In a report released January 15, S&P Global noted that it expected its credit ratings for public power and electric cooperatives to remain resilient and stable despite “significant credit disruptors” for the industry overall in 2020.
The agency noted that low interest rates, moderate economic growth, and low natural gas prices all present opportunities for public power’s financial health this year. On the other hand, factors negatively affecting the agency’s outlook included disruptions to the utility business model from technology, heightened risks associated with extreme weather events (such as wildfires), and uncertainty around how environmental regulations will affect the value of investments.
Despite these risks, the S&P report noted that more than 90% of public power and cooperative entities have a stable outlook. “We believe their financial performance reflects resilience in the face of increasingly stringent power plant emissions regulations and the emergence of technologies that could disrupt the traditional electric utility central station business model,” the report said.
A distribution of ratings shows that most public power and cooperative entities will have an “A” rating, with an “A+” rating being a close second.
Utilities face significant challenges in determining economic viability amid changing environmental regulations at the federal, state and local levels, noted the report. The agency noted that some state regulations and carbon emissions goals might be “ambitious” and “aspirational” and that when these goals and current technologies are mismatched, utilities are likely to be saddled with the resulting economic burden.
The report calls out storage technology as needing significant innovation to match such goals, and notes that current prices make the economics of battery storage “questionable.”
Noting that deploying the technology will require significant investment, the report said that “credit quality might suffer if customers are unwilling or unable to shoulder the potentially burdensome costs of migrating to carbon-free generation fleets.”
S&P noted that the utilities it rates mitigate the risk of reduced customer demand from distributed energy resources in part by “redesigning retail rates to reallocate more fixed costs to base charges to facilitate more certain fixed cost recovery from customers that are purchasing less energy from the utility but that are nevertheless relying on grid connectivity for reliability.”
Climate change causing negative outlook
Utilities with a negative outlook from S&P included those which the agency deemed to be at increased risk from climate change.
The report went into some length about wildfires in California, and the difference in risk for assets owned and operated by public power utilities and investor-owned utilities. Utility vulnerability and susceptibility of assets to wildfires was cited as a reason for a negative outlook for several California utilities.
While the agency gave some public power utilities a negative outlook, the report noted that “We consider public power utilities as better able to recover liability costs than their investor-owned utility (IOU) counterparts because the IOUs lack autonomous ratemaking authority and are subject to regulatory oversight.”
In addition, the report discussed the possibility of parts of Pacific Gas and Electric’s territory switching to community ownership. The report noted that any such acquisition would require the agency to “assess their credit quality with a focus on the acquirer's exposure to costs of rehabilitating neglected PG&E assets, added susceptibility to wildfires through the acquisition and the related potential for inverse condemnation liability.”
Other factors the agency will be assessing in determining utility credit ratings include participation in wholesale markets and preparedness for cyber attacks.