DALLAS — U.S. electric utilities are expected to continue a shift toward natural gas and away from coal as new domestic supplies keep prices for the cleaner-burning fuel low, according to a report from Moody’s Investors Service.
Changes in the coming decade will be gradual because power plants are capital-intensive and long-lived, according to Moody’s.
Furthermore, public power utilities, regulated utilities and their local regulatory authorities will seek to maintain a diversified generation mix, the rating agency said.
“A sustained period of low natural gas prices makes natural gas the preferred fuel for generating electricity, economically trumping all other alternatives,” said analyst Jim Hempstead, author of the report, “Shift in Electric Generation Mix Favors Natural Gas, Renewables at the Expense of Coal.”
“Increased demand for natural gas generation supplies will raise prices at the margin, but will not be sufficient to rebalance the fundamentals behind natural gas production and demand,” Hempstead wrote.
“We think natural gas prices would need to reach approximately [$7 to $8 per 1000 cubic feet] before the sector will begin to aggressively switch back to other fuel sources,” he said.
Though coal is the cheapest source of power, environmental concerns create greater regulatory risks for public and private utilities.
With booming production of natural gas throughout the United States through new hydro-fracking technology, prices have fallen steadily.
However, utilities still face some exposure to possible price spikes like those that occurred in the 1990s. Regulatory uncertainty and environmental concerns about fracking also persist.
As the power shift occurs, coal power is expected to decline to about 30% of total U.S. electric volume by 2020, down from 50% in 2009.
However, elected officials might intervene to help coal-dependent issuers in the Appalachian and Illinois Basin regions, the report noted.
“From a credit perspective, the pace of change in the generation supply mix will also be gradual, leaving a reasonable amount of time for issuers to take proactive steps to revise their plans and mitigate the risks,” Hempstead said.
“We see the regulated and public power utilities as better positioned to adapt to these shifts than the unregulated power companies and merchant power projects,” he said.
The growth rate in total U.S. electric power volume will be modest over the next 10 years, Moody’s said. U.S. economic expansion will help increase energy sales but improvements and a more aggressive deployment of energy efficiency will offset much of the potential gain.
San Antonio’s CPS Energy, one of the largest public power utilities in the nation, last March raised $521 million through revenue bonds to buy an investor-owned natural gas-powered plant in Rio Nogales. It was the first time that CPS had bought a power plant rather than build one.
At the same time, CPS announced that it would close its Deely coal plant in 2018 to avoid a $565 million expense to install scrubbers required under anticipated federal Environmental Protection Agency standards.
In a separate outlook report on public power utilities, Moody’s concluded that its stable outlook reflects the sector’s strong business model and stable financial metrics.
“Nonetheless, state and federal environmental regulatory requirements pose uneven regional impacts and that the costs of compliance are beginning to be passed along to consumers, affecting affordability,” said Moody’s senior vice president Dan Aschenbach, co-author of the report.
“While pressures on the business model warrant monitoring, the sector’s financial metrics should remain stable,” Aschenbach said.