Isra-Mart srl: Stricter EU emissions caps could hurt utility credit ratings: S&P

www.isra-mart.com

Tighter caps on carbon dioxide emissions in the EU starting in 2013 could have an "adverse effect" on the credit ratings of electricity utilities that are required to comply with the mandates, credit ratings agency Standard & Poor's said in a report released Tuesday.

The report found that caps on CO2 emissions and participation in the EU Emissions Trading System as a means of complying with the limits did not negatively affect the creditworthiness of electricity utilities since trading in the scheme began in 2005 because the companies were given carbon credits for free by member state governments in Phases I and II of the ETS.

Phase I ran from 2005-2007, and Phase II started in 2008 and will finish at the end of 2012.

The companies were given free emissions permits by the EU in an effort to make it easier for them to comply with the CO2 limits imposed by the ETS.

"To date, there has been little effect on European utilities' credit quality arising from the cost of carbon liabilities because the majority of companies are able to largely pass through these liabilities to electricity consumers via the wholesale power price," S&P said in its report.

"What's more, lower CO2 emitters such as utilities that generate power from nuclear, hydro and renewable sources have benefited from rising power prices because they receive increased power price revenues without having to meet any emission liabilities."

But in Phase III of the EU ETS, which runs from 2013-2020, electricity utilities covered by the scheme will no longer receive free allocations of EU Allowance carbon credits from member state governments and will instead buy all of the permits they need to meet their emissions quotas from European Commission and member state-run auctions, S&P said in its report.

The change in distribution of EUAs to power companies will hurt the credit ratings of utilities that are not able to easily pass additional costs associated with trading carbon trading on to consumers, the S&P report said.

"We believe that power generators in liberalized energy markets that can set fully cost-reflective tariffs are able to pass on a greater share of the cost of emission allowances to their customers through the wholesale electricity price. Power generators operating under regulated tariff regimes, by contrast, have to negotiate with the regulatory authorities to be able to pass on any additional cost arising from carbon emissions," the report said.

"We calculate that the price of carbon passed through to consumers could add between 6.6% and 20% per megawatt-hour to wholesale power prices, based on the German wholesale price for 2012 delivery of Eur52.64/MWh at the end of June."

S&P Global Head of Carbon Markets Michael Wilkins said in a statement that "the removal of free allocations of EU carbon emission allowances from all electricity generators in Western Europe under EU ETS Phase III will, in our view, likely raise liabilities for all utility companies." "In Eastern Europe, we understand that there is still some uncertainty over the speed at which the EU ETS will introduce full auctioning, with confirmation only likely in the second half of 2011," Wilkins said.