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Credit implications of EPA's proposed rule on carbon emissions are mostly longer term, rating agencies say

From the June 16, 2014 issue of Public Power Daily

Originally published June 16, 2014

By Robert Varela
Editorial Director
The three major credit rating agencies had similar but somewhat different reactions to the Environmental Protection Agency’s proposed carbon emission rule for existing power plants. All fossil-fuel-fired generation "is exposed to increasingly stringent environmental mandates and steadily rising compliance costs," Moody’s Investors Service said. Implementation of the proposed rule for existing plants is likely to span years, "and we expect a highly contentious period of litigation," Moody’s said. "Since these rules won't apply until 2016, there is no immediate impact on credit quality," said Standard & Poor's credit analyst Jeffrey Panger.

The proposed rule "will accelerate the decline of coal as a fuel source, possibly putting pressure on the grid, which could hurt reliability," S&P said. "While we consider the targeted goals achievable, we expect they will also place more pressure on electricity prices for end users and there is a chance the regulations could revive the ‘cap and trade’ concept." The proposed rule’s mandates "were somewhat ambitious, particularly since states must file their initial implementation plans by June 2016," S&P added.

Fitch Ratings said the rules "are unlikely to have short-term effects on investor-owned utilities, independent power producers, and public power issuers and appear to alleviate earlier concerns about plant-specific emission standards." Over the long run, "the impact on issuers will vary as final limits are adopted and states draft and implement compliance plans," Fitch said.

All three rating agencies agreed that generators (including public power utilities and cooperatives) that rely most on coal will be most at risk, while generators with low carbon dioxide output are the obvious beneficiaries.

Standard & Poor’s said "it's too early to assess how the proposed rule will influence the credit quality of and ultimately the ratings on U.S. power producers," but the rule could have credit implications for some over several years. 

The proposed rule "is credit negative for coal-dependent power projects, merchant power generators and utilities because, if enacted, the rule will likely result in reduced power volumes and cash flows despite higher power prices," Moody’s said. The proposed rule "is not yet a game changer," as litigation and fuel-switching to natural gas will soften the impact, Moody’s said.

Using the EPA’s general assumptions of a cost of $12 - $17 per ton of carbon, "we think it’s possible that the proposal could result in incremental generating costs of approximately $5 - $10 per megawatt for coal-fired generating plants," Moody’s said. The combination of low natural gas prices and increasingly stringent environmental mandates "will contribute to the retirement of approximately 60,000 megawatts of coal-fired generating capacity between 2010 and 2017."

The tighter rules on carbon emissions "will lead to some increase in nuclear plant construction," although natural gas will still be the main option for new generation, S&P said. However, utilities value fuel diversity and "changes to plant designs mean that credit risk isn't as great as it might otherwise be for those who choose the nuclear route," said Standard & Poor's credit analyst Judith Waite.


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Vice President, Integrated Media and Communications
Meena Dayak

Editorial Director
Robert Varela

Editor, Public Power Daily
Jeannine Anderson

Communications Assistant
Fallon W. Forbush

Manager, Integrated Media 
David L. Blaylock

Integrated Media Editor 
Laura D’Alessandro