Global Unregulated Utilities Face Risks, Opportunities in More Regulated Market

As the Paris Agreement signatories ready themselves to deal with greenhouse gas emissions mitigation, global unregulated utilities and power companies that contribute the largest share of carbon emissions in developed countries will face growing credit risks, a new Moody’s report asserts.

"We expect to see a continued rise in renewable energy, more distributed generation, and overall lower growth in the demand for energy as a result of efficiency improvements,” said Graham Taylor, a Moody's vice president, senior analyst and one of the report's authors. “Disruptive technologies, including energy storage, could also challenge the economics of power-generation businesses. These trends have already had a material impact on the credit quality of some utilities, particularly in Europe, and will pose an increasing challenge for those with material exposure to higher-cost generation," he said.

But those utilities with flexible generation, a competitive advantage in developing renewables, or innovative offerings may be more likely to survive the new regulatory environment, Moody’s analysts said.

As Moody’s looks to rate the credit quality of these utilities going forward, the ratings agency expects to see revenues decline for power generators currently earning significant profits from selling electricity at market prices as low-cost or subsidized renewable generation weighs on wholesale prices. More carbon-intensive plants may not be able to recover higher costs from carbon taxes.

“Moody's recognizes that disruptive technologies are likely to transform the electric system over time,” analysts said. “Broader deployment of renewables, as well as smart meters and appliances, distributed generation, energy storage, and smart grids, will challenge companies focused on centralized energy generation.”

Those utilities with regulated transmission and distribution networks, however, may be more resilient, though this staying power could diminish over time as “…distributed generation shifts the burden of network costs,” Moody’s said.

– Nicholas Stern, editorial associate

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