Moody’s: Fall in natural gas prices may lead to large-scale plant retirements
By Darren Sweeney
“Gas prices by far have the most dominant effect on the unregulated power sector in the US,” Moody’s said in a March 31 report.Moody’s warns that “persistently low natural gas prices” have placed several coal and nuclear power plants at risk of closure, with merchant generators scrambling to cut costs.
“Low natural gas prices have devastated most of the US merchant power sector because gas-fired power plants often serve as the marginal plant during times of peak power demand,” Moody’s said. “Lower natural gas prices have effectively driven down wholesale power prices for all generators, regardless of whether they are using natural gas, coal, nuclear power or renewable resources to generate their electricity.”
“The way we kind of look at it is, the forward curve assumes things will improve,” Moody’s Vice President and Senior Credit Officer Toby Shea said in an April 7 interview. “In the past, over six years, every time the forward becomes the spot, the prices have fallen, except for 2014. So, it’s not clear that the forward prices that we see right now [are] going to still be where [they are] by the time we get there.”
While this trend is harmful to all merchant generators, the rating agency said it is “most harmful to coal-based generators and to a lesser extent nuclear-based generators.”
“In the current commodity price environment, most unregulated coal and nuclear plants are generating little or negative cash flows,” Moody’s said. “We believe that if the current gas price environment of $2/MMBtu to $3/MMBtu does not improve in the next 12-18 months, there could be more large-scale coal and nuclear plant closures, especially in regions without a forward capacity market, such as Texas and the Midwest.”
Shea said the “area with the highest risk” is the Electric Reliability Council of Texas Inc., especially for coal plants.
Coal plants in the Illinois part of the Midcontinent Independent System Operator Inc. are at risk as well, he said.
“Also, all the single-unit nuclear power plants, no matter where they are … if you’re a single unit, you’re at risk,” Shea added, attributing the risk to economies of scale.
“If you have two or three units, it’s a lot bigger, so your cost goes down [on a] per unit basis,” he noted. “All the things I’m talking about, obviously, are unregulated. Texas, there’s some risk, but not so bad in terms of nuclear.”
Moody’s said coal plants such as NRG Energy Inc.’s 1,689-MW Limestone plant in Texas and Dynegy Inc. unit Illinois Power Generating Co.’s 1,230-MW Newtonplant in Illinois are “particularly vulnerable because the market is designed without a forward capacity payment from the independent system operator.”
Some coal plants in Pennsylvania and Maryland are at risk of either shutting down or being converted to natural gas, according to Shea.
Potential candidates for conversion include NRG affiliate GenOn Energy Inc.’s 668-MW Chalk Point 1 and 2 units and 519-MW Dickerson coal plant in Maryland.Talen Energy Corp’s 1,515-MW Montour coal plant in Pennsylvania may also be converted to gas or a combination of coal and gas, according to Moody’s.
Moody’s revised its ratings on several independent power producers in late March based on concerns of persistently low commodity prices in the sector.
While Calpine Corp.’s ratings were revised upward based on its stronger financial profile, Talen Energy Supply LLC, Illinois Power Generating Co. and GenOn Energy were downgraded by the rating agency.
NRG Energy itself was unaffected, with its corporate family and probability of default ratings affirmed at Ba3 and Ba3-PD, respectively.
Shea said there are “several things” merchant generators have done to combat the low natural gas prices. The associated chart uses Henry Hub figures.
“A lot of coal plants and nuclear power plants … they’re cutting costs like crazy,” he said.
One way they are cutting these costs is through consolidation to reduce overheads, and also through negotiating with coal transportation suppliers and coal producers.
“Coal prices have gone down a lot,” Shea said. “Even nuclear costs, we see them coming down significantly. When you’re not making any money, you find ways to cut costs. [Companies] have a significant amount of cost-cutting in store.”
Acquisitions also have played a big role in combatting prices.
“I think the best example is Dynegy,” Shea said.
Dynegy Inc. in April 2015 completed its acquisition of 12,500 MW of coal- and natural gas-fired generation assets from Duke Energy Corp. and Energy Capital Partners LLC.
“Those are actually pretty good coal assets,” Shea said, adding that the company also has been “diversifying into gas.”
Dynegy and Energy Capital Partners also announced in February that they formed Atlas Power to acquire French utility Engie’s net 8,731-MW portfolio of primarily gas-fired power plants in ERCOT, the PJM Interconnection LLC and ISO New England Inc. for $3.3 billion.
Talen also has been diversifying its fleet, Shea said.
Moody’s, largely, has viewed these moves “positively,” he said.
“In terms of getting assets that are less vulnerable to falling gas prices, we definitely see them as positive. It’s a significant positive,” Shea said. “If Dynegy still had its whole portfolio of mainly coal assets and some gas assets that are not in good markets, then I think their credit story would be very different.”
Ohio PPA impact
The analyst also said the recent approval of a power purchase agreement for FirstEnergy Solutions Corp.’s merchant plants in Ohio is “huge.”
“[FirstEnergy Corp.] and FirstEnergy Solutions’ rating is heavily driven by the fact that they got the PPA,” Shea said. “If FirstEnergy failed to get the PPA, they would have to do something to avoid a downgrade or a negative outlook.”
The PPA is “very important to [FirstEnergy’s] credit quality.”
FirstEnergy’s Davis-Besse nuclear plant is not as much at risk of early closure because it’s protected by the PPA, Shea said. However, there are challenges to the agreement.
“So, I wouldn’t say FE or Davis-Besse [or] all those coal plants are out of the woods. They’re not,” he said.