Low natural gas prices drag down FirstEnergy

OREANDA-NEWS. Utility holding company FirstEnergy's service territory overlies the Marcellus and Utica shale formations that have turned the mid-Atlantic region into the new US producing region but the surfeit of natural gas is bad news for the company's generating fleet.

The "shale gale" boom has created business growth opportunities for the company's transmission arm and regulated utilities that for the past decade have had to cope with flat load as population remained steady in its service area and manufacturing has declined. FirstEnergy in the next few years expects to connect 1,000MW of new load to serve new shale gas midstream and processing infrastructure.

But the news is bad for the company's generating fleet: low gas prices are depressing wholesale power in the PJM Interconnection because natural gas is a common marginal fuel in the PJM region where FirstEnergy plants are located.

The \$50bn company owns 18MW of generation capacity, including 14GW of merchant generation and 4GW of regulated capacity in West Virginia. Coal in 2013 accounted for 57pc of FirstEnergy's fuel mix, followed by nuclear energy with 23pc and natural gas at 8pc.

"Several of our units [in PJM's western region] continue to struggle to run economically. ... We had two units at the Bruce Mansfield plant that did not run for six days in the last two weeks," chief executive Chuck Jones said on the company's earnings call yesterday.

Jones took over as chief executive on 1 January, replacing long-time chief Anthony Alexander.

First Energy's 2,510MW, three-unit Bruce Manfield coal-fired plant is in western Pennsylvania. Capacity factors at the plant never had fallen below 40pc on a monthly average basis before 2014 but were hovering near zero last year, FirstEnergy data show.

Peak hour spark spreads for 7 mmBtu/MWh gas units at PJM West average \$24/MWh for calendar 2016 and shed 29pc by 2020. AEP-Dayton peak spark spreads fall by the same margin from a lower base of \$21/MWh in 2016.

"We are not expecting any significant uptick in [natural gas] forward price curves. So we are structuring our competitive business around those forwards as we know," Jones said.

FirstEnergy is not seeking a sale of its merchant generation, which it views as undervalued, Jones said. The company hopes for a boost in the value of generation uner capacity market reforms PJM is contemplating.

FirstEnergy is a proponent of locking out demand response resources from capacity markets, a thorny legal issue that the US Supreme Court may consider in a few months.

FirstEnergy has asked Ohio state regulators to endorse a proposal to allow electricity consumers in that state to underwrite the operating costs of several merchant coal plants. The company was hoping for an April decision from Ohio regulators but now says the timeline may slip. PJM's 2018-19 forward capacity auction will take place in May.