OREANDA-NEWS. Low natural gas prices should facilitate efforts by most public power and cooperative utilities in the short run to comply with the broad slate of environmental regulations recently enacted, Fitch Ratings says. As higher levels of lower cost natural gas-fired generation displace traditional coal-fired generation, carbon emissions should also decline, lessening the challenges and cost of complying with the Clean Power Plan over the longer term. However, issuers in states including Kansas, Missouri, Nebraska, Tennessee, and West Virginia that rely heavily on coal-fired generation and have been slow to adopt renewable portfolio standards and energy-efficiency mandates will remain more challenged by these regulations.

Low natural gas prices could significantly reduce the cost of environmental compliance in the near term. Low prices allow utilities to use higher levels of natural gas generation to simultaneously lower costs and reduce carbon emissions. This week the Nymex contract for November delivery fell to $1.997 per mBtu. This was only the fourth time contracts have gone below $2 since 1999. Near-term prices are also expected to stay low. The U.S. Energy Information Administration (EIA) forecasts that gas in storage will reach 3.956tn cubic feet by the end of the month. That is a seasonal record.

However, full compliance with regulations including the Clean Power Plan will require the much broader deployment of vast renewable energy resources and demand-side side energy efficiency as well as expanded natural gas-fired generation. Overreliance on natural gas also presents some degree of risk, given its historical price volatility. The U.S. Environmental Protection Agency projects that natural gas-fired generation will grow from 28% of total energy supply in 2014 to an estimated 32% in 2030. If natural gas prices were to unexpectedly rise, environmental compliance costs could soar.

Public power and cooperative utilities in states with sizable mandated carbon-reduction goals, high carbon-reduction costs, and high electric costs will have the most difficult time maintaining margins while complying with environmental regulations. For these utilities, meeting the goals and recovering related costs will likely require sizable rate increases on end users already burden by comparatively high electric costs or retail rates. Although lower natural gas prices together with the autonomous rate-setting authority enjoyed by the vast majority of the Fitch-rated public power and cooperative issuers alleviates some concerns, the willingness of issuers to preserve margins amid higher operating costs is uncertain.