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Moody’s: Glut of Cheap Natural Gas Could Depress Prices, Challenge Suppliers

Investment house cautions cheap gas from Marcellus Shale could speed shutdown of coal plants, boost pressure for nuclear subsidies

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Moody’s Investors Service yesterday issued a decidedly downbeat outlook for unregulated power and utility companies, saying cheap natural gas is leading to a glut of supply that will depress prices and pose severe challenges to suppliers.

The trend, driven by abundant and less-expensive gas supplies being exploited in the Marcellus Shale formation in Pennsylvania and other states, will accelerate the closing of coal-fired plants, and could increase pressure for financial incentives to keep nuclear units afloat, the credit rating agency said.

Those developments are already being experienced here in New Jersey, where PSEG Power is closing two of the biggest coal plants in the state at the end of the month, and is lobbying intensely behind the scenes for financial incentives to keep its nuclear power units open.

The prognosis is likely to be used by power suppliers to press for increased subsidies and changes in the wholesale competitive market to make their plants more economically viable. Those kind of discussions are now taking place here and in other states as well as in Washington, D.C., before federal regulators and at the PJM Interconnection, the operator of the nation’s largest power grid.

Good deals for consumers

In the meantime, consumers in those unregulated market are enjoying lower electricity prices and sharply reduced heating bills in winter if they rely on natural gas as their fuel. That could change if power companies are successful in advocating regulatory changes in what they repeatedly champion as a competitive marketplace.

New Jersey deregulated its energy markets in 1999, a change propelled by arguments that a more competitive market would lead to lower prices in what historically is one of the more expensive energy states in the country.

“When energy deregulation occurred here, all the utilities and energy companies said competition would bring prices down. Instead they went up,’’ said Jeff Tittel, director of the New Jersey Sierra Club. “Now, that it’s finally happening, they are complaining because they’re not making enough money.’’

Blame the Marcellus Shale and fracking, the technology used to extract natural gas from the rock formations. It has led to a rapid buildout of new gas-fired generation units, taking advantage of the cheap fuel.

Fracking the market

“Fracking not only breaks up rocks, but also breaks up markets,’’ said Paul Patterson, an energy analyst at Glenrock Associates, commenting on the volatility in the energy-pricing markets. “It’s not unusual to see this kind of volatility and disruption in markets. That’s how markets work.’’

By 2021, enough new natural gas units will have been built to increase supply of power during peak times in the region by 25 percent, all at a time of little or no growth in demand, according to the Moody’s report.

“According to PJM’s latest forecast, load growth and peak demand have declined over the past 10 years,’’ said Toby Shea, a vice president and senior credit officer at Moody’s. “The market imbalance will drive down prices and pose challenges to generators operating on thin margins.’’

Pushing policymakers

That is why suppliers are pushing policymakers at every level for relief. Just last week in Washington, D.C. the Federal Energy Regulatory Commission held a two-day conference about the long-term viability of the wholesale market, focusing in part on subsidies for nuclear units.

Both New York and Illinois have approved subsidies for nuclear, dubbed zero-emission credits. Both face legal challenges, but Moody’s believes that if they can withstand the litigation, the subsidy practice could spread to other states, such as Ohio and Pennsylvania.

Without the subsidies, nuclear plants in Pennsylvania (Three Mile Island) and Ohio (Davis-Besse) are likely to shutter, according to Moody’s outlook. The ratings agency projected support for subsidies is more promising in Ohio than in Pennsylvania and New Jersey due to “past willingness’’ to provide financial help to FirstEnergy’s generation assets in that state.

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