Fitch upgraded the US public power and electric cooperative sector's credit risk profile to neutral for 2024, citing lower natural gas costs and milder-than-expected inflation.

The credit rating agency explained in a Dec. 7 report that companies this year had "managed cost pressures and benefited from stronger economic activity that were more favorable than originally anticipated" when it issued its deteriorating outlook for 2023.

That stability should continue into the next year, with Fitch expecting few rating changes as interest rates likely top out in 2024, both real and nominal electricity prices fall and gas prices decrease.

Still, "slower economic growth and persistently high interest rates" could dampen performance among public power companies and electric cooperatives and prompt Fitch to revise the 2024 outlook to deteriorating, it said.

Capacity gaps exacerbated by coal plant closures could also jeopardize the sector's stability in 2024, "raising the spectre of higher wholesale energy prices and rolling blackouts," Fitch cautioned.

"Extreme temperatures and burgeoning data- and AI-related load will likely drive record peak demand for electricity, while drought conditions, plant retirements and wildfire risks could challenge resource availability," Fitch said. "Projected capacity needs to offset plant closures and meet growing demand are aggressive, and may be difficult to achieve given cost increases and supply challenges."

The Inflation Reduction Act does give companies the option to grow direct investment. The "elective payment" provision, also known as direct pay, for the first time allows tax-exempt organizations such as electric cooperatives and businesses with limited tax liabilities to claim the equivalent of a tax credit as a cash payment from the Internal Revenue Service.

The American Public Power Association noted in June, when the IRS released much-awaited guidance, that utilities serving almost 30% of the country's power customers had previously been excluded from the lucrative federal tax credits.

"Elective payment of tax credits has the potential to be revolutionary for such investments, unlocking the ability for public power communities to own and control such projects, rather than going hat in hand to Wall Street hoping to find a willing investor," the group said in a statement. "That means local decision-making driving local generation and jobs."

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