In a significant escalation in the debate over the financial risks associated with fossil fuel industries the ratings agency Moody’s has released a report which argues that increasing carbon liabilities and the rise of solar power are “already having a tangible impact on rated companies in select carbon intensive industries.”
The global report, which was released on Tuesday, warns that “credit pressures are building” for the most exposed industries, especially coal mining and coal power generation.
The report – titled Environmental Risks and Developments: Impact of Carbon Reduction Policies is Rising Globally – warns that increasing carbon liabilities are emerging in “many countries.” [Full report available to subscribers only]
Thermal coal production and coal power generation, the ratings agency warns, are “the sectors most materially and immediately exposed to carbon reduction policies” with some of the companies having “limited flexibility to adjust to changing market dynamics.”
As a result, Moody’s bluntly states that the “adoption of carbon emission policies is credit negative for the coal sector.” Moody’s also observes that “policy and regulatory risks are creating uncertainty that is hindering investment decisions and investor flows.”
In the US, the ratings agency estimates that the Obama administration’s Clean Power Plan is likely to see coal-fired generation fall from about 39 per cent to 30-35 per cent over the next decade. The implementation of the plan, Moody’s argues, would be “credit negative for coal-dependent power projects and merchant power generators” and “increase the risk of stranded power plant assets.”
It singles out Dynergy and NRG Energy as unregulated merchant power producers most at risk and Alpha Natural Resources, Arch Coal and Patriot Coal as the coal companies “particularly exposed” to US coal plant closures.
In Europe the report notes that the rise of renewables has caused generation from thermal power stations fall by about 25 per cent since 2010. Combined with the renewables-driven fall in the wholesale power prices there has been a “material reduction in generator’s profits” which has “impacted the sector’s credit quality.” Moody’s singles out RWE and E.On in Germany and Enel in Italy as the companies most profoundly affected.
While the report makes no specific mention of Australia, it passingly notes that as China and India accounted for nearly all of the growth in coal consumption in 2013, what happens with their policies has the power to reshape the global coal market.
“Stricter emissions standards in these two countries – either through domestic policy tightening or the eventual formation of a global standard on emissions – pose the largest risk to coal producers over the next 10 years,” Moody’s report states.
The Moody’s report signals that concern about stranded assets is reaching into the heartland of the financial industry at the very time that the fossil fuel industries are seeking to downplay the significance of the divestment movement.
While the report will unsettle Big Coal’s cheerleaders, another risk for investors is that Moody’s have profoundly underestimated the magnitude of the disruptive challenge that solar, wind and energy efficiency pose to the fossil fuel industries.
Moody’s posit solar as a “long-term” competitor to fossil fuel generation, tout gas as a “short term” beneficiary of a decline of coal and refer to European power demand as “stagnant.”
However, solar and wind power are already an immediate threat to both coal and gas generation. Compounding the fossil fuel generators problem is the fact that in an increasing number of major economies, including in Europe, power demand is falling even though the economies continue to grow.
Moody’s even reassuringly state that, while distributed generation is a threat to electric utilities, “we believe that utilities will receive reasonable regulatory treatment to deal with any potential industry transformation that a widespread adoption of distributed generation would bring.” Perhaps, perhaps not.
While the power of fossil fuel utilities should not be underestimated, Moody’s fail to acknowledge that the rise of distributed generation – especially rooftop solar and community and business-owned generation – is reshaping the politics of energy. Distributed ownership of power generation by people who can vote, as distinct from utilities which can’t, is creating a potent countervailing political force to the conventional utilities.
Nor does Moody’s acknowledge that Chinese coal consumption for power is falling, with profound implications for the global coal market.
While Moody’s report signals an increasing recognition by financial ratings agencies of the escalating risks associated with the fossil fuel industries, they underestimate the magnitude of the turmoil that lies ahead for investors in coal-dependent companies.
Bob Burton is a Contributing Editor of CoalSwarm and a Director of the Sunrise Project, a non-profit group promoting a shift away from fossil fuels. With Guy Pearse and David McKnight he co-authored Big Coal: Australia’s Dirtiest Habit. His Twitter feed is here.