Low gas prices challenge merchant power producers
The July-September quarter is usually the most lucrative for power generators as electric demand soars to meet air conditioning load. Falling gas prices this year reduced revenue and income and pressured cash flow, however, particularly for generators that operate coal and nuclear plants.
Ongoing low commodity prices, weak demand growth and expanding use of renewable generation is expected to weigh on non-regulated power generators into next year, said Moody's Investors Service, which shifted its outlook for the sector to negative from stable. Moody's expects the prolonged drop in natural gas prices to continue into 2016 keeping power prices low and making it harder for power generators to make a profit.
"Supply-demand fundamentals are weak for most of the derergulated power markets in the US which also hurts power prices," Moody's said.
Falling gas prices put the most pressure on cash flow for companies that operate coal and nuclear plants, such as Exelon, NRG Energy and PSEG Power, Moody's said. Because its fuel costs fall along with power prices, Calpine and companies that operate mostly gas fired power plants are more protected. Dynegy and Talen Energy Supply are buying gas plants to reduce their exposure to coal, Moody's said.
Calpine said its gas-dominated fleet generated a record 33,400MWh of electricity in the third quarter, a 15pc increase from 2014. Calpine's largest region, which includes plants serving the PJM Interconnection and New England markets, posted a 31pc increase.
"Lower gas prices result in us taking market share from the coal and nuclear fleet which means more margin," Calpine chief executive Thad Hill told investors.
Even with record production, Calpine's third-quarter operating revenue fell 11pc from the same quarter in 2014 and its net income fell 56pc from the year-earlier period.
Spot gas prices across the country were generally 30pc cheaper in July and August, the high-demand months, compared to 2014. Day-ahead power in PJM averaged $39/MWh in July and August, down 8pc from a year earlier as the region's reliance on coal-fired plants helped support prices.
Elsewhere, power prices fell dramatically. In northern California, peak power averaged 25pc below the prior summer despite a four-year drought that reduced hydropower resources and boosted gas use.
Average summer power prices across Texas ranged from 3pc to 6pc above 2014 prices despite cheaper gas. While day-ahead prices rose 6pc in the north zone of the Electric Reliability Council of Texas (ERCOT), generators across the state were disappointed that record heat-related power demand did not result in higher real-time prices after creation of a scarcity pricing mechanism.
"During August, we saw our first real test of the operating reserve demand curve (ORDC) mechanism and sadly, we watched it fail," said Mauricio Gutierrez, chief operating officer of NRG Energy.
NRG's gas-fired plants produced 30pc more power in the June-August quarter. Lower coal-fired output in Louisiana offset some of that increase, leaving NRG's third-quarter generation at 37,409MWh, up 5pc from the corresponding 2014 quarter.
NRG's average coal cost on a Btu basis fell 8pc from the previous summer while the average cost of gas slid 31pc.
NRG's operating revenue fell by 3pc in the quarter from the year-earlier quarter and net income slumped 63pc.
In Texas, which accounts for about 10pc of the nation's power output, NRG and Calpine "are suffering from the state's rush to renewable energy and ultra-efficient gas generation," said analysts at Morningstar. "We do not think power prices can overcome these secular supply headwinds, even if oil and gas prices rebound and energy demand remains robust."
While the power-price drop was less severe in PJM, Moody's said the spread between power prices for gas and coal generation will not be sustainable as more gas plants enter the market to take advantage of abundant supply from the Marcellus and Utica formations.
Generators in PJM will benefit from higher capacity prices in 2016 based on new capacity performance standards, but "the gains are not enough to offset the much larger drop in wholesale power prices," Moody's said.
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