Global environmental regulations could disrupt a power generator’s ability to meet financial obligations, a New York rating agency said in a new assessment.
Even though the US this spring rejected the Kyoto Protocol that would limit generators’ emissions, 180 other nations are proceeding with the accord. “Generators are faced with the decision to either control emissions now or risk scrambling to catch up later,” Fitch said in the report released last week.
Fitch takes long-term view in evaluating credit risk, including taking into account the electric power industry’s exposure to environmental risk. It said technology used to control emissions may lower output and increase production costs causing a plant’s capacity as well as profit levels to drop. There is also the risk of a company investing in existing control technology, which would be insufficient if regulations become more stringent at a later date.
Uncertainty surrounding environmental requirements has made evaluating this aspect of credit risk difficult, Fitch said. Current and future mandatory environmental standards can convince companies to invest in emission-reducing technology prematurely or not at all.
Either way, credit ratings can be jeopardized as companies “over comply or under comply” with regulations, Fitch said.
Despite uncertainty about when global greenhouse and other pollution control laws will be approved, if ever, the report noted companies must still comply with specific country laws with respect to pollution control technology.
In the European Union, companies trying to comply with emissions regulations are provided a “high degree of support to the industry,” according to Fitch. This support includes technical advice on how to establish the data required to progress through the permitting process. Comprehensive advice and clear targets are provided in writing for phased reduction programs.
In the US, companies obtain additional emission allowances through early reduction credit programs. The idea is to reward companies that make early environmental upgrades with credits that can be redeemed under future mandatory emissions control legislation.
Emission limits are defined for new plants and the states have programs for progressive reductions in SO2 and NOx.
Australia is working to establish an emissions trading system. Fitch reported the government wants to implement a trading scheme with carbon credits, even though it could be a risky move to get ahead of other countries. The biggest problem is pricing the carbon credits, Fitch said.