Moody’s maintains stable outlook for public power in 2019

Posted By: Garnie Holmes Industry ,

Moody’s Investors Service on Dec. 6 said that it is maintaining its stable outlook for the public power electric utility sector for 2019, reflecting the industry’s self-regulated cost recovery mechanisms, sound financial metrics and competitive product.

“U.S. public power electric utilities will continue to display a trend of stable to modestly improving financial metrics, supported by a steady business environment and their self-regulated ability to set electricity rates to pay debt service,” Moody’s said in the report.

The rating agency said it expects strong financial liquidity will be maintained in 2019, in the range of 200-250 days liquidity on hand for public power electric utilities that own generation.

Moody’s noted that sufficient liquidity is a credit positive factor that can be used to mitigate the impact of hurricane disasters, unexpected fuel or power price increases, or budget variances due to generation outages. “Sound liquidity helped many public power electric utilities in the Southeast manage the initial operational and financial impact of Hurricane Florence in 2018,” the report said.

In addition, Moody’s said that prices charged by public power utilities will remain competitive in 2019. In 2017, public power utilities in three quarters of states had lower customer rates than investor-owned utilities. “Since most public power utilities transfer a portion of surplus revenue to the general government, the competitive advantage is reduced, but the transfers are used for general city services.”

Utilities will continue to push ahead with clean energy efforts

Meanwhile, despite federal and some state governments easing enforcement of existing environmental policies, “we expect public power utilities will continue to establish clean energy and carbon reduction strategies, helped by lower energy demand, greater use of natural gas, and the declining costs and more reliable performance of most renewable assets,” the rating agency said.

Moody’s expects this trend will continue over the next 12-18 months, with the lower prices for natural gas and contracted renewable energy being major contributors.

The rating agency believes that most of the legislative actions on carbon reduction will occur at the state level.

It noted that public power electric utilities continue to push forward clean energy plans. The report includes a select list of rated public power electric utilities that have set a goal of 100% renewable energy use.

Except in California, the goals are not legislated or regulated requirements but more in the way of planning guidelines, which vary between utilities.

“While not yet at a 100% objective, Austin’s Energy Resource, Generation and Climate Protection Plan, for example, requests that every city department ensure that its operations are in line with the plan’s objectives, including a goal of reaching 65% renewable energy by 2027, with 100% as an aspiration,” the report said.

Long Island Power Authority (A3 stable) and New York Power Authority (Aa1 stable) are focused on New York State’s Climate Plan, which involves 50% of electricity generated in New York being supplied by renewable energy sources by 2030; 2.4 gigawatts of offshore wind by 2030; a reduction of greenhouse gas emissions by 40% by 2030; and an energy storage target of 1,500 MW by 2025, Moody’s said.

Battery storage

The report said that advances in battery storage have so far been mostly at the residential customer level. “Given that the scale needed for utility power storage projects has not yet developed, we do not expect batteries to achieve a significant breakthrough in 2019,” Moody’s said.

But since power resource procurement or construction is often a multiyear process, “this creates planning uncertainties, particularly for utilities that need to balance new renewables-based generation.”

By way of example, the rating agency said that a significant question under consideration in California is whether utility power storage projects can replace natural-gas-fired generation facilities that serve to mitigate the intermittent nature of solar and wind.

“Battery storage will, however, ultimately prove to be an important development for the public power sector if it helps increase reliability and manage costs,” Moody’s said.

The report pointed out that several states, such as California, New York, Nevada and Oregon, are including energy storage incentives as part of long-term strategies and some state public utility commissions now require that utilities include energy storage in integrated resource plans.

California has been at the forefront of implementing storage systems, Moody’s said. As part of its long-term resource plan, Los Angeles Department of Water and Power (LADWP, Aa2 stable) has included 404 MW of energy storage by 2025.

Electric vehicles

Moody’s said it does not see the expansion of electric vehicles having any material impact on demand for electricity in 2019.

The rating agency mentioned a recent report by McKinsey & Co. that said EVs will add about 1% to total demand on the grid, requiring about 5 GW of new generation capacity by 2030.

Moody’s noted that utilities that have a strong focus on renewable energy, such as public power utilities Austin Energy in Texas, California’s Sacramento Municipal Utility District and Arizona’s Salt River Project, now tend to include EV developments in their strategies, offering EV charging stations, financial incentives and EV price plans for customers “in an effort to position themselves better for future demand growth stemming from EVs.”

Cybersecurity

With respect to cybersecurity, the rating agency said that as infrastructure becomes more digitized and interconnected, utilities face growing risks of cyber security breaches, “with the new threats becoming increasingly sophisticated and requiring continuing vigilance. Smaller utilities are as vulnerable as larger ones.”

Moody’s said the sector is taking an increasingly proactive stance on training and on efforts to comply with federal cyber security standards.

Snohomish County Public Utility District (Aa3 stable) in Washington, for example, invited the state’s National Guard, which includes employees of major technology firms as members, to attempt to hack the utility in a hands-on exercise.

And Moody’s noted that the American Public Power Association has established an online Public Power Cybersecurity Scorecard, which is a cyber security self-assessment process to identify improvements.

The Association developed the scorecard under a cooperative agreement with the Department of Energy (Acknowledgment:  This material [the scorecard] is based upon work supported by the Department of Energy under Award Number(s) DE-OE0000811).

Reposted with permission from Public Power Daily