A 37 percent drop in natural gas prices since June has lowered what U.S. nuclear and coal plants can charge for electricity, potentially speeding the demise of generators teetering on the brink of closing.
While power plants that burn gas get a break on the cost side, allowing them to charge less for their product, coal and nuclear operators are seeing thinning profits. The gas squeeze comes as companies are upgrading plants to meet new environmental rules and demand weakens as a result of competition from solar and wind energy.
FirstEnergy Corp. (FE), NRG Energy Inc. (NRG), and the generation unit that will be spun off fromPPL Corp. (PPL), are among companies most at risk from depressed energy prices, according to a Dec. 31 note published by UBS AG energy analysts. Exelon Corp. (EXC), the biggest U.S. owner of nuclear reactors, said it needs to almost double power prices to keep a New York plant running.
“Natural gas prices have been falling and that’s generally not a good thing for coal and nuclear power producers who sell in competitive wholesale markets,” said Paul Patterson, a New York-based analyst for Glenrock Associates LLC.
Public Service Enterprise Group Inc. (PEG) could also face reduced revenues, UBS said. Plant closings threaten the reliability of power supplies in some regions. Mild weather has disappointed hopes for a surge in summer cooling and winter heating demand for gas.
“The latest slide in natural gas prices raises the specter of big coal-to-gas switching in 2015,” said Julien Dumoulin-Smith, a New York-based analyst for UBS.
Expectations for a repeat of last year’s polar vortex, when frigid temperatures spurred record demand and soaring prices for gas and electricity, are dwindling due to milder-than-expected winter weather.
“As you get further along in the winter, the risk of extreme weather begins to go down,” Patterson said.
Gas settled yesterday in New York at $2.938 per million British thermal units after hitting a two-year low this week. Gas last month hit historic lows in some parts of the Mid-Atlantic.
Power prices for delivery during the peak hours of the day for winter has fallen 21 percent to $54 a megawatt-hour since mid-December in PJM Interconnection LLC, the nation’s largest U.S. electricity grid. PJM serves more than 61 million people from Washington, D.C. to Chicago.
Shares of some of the nation’s largest power generators have also suffered. NRG, the largest U.S. independent generation owner, has fallen 22 percent since hitting a recent high on Nov. 7. Dynegy Inc., another large independent operator, is down 15 percent over the same period.
Owners of utilities, which are allowed to charge rates that provide a profit, are exiting the competitive power business that leaves them vulnerable to market swings. American Electric Power Co. (AEP), the biggest U.S. coal burner, said yesterday it had hired Goldman Sachs Group Inc. to advise on a potential sale of seven power plants as the utility owner struggles to compete amid falling prices.
Utilities including FirstEnergy, which owns about 10,000 megawatts of coal capacity, and Exelon are lobbying regulators and grid operators to boost what they can charge customers at their financially pinched units. They say closing the plants will risk blackouts and raise customer bills even higher.
After recording losses that exceeded $100 million from 2011 to 2013, Exelon said it needs to charge about 83 percent more than wholesale prices to earn a profit at its Rochester-area Ginna plant. Last month, Entergy Corp. shut Vermont’s only operating reactor citing low power prices.
The U.S. Environmental Protection Agency said today it will delay the release of carbon-emission rules for all power plants until the middle of the summer. Industry groups and Republican lawmakers said the proposed rules would effectively ban new coal facilities.
The companies say gas shortages last winter showed the value of coal and nuclear plants that were needed to keep the lights on. PJM, the grid operator, is asking federal regulators to allow for increasing payments to plant owners to ensure at least 2,000 megawatts of aging generation is kept in operation through next winter, according to a filing with the Federal Energy Regulatory Commission.
That won’t provide any relief in the short term as milder weather and lower gas prices could reduce FirstEnergy’s earnings per share by 20 cents in 2015, according to UBS. The company is among “the most exposed” to declining use of coal-fired power units, UBS said.
NRG could see a $30 million reduction in earnings before interest, taxes, depreciation and amortization in 2015, UBS said.
To protect themselves from volatile price swings, power companies are using hedging contracts to lock in future prices for power and gas.
FirstEnergy is taking “aggressive actions” to reduce its exposure to the market and has increased its hedged contracts since November, said Tricia Ingraham a spokeswoman for FirstEnergy. Exelon reduces its exposure to power price movements with a three-year forward hedging strategy, spokesman Paul Adams said. NRG, PPL and Public Service declined to comment on the UBS report. Dynegy didn’t immediately respond to a request for comment.
This year, coal-fired power production in PJM could be close to the lowest level since 2008, according to UBS.