News Column

Fitch: EPA Proposal May Keep Pressure on Coal Power in Long Term

June 2, 2014



NEW YORK--(BUSINESS WIRE)-- Rules proposed Monday, June 2 by the U.S. Environmental Protection Agency (EPA) limiting carbon-dioxide emissions are unlikely to have short-term effects on investor-owned utilities, independent power producers, and public power issuers and appear to alleviate earlier concerns about plant-specific emission standards. However, over the long run, the impact on issuers will vary as final limits are adopted and states draft and implement compliance plans, Fitch Ratings says.

The proposal would, on average, cut carbon emissions from power plants by 30% (from their 2005 levels) by 2030, thus providing a long lead time for states and companies to comply. The proposed rule sets state-specific goals based on the rate of carbon-dioxide emissions and gives states great flexibility in designing their own implementation plans.

If the current iteration of the proposal is implemented, pressure to reduce coal-fired generation would continue to mount. Many older, smaller coal-fired facilities have already been retired or are earmarked for closure by 2016 as a result of low natural gas prices, competition from renewable energy, and stringent emission rules such as the Mercury and Air Toxics Standards. Compliance with latest proposed rules could further curtail coal-fired generation well past 2016. Fossil fuel-fired power plants are the largest source of carbon emissions in the U.S.; coal-fired unit emissions are particularly high.

States that rely heaviest on coal-fired generation and have been slow to adopt renewable portfolio standards and energy efficiency mandates will face the greatest pressure to comply with the rules. Corporate entities, public power, and cooperative issuers with significant coal-fired generation mix would be the most affected, particularly if operating costs rise as a result of cap and trade initiatives or if coal-fired generation is displaced by higher cost, carbon-free resources. While we expect investor owned utilities, public power, and cooperative utilities to recover these higher costs from end users, the financial strain could result in weaker financial metrics and flexibility and downward rating pressure. Coal-fired merchant generators will have to absorb the costs of compliance and those that operate in markets where low carbon sources set the marginal price of power will face the greatest squeeze.

The proposed rule is scheduled to be completed within one year. Legal challenges have already risen and could defer adoption and implementation. The proposal gives states and issuers up to 15 years to comply. Fitch will continue to evaluate the effect of the regulations and the state-specific compliance plans as they are finalized.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings

Dennis Pidherny, +1 212-908-0738

Managing Director

U.S. Public Power

33 Whitehall Street

New York, NY

or

Shalini Mahajan, CFA, +1 212-908-0351

Senior Director

Corporate Finance - Global Power Group

or

Rob Rowan, +1 212-908-9159

Senior Director

Fitch Wire

or

Kellie Geressy-Nilsen, +1 212-908-9123

Senior Director

Fitch Wire

or

Media Relations:

Brian Bertsch, +1 212-908-0549

brian.bertsch@fitchratings.com

Source: Fitch Ratings


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