Credit agencies see EPA carbon rule as having mainly long-term effects on public power
Originally published September 26, 2013
Standard & Poor's Ratings Services and Fitch Ratings both see the Environmental Protection Agency's proposal to limit carbon dioxide emissions at future power plants as having more of a long-term than short-term effect on the credit quality of public power utilities. As a practical matter, S&P said, the proposal would not have an immediate impact on public power utilities’ credit quality because there are no such plants in development. Fitch said the proposed rule "would have limited impact in the near term, as the historically low cost of natural gas-fired generation has significantly reduced the demand for coal-fired facilities."
Fitch said the proposed rules could be negative for public power utilities and cooperatives and "would significantly handicap their cost competitiveness by requiring the use of expensive, and largely untested, carbon capture and storage technologies."
"Although the proposal would apply to both future coal and natural gas-fired generators, we do not believe that the limit set for future natural gas plants will have a practical impact because today's combined-cycle generating units produce emissions well under these limits," said Standard & Poor's credit analyst Jeffrey Panger. "However, we believe that the rule will have an impact on the development of future coal plants."
While EPA suggested carbon capture and sequestration could be used, the technology "has not been proven to work on a commercially viable scale, and there are significant hurdles to overcome before it can be used," S&P said. "Indeed, the American Public Power Association has said that carbon capture and sequestration will not be commercially viable for at least eight years, and we note that it has been saying the same for the past eight years."
Both credit rating companies agreed that the cumulative effect of the proposed standard and other prospective regulations due next year could preclude utilities from building new coal-fired generation and limit fuel diversity. That "could have a profound impact," Fitch said. "If emission standards are applied retroactively, compliance strategies could be extremely costly or infeasible, resulting in the premature retirement of productive assets and significantly higher operating and debt service costs related to replacement capacity."
Over the longer term, the proposed rule could preclude utilities from pursuing new coal-fired generation, limiting future resource options, Fitch said. Other prospective regulations for existing plants are due to be proposed by EPA next year and "could have a profound impact," Fitch said. "If emission standards are applied retroactively, compliance strategies could be extremely costly or infeasible, resulting in the premature retirement of productive assets and significantly higher operating and debt service costs related to replacement capacity."
In today's environment of low natural gas prices, lack of fuel diversity is not a major concern, S&P said. "But natural gas prices have historically been volatile. While projections suggest natural gas prices will remain relatively low in the next five years, we believe that they will inevitably head up. And when gas prices rise, utilities will have less coal generation to turn to as a means of managing costs."
Fitch said it views "resource portfolios that are cost competitive and exhibit fuel diversity as most supportive of long-term credit quality."
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