New England capacity auction to benefit region’s energy companies

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by Swami Venkataraman, Moody’s

ISO New England Inc. (ISO-NE), the independent power grid operator for New England, on Feb. 5 announced the results of its latest annual capacity auction for 2017-18. The auction sets the price that power producers will receive in exchange for keeping their power plants ready to produce on notice and are in addition to wholesale power market revenues the producers obtain for power they actually produce as needed.

The auction cleared at $7.025 per kilowatt per month — more than twice the price in the 2016-17 auction. There was also a small capacity shortfall, with 33,700 MW of bids against 33,855 MW of required capacity. The auction results are the latest in a series of developments in New England, including power plant shutdowns and gas price increases, that are credit positive for U.S. and Canadian power producers, natural gas pipelines, power transmission developers and demand-response service providers.

The results portend stronger cash flows for power producers. The biggest beneficiary will be Exelon Corp. (Baa2 stable), which owns about 2.1 GW of capacity near Boston. NRG Energy Inc. (Ba3 stable), Dominion Resources Inc. (Baa2 stable), NextEra Energy Inc. (Baa1 stable) and Entergy Corp. (Baa3 stable) also will benefit from significant additional cash flows. Calpine Corp. (B1 stable), Dynegy Inc. (B2 stable) and PSEG Power LLC (Baa1 stable) will benefit, too, although less so.

A significant amount of new capacity that cleared the auction included exports from Canada, with Hydro-Quebec (Aa2 stable) a significant beneficiary. Generators in upstate New York are also likely to benefit from exports to New England.

These positive developments for power producers will create opportunities for other infrastructure development in New England. In January, the New England States Committee on Electricity (NESCOE), which represents the six New England governors, asked ISO-NE to assist with the development of electric transmission lines to support imports of electricity from Canada and other states and renewable energy within New England. Northeast Utilities (Baa1 stable) will be the primary beneficiary of network opportunities, although its transmission line faces local opposition in New Hampshire.

Natural gas prices in New England also have risen sharply in recent months owing to a shortage of pipeline transport capacity. This constraint provides opportunities for gas pipeline developers. Spectra Energy Corp. (Baa2 stable) and Kinder Morgan Inc. (Ba2 stable) already have pipelines projects in the region, with Spectra’s targeting a 2017 in-service date. NESCOE also asked ISO-NE to assist in receiving regulatory approval for a gas pipeline tariff whose rates would be collected through regional electric network service rates. Usually, pipelines are supported by contracts with shippers such as local gas distribution companies, gas marketers and power producers. NESCOE’s proposal, if implemented, would support additional pipelines.

Power producers have struggled in the past few years as low demand growth for power, low natural gas prices and new environmental regulations shuttered power plants. Now, it appears New England will be the first region in the U.S. where power producers will experience a turnaround because both capacity prices and energy prices are soaring. We expected an increase in the capacity price because of the planned shutdown of power plants with capacity’s totaling 3.2 GW; however, the increase was greater than expected, especially in the region around Boston, which cleared as a separate subregion of ISO-NE at a price of $15 per kilowatt per month.

Energy prices in ISO-NE’s region also spiked in the past few months because natural gas-fueled power plants normally set the wholesale price of electricity on an hourly basis. Energy prices have thus risen in tandem with gas prices and we expect them to remain elevated for the next two to three years. Power plants based on coal, nuclear, oil and other cheaper fuels, in particular, are seeing much higher profit margins.

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