Further expected increases in renewable energy will continue to erode the credit quality of European thermal generation companies in the near to medium term, says Moody’s Investors Service in a Special Comment published yesterday entitled “European Utilities: Wind and Solar Power Will Continue to Erode Thermal Generators’ Credit Quality“.
“Large increases in renewables have had a profound negative impact on power prices and the competitiveness of thermal generation companies in Europe,” says Scott Phillips, an Assistant Vice President – Analyst in Moody’s Infrastructure Finance Group. “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.”
Moody’s notes that many European countries are considering the introduction of capacity payments to incentivise thermal generators to remain online. Utilities argue that the intermittent nature of renewables makes these mechanisms essential to address security-of-supply concerns, although politicians will be cautious about burdening the consumer with additional costs. Capacity mechanisms would be credit positive for Moody’s rated utilities, although their timing and structure remains uncertain.
The European Commission continues to address the potential balancing and stability problems by promoting interconnection. The ‘Third Package’ aims to remove some of the barriers but its development is still subject to regulatory, political and financial hurdles. The preference for a fully regulated model, with tariffs underpinned by consumers, could prove a sticking point given the impact on tariffs, and the impact on power prices in lower priced regions could prove a further political barrier. If realised, price increases in regions such as the Nord Pool would be credit positive for Fortum Oyj (A2 stable), Dong Energy A/S (Baa1 stable), Vattenfall AB (A2 negative) and Statkraft AS (Baa1 stable), while price decreases for high priced regions (such as the UK) would be credit negative.
Some European utilities are considering electricity storage as a means to manage the impact of further increases in renewable energy. In Italy, Terna – Rete Elettrica Nazionale S.p.A. (Baa1 negative) has earmarked €1.0 billion to invest in batteries and E.ON AG (A3 stable) has commenced construction of a 2 megawatt hydrogen electrolysis plant in Germany. While these emerging technologies are currently small-scale and prohibitively expensive, Moody’s cautions that storage does have the potential to further negatively affect peak power prices and would increase the competitiveness of renewables — a credit negative for thermal generators.
European utilities can hope for favourable new policies such as capacity payments but these may be difficult to achieve in the context of affordability. 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.