Court’s Emissions Rule Decision Will Not Halt Public Power’s Shift Away From Fossil Fuels: Fitch

by Paul Ciampoli
APPA News Director
July 14, 2022

The recent U.S. Supreme Court ruling that limits the Environmental Protection Agency’s (EPA) authority to cap greenhouse gas emissions will not materially affect public power utilities’ credit quality or the move away from fossil fuels, Fitch Ratings said on July 8.

The Supreme Court on June 30 reversed a U.S. Court of Appeals for District of Columbia Circuit ruling striking down the Trump administration’s Affordable Clean Energy rule, which repealed the Obama-era Clean Power Plan and replaced it with the ACE rule, a more limited regulation of carbon dioxide emissions from existing power plants.

The ruling “is mildly favorable for those public power utilities that own and operate coal- and gas-fired units, as they will have more time to develop transition strategies and amortize investments in coal and gas plants,” the rating agency said. “However, any benefits should be short lived.”

Moreover, the decision “may slow decarbonization trajectory but will not reverse its course, as state and local government directives, investor preferences, and increased affordability continue to drive the transition toward renewable energy and lower carbon-emitting strategies,” Fitch said.

The rating agency said that decarbonization strategies have for the most part been driven by states that have set their own clean energy standards.

Fitch noted that the National Conference of State Legislatures reports that 23 states and territories adopted renewable energy standards or goals that apply to public power and/or cooperative utilities. “The transition could accelerate for these issuers if states with no standards or expired standards adopt new or expanded rules,” Fitch said.

In addition, Fitch said that carbon reduction strategies “will also continue to be driven by policies aimed at limiting investment in thermal coal and investors’ increasing concerns over the environmental effects of coal-related assets.”

It said that higher natural gas and market power prices “could also drive issuers toward lower carbon strategies as the comparative economics of renewable energy resources improves and access to these resources better positions public power systems to avoid or mute the effect of higher energy costs.”

Fitch’s forecast assumption for 2022 US natural gas prices is $6.25/thousand cubic feet (mcf), up from $3.25/mcf in December 2021. “While natural gas prices are expected to moderate toward $2.75/mcf over the longer term, sustained high prices could steer utilities to accelerate the addition of renewable resources, notwithstanding current inflationary pressures and supply chain challenges related to green energy.”