NEW YORK--(BUSINESS WIRE)--A rising number of government proposals and voluntary policies aimed at limiting investment in thermal coal and related activities could challenge access to capital for many US public power and cooperative utilities, says Fitch Ratings. Proposals under consideration and policies already adopted by banks and some investors appear to hold less risk for utilities as they are focused on coal mining and new coal-fired generating units. However, as the scope of these initiatives broadens, liquidity pressures on public and cooperative utilities with exposure to coal-fired generation could mount.
Recent pledges from a number of global public and private banking organizations, including the European Investment Bank, the World Bank, JP Morgan Chase, Bank of America, Citigroup and Morgan Stanley, to cease or limit funding for new coal-fired power plants are not, by themselves, expected to have a significant impact on public power utilities over the near term. The development of new coal-fired units has been significantly curtailed already, if not eliminated, as a result of regulations outlined in the Environmental Protection Agency's Clean Power Plan, and the improved economics of natural gas-fired generation and renewable resources. According to the US Energy Information Administration, coal's share of electricity generation in the US was 33% in 2015 from 49% in 2006. We expect declines to continue.
Previously, public power and cooperative utilities have coped well with periods of constrained access to capital. Since 2008, cooperative utilities have successfully managed restrictions imposed by the Rural Utilities Service (the sector's largest lender) on lending for new coal-fired generation, turning instead to alternative funding sources. West Coast publicly owned utilities are also navigating legislative mandates for the long-term divestiture of coal-fired energy resources.
However, concerns are growing as regulations and policies evolve and target a wider universe of issuers and activities. A recent initiative from the California Insurance Commissioner calls for insurance companies doing business in California to sell their thermal coal investments, including those in utilities that generate 30% or more of the energy they produce using coal, regardless of their location. Disclosure related to other fossil fuel investment risk by insurance companies is also required.
Should similar policies and restrictions aimed at utilities with existing coal generation versus new investment proliferate, public power systems could be faced with the difficult decision of prematurely retiring existing units or confronting a significant loss of liquidity. In either case, operating and debt service costs could rise significantly. While we expect that public power and cooperative utilities would recover these higher costs from end users, the financial strain would likely result in weaker financial metrics and flexibility, and downward rating pressure.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
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