Low temperatures sent a shock through power and gas markets, but long-term implications may be positive for credit.

During mid-February, much of the United States experienced abnormally cold weather, particularly in the Midwest and South-Central regions. In Texas, the freezing temperatures resulted in a significant rise in demand for power, more than 10% above worst-case scenario forecasts by grid operators. Furthermore, power supply dropped rapidly as generation assets froze, natural gas infrastructure seized up limiting access to fuel, and grid frequency issues caused forced shedding of power to protect the system. The result was extremely high power and natural gas prices with potentially impactful credit implications, depending on positioning.

As the puzzle started coming together, there were a variety of outcomes, but consistent with expectations, independent retailers were the most negatively impacted. Regulated utilities were not immune from the price volatility either. Vertically integrated electric and gas utilities experienced significantly higher fuel costs in February, reaching more than double normal annual fuel expenses. Given the generally constructive regulatory environments in the Central United States, we expect most utilities to recover costs in rates under mechanisms favorable to utilities and customers. This will result in weaker credit metrics to fund costs, but normalization is likely over the medium term as costs are recovered.

Given the impact that power outages had on Texas, we expect legislators to push for market reform. While sweeping changes are unlikely, a focus on weatherization of power plants and gas infrastructure is most practical in our view. Some sort of a capacity market to attract capital for dispatchable generation would help reliability.

We believe the long-term credit impact for regulated utilities and the larger diversified independent power producers (IPPs) will be neutral to positive. While winterizing assets will be costly up front, it reduces risk over time, and increased regulations may improve cash flow visibility—which would be constructive for credit. Finally, we believe an increased focus on resilience and reliability by state regulators would be positive, driving growth in rate base for regulated utilities.