Dive Brief:

• Many public power utilities in the U.S. face a growing risk from the shift to higher levels of renewable generation, according to a new report from Moody’s Investors Service.

• The report examines municipal utilities as well as generation and transmission (G&T) cooperatives and notes that, especially in more rural locations, they tend to have a greater share of coal in their generation mix than investor-owned utilities (IOU).

• Historically, munis and G&T co-ops were often exempted from adhering to state renewable portfolio standards (RPS). But the combination of the spread of more inclusive state polices, demand from consumers, and competitively-priced renewables is hastening the adoption of renewables among those public power entities, creating potential credit risks, Moody’s says.

Dive Insight:

The U.S. power sector is feeling some effects from the Paris Climate Accord even though President Donald Trump announced last June that the U.S. would withdraw from the non-binding agreement aimed at curbing global greenhouse gas emissions.

Moody's new report, "Public Power and Electric Cooperatives – US: Prudent self-regulation is key to managing carbon transition risks,” uses a framework to assess carbon transition risk for munis and G&T co-ops that draws on the Nationally Determined Contributions (NDCs) of the Paris accord — the emissions cuts pledged by each country that signed the agreement.

"Risks for utilities from the transition to a low-carbon electric grid center on the potential for stranded assets," Moody's explains in an announcement accompanying the report. "Utilities may be required to shut down carbon-emitting generation assets — particularly coal plants — before the end of their useful lives. The ability to recover those capital costs while obtaining replacement power from another source could create affordability concerns if rate increases required are significant or politically sensitive," the announcement continues. 

Climate change is a long-term issue, one that will last longer than a few presidential terms, Swami Venkataraman, a senior vice president at Moody’s, told Utility Dive. The Paris accord presents “a likely scenario to assess carbon risk,” he said, adding that there are other factors driving the sector toward decarbonization. State energy policies, for instance, are growing in importance as more states take steps to reduce their GHG emissions, absent federal action.

Even in states that opposed the Obama administration’s Clean Power Plan, there are co-ops embracing renewables, Venkataraman said. That is particularly the case at municipal utilities in large cities where customers are asking for renewables, he told Utility Dive. In addition, the costs of renewables have declined to the point where they are competitive with conventional resources. “Only when renewables got really cheap, did a lot of co-ops get into the game,” Venkataraman said.

And while munis and G&T co-ops can be at greater risk because they have a higher proportion of coal-fired generation in their portfolio, they often have an advantage because they don’t face the same level of regulatory scrutiny as IOUs.

Self-regulation remains the key differentiating factor for munis and G&T co-ops compared to IOUs, Venkataraman said. They can raise rates to maintain their credit profiles, which means that prudent self-regulation will be crucial if public power entities are going to maintain their credit profiles and avoid credit risk in the transition to decarbonization, the report says.