• Energy Industry
  • Market Transformation
  • Utility Asset Management

Exelon Split-Up Shows Ebb and Flow of the Energy Industry

Brett Feldman
Mar 30, 2021

Guidehouse Insights

I worked at Constellation Energy 10 years ago, at the time when the company and Exelon announced they were merging. Coming out of the financial crisis of 2008, the economy and energy markets were on the rise. It seemed like an opportune time for companies to expand their portfolios, and the likes of Exelon, NRG, and NextEra Energy, to name a few, did just that. To varying degrees, they added to their regulated asset base as well as their deregulated generation and retail supply businesses. They touted the synergies that could be accrued by scale and by combining different types of business units.

Almost exactly 10 years later, Exelon has announced that it is separating its regulated utility business from its deregulated generation and retail business into two entities. It doesn’t seem coincidental that we are just coming out of another economic (and health) crisis caused by the pandemic. The economy is in recovery and markets are on the rise, so now could be a good time to shake up the business and try to create more shareholder value.

The Business Case for Separation

From a business standpoint, there are drivers that support the separation. The risk profiles of the regulated and deregulated business models are very different. Regulated utilities rely on state-level regulators to determine their rates of ROI, which are generally stable and predictable. The deregulated generation and supply business has much greater risk based on federal regulations and market forces, as seen by the recent Texas blackouts. These cases attract different investors, so the theory is that each standalone entity will be able to maximize the value for each of its shareholder bases.

Tough questions for the two Exelon entities going forward include:

  • How will the regulated utilities find ways to standardize operational practices and state regulatory structures to improve the overall efficiency of the organization (to absorb the dis-synergies)?
  • What will happen with the nuclear assets of the deregulated entity? What are the best ways to keep them profitable, or will they need to be phased out and more focus given to building new renewable resources?
  • How will the wholesale generation and retail supply businesses be transformed into clean energy solution providers?
Exelon Is Not Alone

In the bigger picture, Exelon is not a unique case. NRG has undergone a similar wave of consolidation and divestiture for many of the same reasons. And in general, industries and corporations often go through periods when bigger seems better and then down the road, a breakup is viewed as beneficial. Those are primarily financial decisions rather than any real operational strategies.

Although Exelon might not be the only case, it is certainly the biggest. For this reason, the outcomes will be closely monitored by peers and regulators, and decisions on whether to follow suit or learn from failed lessons will ensue.