Shale glut drives down power profit margins

• 12 years ago (2012-01-18)
• David Flin

North America 998 Nuclear 640 Renewables 752

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A shale-gas glut has driven down electricity prices for the US power industry by around 50 per cent since 2008 and reduced investment in costlier sources of energy, according to a research report by Aneesh Prabhu, a Credit Analyst with Standard & Poor’s Financial Services LLC.

With abundant new supplies of gas making shale the cheapest option for new power generation, the largest US wind-energy producer, NextEra Energy Inc. (NEE), has put on hold plans for new US wind projects next year. Exelon Corp. (EXC) has called off its plans to expand two nuclear plants, while Michigan utility CMS Energy Corp. (CMS) has cancelled a $2 billion coal plant after deeming it financially unviable at a time of “low natural-gas prices linked to expanded shale-gas supplies.”

Electricity prices in the west hub of PJM Interconnection LLC, the largest wholesale market in the US, declined to about $39 per MW/h in December 2011 – down from $87 in the first quarter of 2008. “As profit margins shrink...more generators are expected to postpone or abandon coal, nuclear and wind projects, decisions that may slow the shift to cleaner forms of energy and shape the industry for decades to come,” said Mark Pruitt, a Chicago-based independent industry consultant.

“You’re lowering the earnings ceiling every time natural- gas prices drop,” said Pruitt, former director of the Illinois Power Agency, which negotiates power-purchase agreements for the state’s utilities.

“Declining power prices may also make it unprofitable for utilities to install pollution controls on older coal-fired plants, adding to the wave of plant closures that are expected to result from new U.S. Environmental Protection Agency rules over the next two to three years,” Pruitt said.