Capacity Constraints, Rolling Blackouts Not Seen As Near-Term Risk To Public Power: Fitch

by Paul Ciampoli
APPA News Director
July 20, 2022

Summer capacity constraints and rolling blackouts are not viewed as a near-term risk to public power and electric cooperative credit quality, Fitch Ratings said on July 15.

Fitch noted that its rated portfolio of public power issuers “typically own or contract for sufficient electric generation during the summer months to match or exceed their expected load demand, providing a financial hedge against market scarcity and volatile energy prices.”

However, general economic inflationary pressures “will necessitate rate increases in the sector, and customer tolerance for rate increases could be diminished by recurring rolling blackouts. To the extent utilities cannot pass through needed rate increases, utility financial profiles would likely weaken and could put pressure on credit quality over the longer term,” the rating agency said.

Supply shortages and the potential for rolling blackouts are likely to happen with more frequency across the U.S., Fitch said.

It said that public power and cooperative utilities tend to own or contract for generation supplies conservatively so that they have more than sufficient reserves to meet potential increases in demand “but there may be residual risk if temperatures cause demand to be substantially higher than anticipated.”

Costs of meeting demand in excess of power supply are typically modest in relation to utilities’ overall budgets, Fitch said, adding that most utilities have a power cost adjustment feature in their rate structure that recovers power costs above budget or reduces rates to customers if power costs are below budget throughout the year.

“As a result of the conservative planning in the sector, public power utilities are often net sellers during scarcity events, protecting the financial profile of utilities during shortage or volatile pricing periods,” Fitch said.

The Electric Reliability Council of Texas (ERCOT) earlier this month asked Texas residents and businesses to voluntarily conserve electricity as extreme hot weather created record power demand across Texas.

Fitch noted that the call for voluntary conservation was successful, reducing peak demand to approximately 78.3 gigawatts on two days, and no rolling blackouts occurred.

If rolling blackouts occur during a heat event in Texas this summer, they will likely last for a few hours, not days, as occurred in February 2021 during Winter Storm Uri, and would not impact long-term public power utility credit quality, the rating agency said.

In a recent episode of the American Public Power Association’s Public Power Now podcast, Woody Rickerson, Vice President of System Planning and Weatherization at ERCOT, detailed ongoing efforts by the grid operator to bolster reliability in the state.