A bellwether power market auction that helps set long-term electricity prices in 13 U.S. states shows the natural gas glut may stifle a profit boost generators had expected from retiring coal plants.
Power producers including Exelon Corp. and FirstEnergy Corp. have been counting on tougher environmental rules to shutter a record number of coal plants by 2015, limiting electricity supplies enough to raise prices in coming years. Instead, bidders at the biggest U.S. power market auction last week saw forward prices for electricity delivered from June 2016 to May 2017 tumble 56 percent from last year’s auction, a steeper plunge than analysts expected.
“Clearly, it isn’t what people had expected,” said Paul Patterson, a New York City-based utilities analyst with Glenrock Associates, in a telephone interview yesterday. “For power generators, it’s not positive. The handwriting’s on the wall.”
Exelon and FirstEnergy, which sell much of their output into the 13-state region covered by PJM Interconnection LLC were downgraded by some analysts after the auction. Exelon dropped 7.5 percent to $32.05 at the close in New York, the most since Dec. 1, 2008, according to data compiled by Bloomberg. FirstEnergy declined 6.5 percent to $39.86, its lowest since May 15, 2009.
NRG Energy Inc., another large power producer in the region, fell 3.7 percent to $26.17 after earlier falling as much as 5.3 percent, the lowest since Nov. 23, 2011. They’re among the coal and nuclear-plant operators that have seen profits shrink since 2008 as a recession reduced electricity consumption and a flood of gas from the boom in shale drilling sent power markets into a tailspin.
The drop in power prices has erased $31.1 billion of market value at Chicago-based Exelon in five years, according to data compiled by Bloomberg. Owner of the largest group of U.S. nuclear plants, Exelon earlier this year cut its quarterly dividend for the first time in its 12-year history as price declines and expiring long-term contracts reduced profit.
Officials at Exelon had been optimistic the market was turning back in their favor as gas prices rose from last year’s 10-year low. Jonathon Thayer, the company’s executive vice president and chief financial officer, predicted during Exelon’s May 1 earnings call that wholesale prices would rise $2 to $4 per megawatt hour in the next three years as gas prices increase and a record amount of coal generation retires.
The latest PJM auction may trim Exelon profits by 15 cents to 20 cents a share in 2016, Jonathan Arnold and Keith Stanley, New York-based analysts with Deutsche Bank Securities Inc., said in a research report yesterday. Exelon would need to see a 2.25-per-megawatt-hour “uplift” to compensate for the lower-than-expected revenue.
“We are stepping to the sidelines as we cannot ignore the thesis-altering implications of Friday’s PJM capacity auction results,” wrote Arnold and Stanley, who downgraded Exelon to a “hold” from their previous “buy” rating.
Paul Adams, an Exelon spokesman, said Exelon remains well-positioned for the future despite the disappointing auction results.
“Going forward, Exelon has the financial flexibility to pursue growth opportunities that will provide strong returns - and we will, both organically and through a wide variety of transactions,” Adams said in an e-mail.
PJM, which runs a power grid that serves 60 million people from Tennessee to Illinois -- the largest electricity market in the U.S. -- said May 24 that capacity prices for the year starting June 2016 will decline to $59.37 a megawatt a day from the $136 benchmark set in last year’s auction. Capacity payments are made to generators to ensure a sufficient supply of power.
The grid operator, based in Valley Forge, Pennsylvania, blamed the price drop on a record 5,463 megawatts of new generation bid into the auction and imports of cheaper power from neighboring markets that doubled to 7,483 megawatts from last year.
The impact of coal’s decline may be muted as power producers increasingly decide to convert those uneconomic units to run on gas, Julien Dumoulin-Smith, a New York-based utilities analyst with UBS Securities LLC, said in a research report yesterday. With substantially lower operating costs, these units may be able to generate a profit, or at least break even, despite lower prices.
FirstEnergy, based in Akron, Ohio, was “disappointed with the results,” Doug Colafella, a company spokesman said in a phone interview.
“We’re still unsure what is causing generators to build new power plants under the existing market conditions,” he added. “We’re starting to see low power prices becoming a longer-term trend, and you’re seeing some generators out there building power plants in those market conditions.”
Weak prices and the influx of new gas plants may make it difficult for FirstEnergy to sell hydro-power plants in the PJM market and coal plants from its competitive business to its regulated West Virginia utilities, Arnold said in a report yesterday. Colafella said he doesn’t know whether the auction would affect FirstEnergy’s planned asset sales.
“Poor discipline by incumbent generators” has depressed future power prices, crushed the price for providing power-producing capacity and boosted shipments into the PJM market, Dan Eggers, a New York-based analyst for Credit Suisse wrote yesterday in an note to clients lowering FirstEnergy shares to the equivalent of hold from the equivalent of buy.
“We see downside from here in all of the integrated power names as the long and uncertain path to a power market recovery forces investors to re-consider the multiples paid for commodity cyclical power generation assets.”