Moody's: Carbon reduction policies bring risk, opportunities for global unregulated utilities

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 via the link provided at the end of this press release. "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.

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