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Soaring Natural Gas Puts U.S. Utilities’ Clean-Energy Projects at Risk

Soaring Natural Gas Puts U.S. Utilities’ Clean-Energy Projects at Risk

U.S. utilities will shed insights on whether soaring natural gas prices will crimp investments needed to revamp electric grids and pursue clean energy projects when they report earnings starting this week.

NextEra Energy Inc., owner of the biggest Florida utility, and FirstEnergy Corp., which runs utilities in Ohio and Pennsylvania, kick off earnings season Thursday when they disclose their first-quarter results -- along with the impact of surging fuel costs.

Natural gas prices have almost doubled this year, with the run-up in fuel used for heating and power plants making it more expensive for utilities to produce or buy power. While utilities typically can pass along those additional costs to customers, the resulting higher bills -- if they persist -- could make it harder for companies to get regulatory approval for spending more on big projects including adding more clean power.

Utilities benefited from low natural gas prices during the past decade because it allowed them to invest and increase earnings without raising customers bills very much, said Travis Miller, an energy and utility strategist at Morningstar Inc. Utilities can recover the cost of their capital spending along with a profit from customers with approval from regulators. 

“As you get higher energy prices through customer bills, it’s going to make it harder for utilities to justify to regulators any new investments,” Miller said. “It’s something analysts are going to focus on.”

Consumers are already grappling with the highest inflation in more than 40 years with prices rising for goods from food to gasoline, and rising heating costs are adding to the household burden.

Soaring Natural Gas Puts U.S. Utilities’ Clean-Energy Projects at Risk

Utilities have been ratcheting up capital spending by record amounts to upgrade aging grids and transition to cleaner energy sources. The industry is projected to spend nearly $140 billion on capital projects this year, an almost 80% increase from the amount spent in 2011, according to the Edison Electric Institute, a Washington D.C.-based utility trade group.

Soaring natural gas may put that in jeopardy.

Natural gas traded as high as $7.41 per million British thermal units Wednesday in New York after hitting $8.065 per mmbtu earlier in the week, the highest since 2008. Prices are more than double the average of the past decade, and significantly above the $2.73 per mmbtu from a year ago.

‘Sticker Shock’

“The pass-through of gas-price increases will cause some sticker shock with utilities’ customers,” said Hugh Wynne, co-head of utilities and renewable energy research at Sector & Sovereign Research LLC.

Natural gas plays an outsized role in customer utility bills because the fuel powers roughly half of the non-renewable generation in the U.S. and sets the price of electricity in many wholesale power markets, according to the Stamford, Connecticut-based research firm.

“With utilities plowing a lot of money into capital investments, they’ve been able to leverage lower fuel costs as a subsidy to spend on capital growth,” said Shahriar Pourreza, a North American utility analyst for Guggenheim Partners. “It’s not lost in people’s minds that subsidy is going away.”

Persistent higher gas prices could delay capital spending if utilities can’t find other ways to mitigate the elevated fuel costs, Pourreza said. That could be tricky since companies are also dealing with other inflationary pressures such as higher labor costs, he said.

Some of the utilities reporting earnings ahead:

Company NameDateAdj. EPS Est.
NextEra Energy Inc.4/21$0.72
FirstEnergy Corp.4/21$0.62
Southern Co.4/28$0.90
Sempra Energy5/5$2.74
Duke Energy Corp.5/9$1.32

©2022 Bloomberg L.P.