Payments Plunge on Largest U.S. Grid, Threatening Closures

  • Dynegy, Talen Energy pace losses among producers after auction
  • Auction cleared at $100 a megawatt-day, down 39% from year ago

Payments to power generators for supplying the biggest U.S. electricity grid slid in an auction this month, increasing pressure on plants already struggling to keep running amid low wholesale prices. Dynegy Inc. and Talen Energy Corp. fell.

Payouts to suppliers who can guarantee capacity in the year starting June 2019 cleared at $100 a megawatt-day, grid operator PJM Interconnection LLC said on its website Tuesday. That’s down 39 percent from $164.77 in a sale last year. Valley Forge, Pennsylvania-based PJM manages a grid delivering power to more than 61 million people across parts of the U.S. Midwest, Mid-Atlantic and Northeast.

The drop will hit suppliers being squeezed by record low power prices in parts of the U.S. East because of slumping natural gas costs. The eight largest power generators in PJM will lose about $1.75 billion in annualized payments due to the “surprisingly low” prices, Kit Konolige, an analyst at Bloomberg Intelligence, wrote in research published Wednesday.

“You are seeing considerably lower prices than what some people were expecting,” Paul Patterson, a New York-based analyst at Glenrock Associates LLC, said in a telephone interview. “Given the current market conditions, I think there are going to be some generators that are very unhappy with the results.”

Shares Drop

Dynegy fell 4.5 percent to $17.76 at 10:49 a.m. in New York, while Talen lost 4.3 percent. Public Service Enterprise Group Inc. slid 3.1 percent, as NRG Energy Inc. retreated 2.6 percent. FirstEnergy Corp. dropped 1.4 percent.

The latest results contrast with a year ago when payments surged following new rules designed to increase revenue for plants to help them meet demand on the hottest and coldest days of the year.

Losses for Exelon Corp. were cushioned because prices serving the ComEd region only fell slightly from a year ago. The stock was down 0.6 percent.

Auction costs fell after demand forecasts were cut largely because of energy efficiency, Stu Bresler, senior vice president of market operations for PJM, said on a conference call. “We also had a significant injection of new supply in this auction.”

Power Supplies

The auction secured power supplies for $6.9 billion, down from almost $11 billion the previous year, Bresler said.

Exelon, which had previously warned that it may have to shut some reactors in Illinois, said its Quad Cities and Three Mile Island nuclear plants didn’t clear in the auction and won’t receive capacity payments. Dynegy cleared a total of 9,804 megawatts for about $481 million in capacity revenue, according to a statement. Public Service and Talen couldn’t immediately be reached for comment. 

Talen stands to lose $215 million in sales and Dynegy about $180 million as a result of the drop in payments, according to Julien Dumoulin-Smith, an analyst at UBS Securities LLC .

The clearing prices came in below analysts’ estimates. UBS had forecast a price of $125 per megawatt-day, while Tudor Pickering Holt & Co. said it expected prices to settle above other analysts’ estimates that ranged from $120 to $150.

The grid’s reserve margin -- supply buffer -- rose to 22.4 percent, higher than the target of 16.5 percent and last year’s 19.8 percent, PJM said. Capacity costs are passed along to households and businesses on their utility bills.

The 13-state grid secured 5,000 megawatts of new gas-fired generation while commitments to coal and nuclear generation fell by more than a combined 4,000 megawatts, Bresler said.

“Future capacity prices will remain volatile, thereby making it difficult to forecast earnings,” Michael Worms, an analyst at BMO Capital Markets, wrote in a note. “The one major surprise was the level of new generation, which was higher in this auction than last year and, we believe, well above expectations.”

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