BRADENTON, Fla. — Newly proposed Environmental Protection Agency rules to reduce carbon emissions could negatively pressure issuers' credit ratings, analysts said in preliminary comments this week.
The more than 600-page draft rule the EPA announced Monday is a credit negative for coal-dependent utilities, power projects, and merchant power generators because the rule would likely result in reduced power volumes and higher costs for generation if enacted, according to Moody's Investors Service.
The proposed rule would cut carbon emissions at existing power plants 30% by 2030. It would set state-by-state carbon emission reduction targets based on each state's existing generating fleet profile.
By June 2016, each state would be required to file implementation plans.
Among public power agencies, the Northeast and Southeast regions of the U.S. were exposed to greater coal-fired production in 2012 than other regions of the country, according to the most recent statistics provided by the American Public Power Association.
The EPA's proposed rule is a double-whammy for the industry, as it comes at a time when Congress continues to consider measures that would reduce or eliminate the tax exemption on municipal bonds.
Tax-exempt bonds are important to public power, APPA chief executive officer Sue Kelly told The Bond Buyer's Financing Municipal Utilities conference in Jacksonville, Fla., Tuesday.
"We are fighting back on that hard because it's our primary financing tool," she said.
Kelly said the APPA is doing "everything we can" to push back on any changes that would affect the issuance of tax-exempt debt.
"Some people say it could increase financing costs by as much as 200 basis points," she said. "We're fighting this proposal."
As for the EPA rule, Kelly said it would affect states differently because it proposes different reduction goals, and until the impact is better known the APPA is reserving comment.
"Our position is states should have flexibility to set reduction numbers and standards," she said.
If the proposed rule is adopted as is and implemented, pressure to reduce coal-fired generation would continue to mount, according to a report by analyst Dennis Pidherny, managing director of U.S. public power for Fitch Ratings.
"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," he said.
To date, retrofits of coal-fired units by public power agencies and electric cooperates have been generally manageable, and have been largely funded through debt issuance that "has not unduly strained key credit metrics," said Standard & Poor's analyst Jeffrey Panger.
It's too early to tell what will be required of each state, and what the impact on credit quality will be, he added.
"We believe that it is safe to say that there will be additional costs and closures, and that these will likely be more significant than experienced to date," Panger said.
"A relatively small percentage of the announced coal-unit retirements to date belong to public power and electric cooperatives, and the bulk of these belong to the Tennessee Valley Authority, which has announced the retirement of roughly 5,500 megawatts of generating capacity since 2010."
According to the APPA, every region in the country is served by power produced from various sources, including coal, oil, gas, nuclear, hydro and "other" sources, such as renewable energy.
In 2012, only the Pacific region had no exposure to electricity produced by coal, the APPA said.
Those states include Alaska, California, Hawaii, Oregon and Washington State.
The South Atlanta and East South Central regions had the greatest exposure producing a combined 70.9 million megawatt hours by coal as of 2012.
The region includes Washington, D.C., Delaware, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, West Virginia, Alabama, Kentucky, Mississippi and Tennessee.
The New England region produced 35,682 MWh, the East North Central region produced 44.2 million, and the Mountain region produced 42.9 million.
