be one-size-fits-all. In the meantime, I think the operators are taking it upon themselves to come up with other creative solutions to that problem.
GF: Other countries are not moving away from renewables and environmentally responsible projects. Is that likely to change?
Hook: Outside the US, we generally see a trend to continue pursuing renewable energy resources. That being said, I think that there are some practical constraints globally to meeting all of the new power needs through renewable energy. So, much like in the US, I think that there are some practical considerations that might drive countries to consider gas and even coal, in some cases, as part of the all-of-the-above strategy to get enough power in the time frame that’s needed. While we haven’t seen anyone specifically turn away from renewables, I suspect that it’s possible we’ll see an uptick in nonrenewable sources, just because of the practical need to provide so much power.
GF: Are we seeing an increase in interest in the nuclear industry?
Hook: There’s certainly an increased interest in nuclear power, both on the side of the administration and in the private sector; and we are seeing facilities that are discussing recommissioning or essentially coming out of retirement. The best known is the Microsoft-Three Mile Island deal, where Three Mile Island [a power plant near Middletown, Pennsylvania, that in 1979 was the scene of the worst commercial nuclear accident in the US] will be brought back online to serve the Microsoft [energy] load.
There’s a lot of excitement in the nuclear community right now. People are very bullish on it. There’s a lot of attention to SMRs as well. It will take some time to deploy nuclear; and as we heard reported about the Microsoft-TMI deal, it is a pricey resource to contract with. But these facilities run continuously for very long stretches of time without needing any maintenance, so it’s quite attractive.
GF: There is a lot of chit-chat about how law firms are using big data analysis and AI to make some of their corporate practices more efficient. What is your experience?
Reeves-Sobers: At least from an environmental perspective, the more information, the better, because it clears up some of the unknowns that come with environmental liability. And that’s always better when you’re thinking about an investment and whether you want to pull the trigger on any particular project.
Hook: More information is better; more data is better. I would point to two discrete impacts. One is being able to find potentially material issues for valuation purposes much more easily. And then, two, just the efficiency in doing so.
There is now a platform, EnerKnol, that we use regularly to aggregate the regulatory filings and issuances from every US public utility commission, the Federal Energy Regulatory Commission, the Department of Energy, and every major government agency including the Environmental Protection Agency.
In the past, when I was a younger lawyer, if I had wanted to conduct due diligence on an entity that has operations across the US, I would have to go to every state website and use their sometimes-antiquated search functions—and it’s very challenging in those instances to find material issues. Now, we can go to one platform and search everything. And then on top of it, this platform is experimenting with AI tools to try and make it even better. I’m very optimistic about the ways that AI and other technological developments will improve our ability to advise our clients in the US.
GF: How does the current climate affect M&A and consolidations, not just in the energy sector but in others? Do you see a freeze?
Hook: It’s an interesting time because there’s certainly still M&A activity going on. The expectation is that M&A activity will increase, because there will be market participants looking to exit various investments or projects that they were developing. The sense that I’ve gotten from speaking to folks in the industry is the expectation that it will be a buyer’s market, whereas maybe three years ago it was more of a seller’s market.
We do expect to see an uptick in M&A activity. I’m not quite sure what the timescale for that is, because we’re still seeing it. I don’t know that there’s been a significant uptick yet, but that is certainly the expectation.
