Moody’s Investors Service has lowered its outlook for the nation’s competitive wholesale electric utilities – serving about half the country – from stable to negative in the light of the coronavirus pandemic. The debt rating company says the rapid spread of the highly infections and fatal virus has hit the competitive electricity providers with a double whammy: reduced power demand and a “deepening natural gas glut.”
Moody’s says the “dual shock of power demand destruction from businesses shutting down and a natural gas oversupply will further pressure power prices and operating margins in 2020 before rebounding in 2021.” Particularly vulnerable, says Moody’s, is the “commercial customer class, a group that has been generally fairly resilient to past economic contractions.”
The recently passed, and yet to be implemented, $2 trillion pandemic rescue legislation, which has funds aimed at commercial, often small, businesses, “will provide a lifeline to these small businesses but it remains unclear how many of them will emerge or how long it will take their load to recover once we are on the other side of the crisis.”
The rating agency notes four trends that will make life difficult for the competitive providers.
* Social distancing, so far the only tool in the public health toolbox. “Actions to limit the coronavirus pandemic have driven large parts of the US to halt normal business activity resulting in immediate effects to power consumption. We expect business activity in the US to contract 4.3% in the first half of the year.”
Big losses will show up in this year’s second quarter, says Moody’s. Government rescue efforts are unlikely to kick in until subsequent quarters and into 2021. March power consumption shows a decline of 4%-8% “across nearly all unregulated power markets compared to 2016-2019 averages,” with further declines in store for April.
* A natural gas “dual shock.” While demand for gas for generating power is declining, the current oil price war between Saudi Arabia and Russia means prices are falling, and will be low “throughout the year with potential strengthening in 2021.” Low gas prices, says Moody’s, will “reduce the supply of gas in the market.”
* Market hedging should help some power producers. Companies with “hedged cash flows or those that rely on capacity sales are likely to weather the storm better.” This is bad news for nuclear and coal generators that are unable to win in capacity market bids. But “larger [independent power producers] that have size, own generation and accompanying retail energy supply business,” should fare better. Even those companies can expect “delays in receivable collections or higher receivable write offs” from the retail side.
* Merchant generator margins will shrink. The dual whammy will reduce cash flow. “Warm weather trends have already stressed power generators’ profitability….” The extraordinarily warm 2019-2020 winter means companies “with assets in the mid-Atlantic and Northeast likely are already underperforming budgets for the year.”
— Kennedy Maize