Moody’s raises concerns in wake of power auction

Changes outlook to negative for region’s electricity generators

MOODY’S INVESTORS SERVICE on Tuesday issued a negative outlook for the region’s power generators in the wake of a very successful auction held last week to secure electricity supplies for New England in 2019-2020.

Each year, the operator of the regional power grid holds a so-called forward capacity auction to secure electricity supplies three years out. The auction sets the price generators receive for having their plants ready to produce power when needed. (Power generators pay a steep fine of $2,000 per megawatt hour if they are not able to deliver power when needed.) In addition to the capacity payments, generators also get paid a wholesale price for the energy they actually deliver.

Last week’s forward capacity auction easily secured enough electricity to meet the region’s power needs at a price that was $1 billion, or 25 percent less, than the clearing price of the previous year’s auction.

Moody’s said in an analysis that the plentiful supplies and the low price “confirm our expectations that the downturn in the merchant sector is likely to persist,” resulting in a negative outlook for the industry.

Moody’s said companies such as Dynegy Inc., Exelon Corp., NRG Energy, Dominion Resources, and NextEra Energy will see their cash flows pinched. Moody’s said debt issued by such power generators as Entergy Rhode Island State Energy LP, Essential Power LLC, and FirstLight Hydro Generating Co. will be negatively affected.

The downturn in forward capacity prices was driven by 1,459 megawatts of new generation, 371 megawatts of demand-side resources (promises by large energy users to reduce usage when called upon by the power grid operator), 27 megawatt s of new wind power, and 44 megawatts of new large-scale solar. Moody’s also noted that the region’s power grid operator, ISO-New England, had estimated that rooftop solar installations were reducing overall demand in the region by 390 megawatts, the equivalent of 57 percent of the output of Pilgrim Nuclear Power Station, which is slated for retirement.

“These developments, along with the likelihood of new electric transmission lines that will support importing power from Canada, bode ill for long-term capacity prices in the region, although ISO-New England remains the most lucrative among US merchant markets,” Moody’s said in its analysis.

Dan Dolan, president of the New England Power Generators Association, said Moody’s was reacting both to the downturn in capacity prices and also to how those prices came down much more than most analysts had expected.  He acknowledged the lower capacity prices will affect the finances of power generators, but he said the broader message of the capacity auction was that the market to deliver electricity in New England is working. He said companies are investing in new power plants to replace retiring plants, and doing so without demanding long-term contracts or subsidies from ratepayers.

Gov. Charlie Baker has proposed legislation that would direct the state’s utilities to negotiate long-term contracts with hydroelectric and wind suppliers for up to 2,400 megawatts of power, which is about a third of the Bay State’s electricity consumption.  Dolan said the lesson of last week’s capacity auction is that such long-term contracts are unnecessary. “We don’t need subsidies to get new resources on to the system,” he said.

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Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

About Bruce Mohl

Bruce Mohl is the editor of CommonWealth magazine. Bruce came to CommonWealth from the Boston Globe, where he spent nearly 30 years in a wide variety of positions covering business and politics. He covered the Massachusetts State House and served as the Globe’s State House bureau chief in the late 1980s. He also reported for the Globe’s Spotlight Team, winning a Loeb award in 1992 for coverage of conflicts of interest in the state’s pension system. He served as the Globe’s political editor in 1994 and went on to cover consumer issues for the newspaper. At CommonWealth, Bruce helped launch the magazine’s website and has written about a wide range of issues with a special focus on politics, tax policy, energy, and gambling. Bruce is a graduate of Ohio Wesleyan University and the Fletcher School of Law and Diplomacy at Tufts University. He lives in Dorchester.

Peter Lorenz, a spokesman for Baker’s office of energy and environmental affairs, said hydroelectricity from Canada and possibly wind from northern New England or New York are needed to reach the state’s greenhouse gas emission reduction goals for 2020.

“The Baker-Polito administration looks forward to working with the Legislature to make the administration’s proposal for clean, base-load generation law, as it represents a diversified and balanced approach that will be important to achieve the Commonwealth’s energy and environmental goals,” Lorenz said in a statement.