Europe’s drive to decarbonize its energy “poses long-term risks to the region’s regulated electricity and gas network operators” according to a new report from credit and risk company Moody’s Investors Service.

And the study states that Europe’s continued transition to renewables, particularly wind and solar, is prompting new business models, developing technology and evolving regulation that could all “potentially undermine the credit quality over time” of those network operators.

“The shift to renewables in Europe has thrown up different challenges for the region’s energy network operators, with the huge uptick in renewables-related investment into electricity networks posing execution risks, while the move to decarbonization casts doubt over the long-term use of natural gas and the networks that distribute it,” said Stefanie Voelz, vice-president Senior Credit Officer at Moody’s.Decarbonization poses risks to Europe’s grid operators says Moody’s

Moody’s report also states that large scale energy network operators “may also be slow to adapt to the changing generation and consumption landscape, with electricity users becoming partially independent from the grid as they increasingly operate their own renewable generation and/or storage units. Furthermore, the growing electrification of transport or heating could significantly change network requirements.”

The report warns that these ongoing developments could lead to sector fragmentation, potentially threatening existing network operators. However, it adds that their role as system operators – whereby they coordinate the efficient use of power generated by widely-distributed, independent sources and ensure supply security on a wider level – may become more important.

Voelz said that the regulatory response to the renewables shift “will be key to the future evolution of the energy network sector, as the change in scope of activities in an environment of significant technological shift, may necessitate changes in the way European networks are remunerated and customers’ tariffs are set, if credit quality is to be maintained.”

Moody’s says that affordability will remain a key focus for network operators, as cost pressures increase on consumers. It also finds that with investment requirements remaining high, leading to growth in companies’ asset base beyond 2020, pressure on customer bills will rise. “As renewable subsidies continue to weigh on bills, affordability concerns could lead to deferral of cost and investment recovery for networks, a credit negative,” said Voelz.

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