From the IEEE: Outlook Darker Than Ever for Texas's Energy Future Holdings

Andre Kesteloot andre.kesteloot at
Thu Mar 15 16:36:51 CDT 2012

BLOGS <> // Energywise 

  Outlook Darker Than Ever for Texas's Energy Future Holdings

*POSTED BY:* Bill Sweet  /  Thu, March 08, 2012


In fall 2007, in one of the biggest leveraged buyouts in history, the 
famed takeover specialists KKR took control of the Texas utility TXU, 
promising to cancel all but three of eleven planned coal-fired plants 
and find greener, alternative energy. Involved was a stellar cast of 
negotiators, facilitators and investors, including former president 
George H.W. Bush's right-hand man James Baker, the sage of Omaha Warren 
Buffett, and the very influential and highly remunerated CEO of the 
Environmental Defense Fund, Fred Krupp 

Now Buffett is calling his investment in TXU, renamed Energy Future 
Holdings, a "major unforced error." 

Even at the time of its closure, however, the deal raised serious 
questions. /IEEE //Spectrum/ editor Susan Hassler wondered whether the 
deal was as green as advertised 
where the replacement energy would come from, and whether professed 
concerns about climate change might be just a cover to get out of 
investment commitments that were looking spurious. Soon, TXU disclosed 
plans for an ambitious program of nuclear construction, which may have 
been a surprise to some of Krupp's constituents.

By early 2010 it was apparent that another factor was eroding the 
foundation of the deal, namely plummeting natural gas prices 
The main message here is that the revolution in unconventional 
gas---hydraulic fracturing or "gas fracking"---is proving to be a 
"disruptive technology" in every possible way. But why is it turning out 
to be so disruptive to the fortunes of Energy Future Holdings, and why 
did so many brilliant people not see the iceberg coming?

Ultra-low natural gas prices are increasingly a nightmare for all 
developers of innovative energy technologies. Yet at the same time, 
paradoxically, they are a blessing from the perspective of climate 
change policy: The very parties that have fought hardest against putting 
a price on carbon, the utilities that rely heavily on coal to make 
electricity, are now switching to gas-fired generation, keeping U.S. 
greenhouse gas emissions markedly lower than they otherwise would be.

Seen in the narrower perspective of a profit-maximizing investor-owned 
utility, surveying prospects at the end of 2007 when gas prices were 
relatively high, if you happened to be relying mainly on paid-for coal 
plants that produced inexpensive electricity, then you stood to reap big 
rewards if you could sell that cheap energy into markets in which the 
marginal cost of electricity was governed by the higher cost of natural 
gas. That evidently was the fundamental premise of the TXU takeover.

"The [TXU] deal was announced and closed at $8 gas [per million British 
thermal units] and now here we are at $3 gas 
an analyst told the Financial Times [subscription required] this week. 
"The majority of the earnings power is from generation assets and they 
are inherently long natural gas. Those prices just did not work out for 
them and the reason is fracking."

But why, considering that the revolution in unconventional gas began in 
Texas's Barnett Shale [red area in map] , did the luminaries examining 
the prospective TXU deal not see the possibility of a long-term decline 
in natural gas prices? Nobody knows or nobody's saying, but it's a clear 
warning to anybody who thinks they know for sure the world's energy 
future---even its near future.

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