Moody's Investors Service is maintaining its negative outlook on the US unregulated power sector for 2018, reflecting anemic demand, an oversupplied market and low wholesale power prices.
The annual outlook report observes that the price of natural gas, a key driver of wholesale power prices, seems to have stabilized at relatively low levels after a small rise compared to 2016. The benchmark Henry Hub in Louisiana, for example, has seen natural gas trading around $3.00 per MMBtu, up from around $2.00 per MMBtu in 2016.
"Power prices are showing a similar trend to natural gas prices, rising slightly from lows in early 2016 but with forward projections looking relatively flat," says Laura Schumacher, a vice president at Moody's.
In the PJM Interconnection region (Aa2 stable), where the majority of Moody's rated issuers have substantial operations, the abundance of natural gas from the Marcellus Shale region continues to oversupply the market. As a result, power prices trended lower during 2017.
In the ERCOT region (Aa3 stable), coal plant closures may curb oversupply, but an influx of renewable energy sources coming online will continue to pressure prices. Similarly, in the California ISO region (A1 stable), the large amounts of solar and wind generation coming online reflects California's mandate of transitioning to environmentally sustainable generation.
On the other side of the equation, the oversupply has been met with stagnant demand, which is influenced by economic conditions, weather and efficiency efforts.
Potential market interventions, such as nuclear power credits in the State of New York (Aa1 stable) and Illinois (Baa3 negative), could bolster certain economically challenged plants. Additionally, a recent Department of Energy letter to the Federal Energy Regulatory Commission instructing it to issue a rule supporting some base load generation is likely to accelerate energy pricing reform.
"This type of reform may lead to increased revenues for nuclear and coal-fired generation," says Schumacher. "However, this would likely delay the shutdown of uneconomic plants, which could prolong the oversupply situation."
According to the outlook report, merchant power projects may have less flexibility than corporate power entities, which tend to have more diversified operations and greater flexibility to lower costs from greater efficiencies or to lower debt from asset sales. While most of the projects have several years of cash flow visibility, some face increased refinancing risk given their single asset nature.