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Announcement:

Moody's: Marcellus Shale Gas Buildout Wreaks Havoc on PJM Power Market

Global Credit Research - 08 May 2017

New York, May 08, 2017 -- A large influx of natural gas plants entering PJM Interconnection due to the cheap gas supply from Marcellus Shale will pose severe challenges for generators operating in the region, according to a new report from Moody's Investors Service. Powered by the glut in supply, new plants coming online will drive down market power prices, which could lead to widespread closures of coal plants and pressure margins for all generators, including other gas-fired plants.

Moody's estimates that new high-efficiency gas plants coming online between 2016 and 2020 will produce approximately 100 terawatt hours (TWh) per year of additional on-peak power compared to 2015 levels, resulting in a 25% increase in supply during on-peak hours. According to the report, however, the growth in supply will occur at a time with little or no growth in demand.

"According to PJM's latest forecast, load growth and peak demand have declined over the last ten years," says 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."

Moody's projects on-peak equivalent power prices in PJM to fall by about $7/megawatt-hour (MWh), and around-the-clock prices to fall by about $3.5/MWh, starting in 2021. The scenario would represent 15% and 10% declines, respectively.

The natural gas plant build-out and subsequent power price drop will drive out some of the largest facilities in the market, according to the report. Coal plant capacity factors will be much lower and the plants will have difficulties surviving on capacity payments alone because they have a much higher fixed cash cost to cover.

"We believe that 7 gigawatts of high-risk coal plants will shut down, along with some of the medium-risk plants," says Shea.

Corporate issuers with the most coal capacity in PJM include Talen Energy Supply (B1 stable), FirstEnergy Solutions (Caa1 negative), GenOn Energy (Caa3 negative) and Dynegy Inc. (B2 stable).

The glut of natural gas poses similar challenges for smaller or high cost nuclear plants, but state-level subsidies for zero-emission generation could keep them afloat. Subsidies in New York and Illinois are currently facing legal challenges from fossil fuel generators, but Moody's believes that if the legislation can withstand the litigation, the subsidy practice could spread to other states such as Ohio and Pennsylvania.

To counter the deteriorating market conditions, power companies are reducing their debt. Calpine has said that it plans to cut debt by $2.7 billion by the end of 2019. In Moody's estimation, Exelon Generation (Baa2 stable) will need to reduce debt by $3 billion to achieve its leverage target. Dynegy will require about $1.5 to $2 billion of debt reduction.

The report, "Unregulated Power and Utilities -- US: Marcellus Shale Gas Buildout Wreaks Havoc on PJM Power Market," is available to Moody's subscribers at

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1066836.

************************************************************************

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on www.moodys.com for the most updated credit rating action information and rating history.

Toby Shea
VP - Senior Credit Officer
Public Project & Infra. Finance
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Jim Hempstead
MD - Utilities
Public Project & Infra. Finance
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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