Moody's: Renewables boom poses credit risk for coal and gas power plants

Global credit risk agency Moody’s has today released a potentially explosive new report warning that the credit quality of European thermal power plants will continue to be damaged as a result of the Continent’s switch towards renewable energy.

The report, entitled European Utilities: Wind and Solar Power Will Continue to Erode Thermal Generators’ Credit Quality, warns that the rapid increase in renewable energy capacity in many European markets could seriously damage the financial prospects of coal and gas-fuelled power plants in the near to medium term.

“Large increases in renewables have had a profound negative impact on power prices and the competitiveness of thermal generation companies in Europe,” said Scott Phillips, an assistant vice president and analyst at Moody’s Infrastructure Finance Group, in a statement.

“What were once considered stable companies have seen their business models severely disrupted and we expect steadily rising levels of renewable energy output to further affect European utilities’ creditworthiness.”

The report acknowledges that the credit risk of conventional power plants could be boosted by the introduction of so-called capacity mechanisms in several countries, whereby governments would guarantee payments to thermal plants that provide back-up power for intermittent renewable energy sources.

But it also warns the precise detail surrounding these proposed capacity mechanisms is yet to be finalised and argues that cash-strapped governments and consumers are unlikely to authorise lucrative payments.

“European utilities can hope for favourable new policies such as capacity payments but these may be difficult to achieve in the context of affordability,” the report concludes. “Ultimately, renewable companies, utilities and network operators may be forced into a three-way lobbying battle to secure a share of the total revenue pot. Utilities must therefore adapt to this new paradigm or risk being squeezed out.”

In addition, Moody’s predicts that the EU’s attempts to address intermittent renewable energy generation by improving integration between different national energy markets to create a European super grid will benefit energy generators in regions where there is over-capacity and low energy prices, such as the Nordics, at the same time as leading to lower credit ratings for operators in high priced regions such as the UK.

Moreover, the report predicts that fledgling investments in energy storage technologies also have the potential to be “credit negative” for thermal power plants, as if successful they will allow renewable energy generators to store power and release it at times of peak demand.

The report follows similar warnings from the Carbon Tracker Initiative, an NGO that has been campaigning for the financial risks associated with carbon intensive businesses to be properly recognised.

Earlier this year, the group called on head of the Bank of England Mervyn King to investigate whether a carbon bubble was developing, whereby highly valued companies were reliant on carbon intensive business models that will not be able to continue if the world is to deliver deep emission reductions.

The group has consistently warned that just five carbon intensive companies in the FTSE 100 are responsible for a quarter of the value of the index, despite their being locked in to unsustainable business models.

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