The Federal Reserve's first benchmark interest rate cut in years should help lower financing costs for US electric utilities and temper concerns over customer bill increases at a time when the industry and its regulators are under pressure to satisfy datacenter customers' insatiable demand for electricity, sector experts told S&P Global Commodity Insights.
But even with the cost of capital decreasing in the near term, utility equity values have not seen a commensurate jump since the Federal Reserve's Sept. 18 announcement of a 50-basis-point cut to interest rates.
While the S&P 500 closed up nearly 2% on Sept. 19, the S&P utility sector index closed down more than half a percentage point.
"Utilities have a fixed weighted average cost in many ways, so you don't really see their cost of capital reacting in such a real-time way versus renewable developers," Julien Dumoulin-Smith, who heads Jefferies' power, utilities and clean energy research group, said in an interview.
Utility stocks have also outperformed the market in 2024 so far, breaking their high correlation with long-term interest rates thanks to AI exposure as well as to the sector's defensive characteristics amid a weakening economic outlook, Jefferies analysts wrote in a Sept. 19 report.
Independent power producers that own substantial nuclear energy assets, on the other hand, saw their stock prices rise on Sept. 19, with Constellation Energy Corp. recording a 4% gain, Talen Energy Corp. units increasing 2% and Vistra Corp., which on Sept. 18 announced a deal to buy out the remaining stake in its Vistra Vision LLC unit, gaining 1.4%.
"The themes that you are seeing performing well are more economically sensitive" and have more AI exposure, Austin Zuech, associate director of S&P Global Market Intelligence's investor relations and capital advisory group, said in an interview.
If utility stock prices do eventually react positively, companies will be able to issue more equity to finance their growing capital expenditure programs, according to Moody's Associate Managing Director Michael Haggarty. "The industry does a lot of refinancing, it's one of the largest debt issuing industries that we cover ... but I don't think there's a particular cliff coming" for sector debt maturities, Haggarty added.
Capex and operations and maintenance costs could also be negatively impacted by the rate cut, which boosts the risk of sending inflation higher.
"While inflation has moderated some, it's still higher than it's been historically over the last 20 years," Lillian Federico, energy research director at Regulatory Research Associates, a group within S&P Global Commodity Insights, said. "Will these interest rate reductions at this time overheat the economy and reignite inflation, which would be problematic for utilities because of regulatory lag and how long it takes to get increased operating costs into recognized rates?"
Regulatory impacts
The Fed's move will take time to work its way through rate cases and benefit residential ratepayers, but it does "give regulators more flexibility" in responding to the AI industry's needs, particularly in light of the recent high PJM Interconnection LLC capacity auction results, Haggarty said.
Gabe Grosberg, managing director of North American regulated utilities at S&P Global Ratings, agreed in an interview that the interest rate cut is "modestly positive" for customer affordability.
After PJM's July auction for the 2025–2026 delivery year cleared at $269.92/MW-day for much of the region's footprint, CreditSights analysts said the results would add about $15 billion to customer bills, while executives at both PPL Corp. and Exelon Corp. acknowledged ratepayer costs would increase.
Independent power producers said during second-quarter earnings conference calls that they do not see the auction as a big enough signal to justify building more generation, either.
Consumer advocates, meanwhile, will likely use the rate cut to push back against utilities' rate increase requests, according to Federico.
"I'm sure intervenors will use this reduction and the prospect for additional reductions into 2025 to sort of argue against any arguments utilities might make in terms of needing a higher authorized [return on equity] in the context of pending rate cases or rate cases that come up in the near future," Federico said in an interview, adding that authorized equity returns have not "ramped up as quickly" as interest rates did over the last two years.