Low natural gas prices are presenting opportunities for regulated electric utilities to benefit from coal-to-gas switching, Standard & Poor's said Friday.
The utilities in the best position to benefit are those that have sufficient gas-fired generation "to make a difference" or those that are building out their gas-fired fleet, S&P said in a report.
S&P, like Platts is a unit of The McGraw-Hill Companies.
Dimitri Nikas, the primary credit analyst of the report, identified four utilities that have been reaping the benefits of low gas prices: American Electric Power, Dominion Resources, Public Service Company of Colorado, and Southern Company.
In an interview, Nikas said regulated utilities can benefit in two ways from low gas prices.
Lower fuel costs can enable utilities to pass on savings to customers. That gives utilities the ability to pay down deferred fuel-cost balances, which are sums that a utility has not yet been able to recover from customers, for example when fuel prices rise more rapidly than those costs can be recovered. The net effect is that customers' bills remain stable, which can make regulators "less apprehensive" about approving future ratebase increases in a recovering economy.
The other way utilities can benefit from low gas prices, Nikas said, is by providing an opportunity to replace coal-fired plants that are facing more rigorous US Environmental Protection Agency emissions restrictions with gas-fired plants.
Ordinarily, tighter restrictions would require capital expenditures for pollution control equipment that would have to be approved by a regulator, Nikas said. But low gas prices present an opportunity for a utility to flip the fuel cost/capital cost ratio for a plant that is switching from coal to gas, he said. The old coal plant would have low capital costs because the debt is paid down but high costs to buy coal, Nikas said. A new gas plant could have the inverse ratio, allowing the utility to save enough on fuel to cover the capital costs without raising customers' bills, he said.
In addition, the higher capital costs raise the utility's ratebase, so while the company's allowed return would be the same on a percentage basis, there would be more dollars coming in, Nikas said.
The downside of that decision, though, is that building new gas-fired units is "permanent and irreversible," Nikas said. That could result in a loss of resource diversity. But unless a regulatory commission provides an incentive to diversify resources, the lowest-cost alternative will prevail, he said. Thus, it is likely more gas-fired generation will be built as long as gas prices remain below $4/MMBtu, he said.
