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RPT-Fitch: EU emission cost focus positive; won't lift utility risks
January 27, 2014 / 11:42 AM / in 4 years

RPT-Fitch: EU emission cost focus positive; won't lift utility risks

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Jan 27 (Reuters) - (The following statement was released by the rating agency)

The European Commission’€™s focus on minimising the cost of reform in its latest climate and energy goals is positive for utilities, as rising consumer bills are creating significant political risk for the sector, Fitch Ratings says. But this cost focus, indicated by a report on costs alongside new 2030 emission targets, does not alter our negative outlook for the sector, especially as the new targets will continue to drive down traditional electricity generation.

The Commission’€™s report highlights that new taxes and levies have been the main driver of rising electricity bills across the continent and that the energy component of retail bills has largely shadowed wholesale power prices. We believe energy affordability will become even more of a problem for consumers in many European countries this year, increasing the risk of political intervention such as tariff controls.

The acknowledgement that energy policy reform has been the key driver of higher bills may temper some of this risk, but other measures to reduce consumer costs will pose challenges. The Commission’€™s plan to further increase energy efficiency will likely reduce demand, and its call for further improvement of energy infrastructure could further increase network costs.

The headline 2030 target of reducing greenhouse gas emissions by 40% from their 1990 level will likely lead to a further fall in power generation from fossil fuels. In the long term the reforms are likely to ensure that natural gas remains a significant energy source for Europe. Gas is cleaner than other fossil fuels and is ideal as a flexible source of generation to support less predictable renewables.

However, in the short to medium term we do not expect any reversal of the current cost advantage that coal generators hold over gas. This is because carbon emission permits remain oversupplied, keeping permit prices low and minimising the cost associated with coal’s greater carbon dioxide emissions. The Commission’s plan to delay the addition of some carbon allowances has had little effect on prices so far and more wide-ranging reforms to the emission trading system will not come in to force until 2021.

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