London, 19 October 2016 -- Global unregulated utilities and power companies, as the largest
source of carbon emissions in most developed countries, will need
to contribute a large share of the emission reductions agreed under the
Paris Agreement , says Moody's Investors Service in a new
report published today. However, generators with the right
business mix may find opportunities, while supportive policies in
some markets may ease the transition for those negatively affected.
Moody's report, titled "Global Unregulated Utilities
and Power Companies: Carbon Transition Brings Risks and Opportunities",
is available on www.moodys.com. Moody's subscribers can access this report here
"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. Disruptive technologies,
including energy storage, could also challenge the economics of
power generation businesses," says Graham Taylor, a
Moody's Vice President -- Senior Analyst and one of the report's
authors.
"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," adds Mr Taylor.
However, utilities with flexible generation, competitive advantage
in developing renewables, or innovative service offerings may be
better positioned to weather changes in the sector.
Moody's will consider utilities' ability to adapt to changing
policies and market conditions in its assessment of their credit quality.
As a starting point, its assessment will use a central scenario
consistent with the Nationally Determined Contributions (NDCs) agreed
at the United Nations' Paris Conference. In addition,
Moody's analysis will also qualitatively consider a wider range
of potential outcomes, depending upon either a more or less rapid
carbon transition.
In its central scenario, Moody's expects a drop in revenues
for power generators currently earning significant profits from selling
electricity at market prices, as the growth of low-cost or
subsidised renewable generation weighs on wholesale prices. Plants
that are more carbon-intensive compared to their local market may
also be unable to recover the higher costs imposed by carbon taxes and
similar measures. However, even as generators with high variable
costs are able to run profitably for increasingly short periods,
efficient and flexible plants may benefit by balancing renewables.
"We will also incorporate regional variations in the profitability
of various fuels. For example, in the US low prices will
drive strong demand for natural gas over the next decade despite it being
a fossil fuel. Gas is seen as a less carbon-intensive bridge
to a cleaner energy future," said Swami Venkataraman,
Senior Vice-President and one of the report's authors.
Moody's recognises that disruptive technologies are likely to transform
the electric system over time. Broader deployment of renewables
as well as smart meters and appliances, distributed generation,
energy storage and smart grids will challenge companies focused on centralised
energy generation.
Utilities with regulated transmission and distribution networks and other
sources of highly-predictable earnings may be more resilient,
although these may also become more risky over time as distributed generation
shifts the burden of network costs.
This report is part of a series assessing the credit implications of the
Paris Agreement for those sectors Moody's identifies as most impacted
by its implications. More details on other sectors at risk can
be found here:
https://www.moodys.com/newsandevents/topics/environmental-risks-and-developments/-/00702C/-/-/-1/0/-/0/-/-/-/-/-/-/-/en/global/pdf/-/rra
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