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Conventional power companies could see cost of credit rise due to renewables

Conventional power generators could face a rise in the cost of credit because of market disruption caused by the growth of renewable energy, Moody's has warned.07 Nov 2012

In a special report (subscription required), the ratings agency said that further expected increases in the use of renewables would affect the creditworthiness of coal and gas burning companies "in the near to medium term". However, the planned introduction of 'capacity mechanisms' to incentivise reliable power generation in a number of European countries would be "credit positive" for the companies Moody's tracks, it said.

"Large increases in renewables have had a profound negative impact on power prices and the competitiveness of thermal generation companies in Europe," Scott Phillips, an analyst with the ratings agency, said. "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."

In addition, the report warned that utilities would likely be "forced into a three-way lobbying battle" in order to compete for incentives alongside renewable companies and network operators. These companies had to "adapt to this new paradigm or risk being squeezed out", Moody's said.

The agency added that the timing and structure of potential capacity mechanisms remained uncertain, particularly as politicians would be "cautious about burdening the consumer" with the additional costs necessary to operate these schemes.

A capacity mechanism is system designed to guarantee that sufficient energy generating capacity is available when needed. It is intended to compensate for the increasing use of more intermittent forms of renewable energy generation, such as wind, by incentivising conventional power generators to remain online.

The UK has proposed the introduction of a capacity market, to be administered by the National Grid as system operator, as part of its flagship Electricity Market Reform (EMR) programme. Legislation allowing it to establish the capacity market is due to be published as part of the next draft of the Energy Bill, due before the end of this year. The capacity market will enable the National Grid to purchase the total volume of generation capacity it requires through a central auction including all providers willing to offer capacity, and will offer incentives for energy companies to invest in new capacity or keep existing capacity operational.

The Government is also expected to announce a new gas generation strategy in the autumn, which the Government has indicated could include the construction of an additional 20GW of gas generation capacity between now and 2030. Support for low carbon gas generation has also been included in the EMR, which the Government has claimed will provide potential investors with "transparency, longevity and certainty". Around one fifth of the country's existing power generating capacity is due to come off-line over the next decade due to aging power plants and more stringent environmental standards.

In its report, Moody's suggested that the European Commission's drive to promote energy market interconnection and stability was another factor likely to impact on the creditworthiness of generators with bases in different states. The Commission's Third Energy Package aims to remove some of the barriers to interconnection but the ratings agency pointed out that the programme remained subject to "regulatory, political and financial hurdles" particularly due to its likely impact on power prices in lower priced regions.

If passed, the price increases indicated by the programme could prove to be a credit positive factor for companies based in the Nordic region, according to Moody's. However, its impact would be credit negative where it forced price decreases in higher-priced regions, such as the UK.