By Aaron Vale, CAIA, CFA, MFin, Global Managing Director, Mexico Infrastructure Partners
The landscape of owning natural gas power plants in the United States has undergone a dramatic transformation in recent years, shifting from a position of perceived vulnerability to becoming one of the most sought-after assets within private infrastructure portfolios. Investors who astutely recognized and acted upon this inflection point have experienced significant rewards. To fully grasp the current dynamics and their implications for investors, it is essential to trace the trajectory of this sector from its earlier periods of robust growth to a subsequent downturn, and its recent resurgence.
From a Golden Era to a Market Correction
The late 1990s and early 2000s marked a golden age for the U.S. natural gas power sector, characterized by a significant expansion in generation capacity. This era was fueled by a confluence of factors: the deregulation of electricity markets, persistently low natural gas prices, and a steady increase in power demand. These conditions spurred a massive buildout of highly efficient combined cycle gas turbines (CCGTs), which quickly became indispensable components of the American power grid. This period saw independent power producers and infrastructure sponsors attract billions in capital to finance the construction and operation of these facilities.
However, by approximately 2007, the market began to shift. Electricity demand growth stagnated, while renewable energy sources, propelled by substantial tax credits and rapidly decreasing installation costs, captured significant investor attention and capital. Concurrently, coal-fired power generation experienced a precipitous decline. Despite these evolving market conditions, natural gas generation continued to expand, ultimately solidifying its position as the dominant source of electricity generation in the United States.
The early 2020s witnessed a stark reversal for merchant gas plants – those selling power into the wholesale market without long-term contracts. A decade of low electricity prices eroded their cash flows, leading to a wave of bankruptcies and distressed asset sales as some projects struggled to meet their debt obligations. This period signaled a clear shift in investor sentiment, with capital increasingly flowing towards renewable energy projects, while natural gas generation was perceived as a legacy asset.
The Unforeseen Demand Shock: AI and Electrification
A significant and unexpected catalyst for the reversal began to emerge in 2023 with the rapid proliferation of artificial intelligence (AI). Data centers, the engines of AI computation, are now projected to consume a substantial and growing portion of U.S. electricity. In 2023, they accounted for approximately 4% of total U.S. electricity consumption, a figure that is anticipated to surge to between 10% and 12% by 2028. This exponential growth is driven by hyperscalers racing to build out the compute capacity necessary for training and deploying sophisticated AI models, including large language models. The power requirements for these advanced computing workloads are orders of magnitude greater than those of traditional enterprise computing, and this demand is not only accelerating but is expected to continue its upward trajectory.
The demand surge from data centers is not an isolated phenomenon. It is occurring concurrently with other major electrification trends. The widespread adoption of electric vehicles, the electrification of industrial processes, and a national drive to reshore domestic manufacturing are all placing additional strain on an already stretched electrical grid. In many regions, the grid has experienced minimal additions of dispatchable generation capacity over the past decade. As a result, grid operators are now forecasting sustained tightening of reserve margins, a situation not seen in a generation.
The growth of renewable energy, while crucial, cannot single-handedly address this escalating demand for reliable power. Wind and solar power remain intermittent sources, contingent on weather conditions. While battery storage technology is advancing, current deployments typically provide backup power for several hours, falling short of the continuous reliability required by the grid. When demand peaks or renewable generation falters, a natural gas power plant is the critical asset that can be called upon to meet immediate needs. This operational reality, which may have been understated in policy discussions, has now become impossible to ignore.
The Structural Advantage of U.S. Natural Gas
A key factor underpinning the renewed attractiveness of U.S. natural gas power plants is the significant cost advantage of domestic natural gas supply. U.S. natural gas production is projected to reach record highs, between 120 and 122 billion cubic feet per day, through 2026-2027. This sustained high level of domestic production is expected to keep U.S. natural gas prices structurally lower than international import benchmarks in Europe and Asia. For gas-fired power generators, the cost of fuel is their primary variable expense. Therefore, well-positioned U.S. plants benefit immensely from their proximity to abundant and low-cost natural gas supplies. This inherent advantage has been further amplified by recent geopolitical events, including conflicts in Ukraine and the Middle East, which have placed additional upward pressure on global natural gas import prices.
Capital Markets Respond to Shifting Fundamentals
The capital markets have responded swiftly to these evolving fundamentals. In the twelve months ending November 2025, energy sector mergers and acquisitions (M&A) activity reached nearly $142 billion, a substantial increase from the less than $28 billion recorded in the preceding year. Deal multiples have also expanded significantly, with recent private market transactions for natural gas power assets achieving enterprise value to EBITDA (EV/EBITDA) multiples of 7 to 8 times or higher. A notable transaction that underscores this trend is the $26.6 billion acquisition of Calpine by Constellation Energy, which represents the largest private power transaction in U.S. history.
Despite the significant M&A activity, current valuations for operating natural gas plants remain below their replacement costs. The expense of constructing new greenfield CCGT facilities is estimated to range from $2,200 to $3,000 per kilowatt. In contrast, operating brownfield assets are currently trading at significantly lower multiples, between $700 and $1,350 per kilowatt. This valuation discount offers a considerable margin of safety for investors. It also reflects a hard-to-overcome structural reality: the rapid deployment of new generation capacity through new construction faces substantial hurdles. These include lengthy interconnection queues, permitting timelines that can extend for years, and extended delivery schedules for new gas turbines, with some lead times stretching to 2030.
Differentiated Investment Profiles: Brownfield vs. Greenfield
For institutional investors, the decision between acquiring existing operating plants (brownfield) and developing new facilities (greenfield) presents a clear risk-reward calculus.
Brownfield acquisitions are currently dominating deal activity for several compelling reasons. Operating plants immediately generate cash flows from day one, possess established grid connections, and benefit from operational histories that facilitate rigorous underwriting. While uncertainties remain regarding future power prices and potential regulatory changes, these risks are analytically forecastable.
Greenfield development, conversely, is a more complex undertaking. It involves multi-year permitting processes, significant interconnection delays, and the scarcity of critical equipment. These factors compound execution risk. However, the potential for higher returns can be unlocked when developers can secure long-term power purchase agreements (PPAs) before commencing construction. A prime example of this strategy is the development of co-location facilities for data centers. In this model, new generation capacity is built adjacent to a hyperscaler’s facility and contracted directly to provide dedicated, behind-the-meter power, offering a more predictable revenue stream.
The Opportunity: A Thermal Renaissance
The current market environment presents a significant opportunity for institutional allocators. The U.S. natural gas power sector is a large and liquid market offering diverse risk profiles, and its valuation has been dynamically repricing in response to fundamental shifts. The question is no longer whether natural gas generation is attractive in principle, as its supply, demand, and pricing fundamentals appear robust and durable. The U.S. natural gas generation sector has completed a remarkable arc: from boom, to bust, and now back to a renewed period of growth. This era marks the beginning of what can be aptly termed a "Thermal Renaissance."
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