The Environmental Protection Agency's efforts to speed up the transition away from dirty energy sources like coal could pressure public power utility ratings, especially if it results in the accelerated retirement of coal-fired generation facilities, according to Fitch Ratings.
Analysts say that accelerating a shift to clean power — particularly when the technology for carbon capture is largely untested and demand for power is trending upward — could expose utilities to market dislocation, price spikes and operational disruptions.
If that happens, it could drain the utilities' liquidity and create downward rating pressure, wrote Dennis Pidherny, a Fitch managing director, and Kathy Masterson, a Fitch senior director, in a report published Tuesday.
Fitch rates 164 municipal electric retail systems, wholesale systems and projects. Of those, 47 had some ownership of coal-fired generating capacity in 2020.
Demand for electricity has been virtually flat for the past 15 years, but is expected to grow by 2% to 3% annually over the next decade to support the needs of artificial intelligence, electric vehicles and data centers, Pidherny said.
Accelerating the movement away from coal by three or four years could be significant at a time when the North American Electric Reliability Corp.
"The rules codify what has been discussed for 15 years," Pidherny said. "I wouldn't say they are more draconian than what folks had anticipated, but that doesn't mean everyone believes the methodologies and technologies included in the scenarios are ready for prime time."
For instance, the new regulations would require a 90% reduction in emissions through carbon capture or other means by the timetable outlined, which Pidherny said appears to have brought the dates for execution closer.
That is a fairly "dramatic reduction," given that carbon capture technology to date hasn't proven to be commercially viable, Pidherny said.
"The only large carbon capture facility is the one in Mississippi, owned by Southern Company," Pidherny. "There are a number of other issuers looking at carbon capture projects, but it is a long way from being cost effective."
Fitch analysts questioned to what degree the accelerated timetables result in faster retirements for coal generating facilities, because the facilities don't meet the new emission requirements, or the cost of meeting them doesn't make sense.
Coal still produces a good portion of energy in this country with public power producing plants sprinkled throughout the country, though not so much on the West Coast.
The amount of power produced by coal is expected to decline one way or another. Projections from the U.S. Energy Information Administration forecast 97 gigawatts of energy will be produced by coal-fired plants in 2032, compared to 188 gigawatts in 2022.
"So roughly half will close between 2022 and 2032, based on the EIA's annual outlook for 2032," Pidherny said.
There is also concern that proposed natural gas-fired plants could be curtailed because they can't meet the new guidelines, creating more of a supply-demand issue, Pidherny said.
"The rules are "final," but they are being challenged in court," he said.
Another caveat is the outcome of the presidential election in November could put a wrench in everything.
"It's a little like Groundhog Day, because if a Republican administration is elected in November, our anticipation is the rules would be rewritten again," Pidherny said.
Environmental regulations have experienced a whipsaw effect — with more aimed at moving the needle on climate change put in place during the Obama administration, then much of that rolled back by the Trump administration. Now, the Biden administration's efforts seek to put teeth and add more specifics around emission reductions.
The prior Republican draft did ask for continued limitation on carbon emissions, Pidherny said, but the rules focused on carbon limitations for certain types of assets and didn't require anything be closed.
The Biden administration rules don't say the utilities "have to close anything, they just outline the threshold that needs to be achieved, if they want to continue to run the plants," he said.
And the methodology for reaching the threshold for coal plants involves employing carbon sequestration. If carbon capture is the method used, he said, it has to reduce pollution by 90% in order for the plant to remain in operation.
If coal plant operators want to operate past 2039, they need to reduce emissions by 90% beginning in 2032. The same applies to any new natural gas plants that come online.
"There are a good number of utilities who have set dates for retiring the facilities — but these rules will create a problem for supply and demand if that is moved up by three or four years based on these rules," he said.
