California's drought could pressure hydroelectric public utilities to use more expensive generation sources with greater environmental compliance costs.

SAN FRANCISCO — California's severe drought could force some hydroelectric-reliant public utilities toward more expensive generation sources, leading to increased environmental compliance costs, according to Fitch Ratings.

Costs of generation sources are expected to be manageable, the agency said on July 28, but increased natural gas usage will lead to higher greenhouse gas emissions and could frustrate strategies to meet statewide emission standards.

"Reduced hydroelectric production may have a limited effect on the ability of California public power utilities to meet statewide renewable portfolio standards, which are scheduled to rise from 20% to 25% by 2016, since large hydro production doesn't qualify as renewable under existing rules," said Fitch's managing director and head of public power, Dennis Pidherny. "However, to the extent that reduced hydroelectric production is replaced with fossil fuel-fired resources, greenhouse gas emissions will rise and systems could find it increasingly challenging and more costly to comply with greenhouse gas reduction targets if forced to purchase more expensive carbon-free, renewable energy or emission allowances."

Some California legislators are already supportive of increasing renewable targets beyond the 33% requirement for 2020, and an increase in statewide greenhouse gas emission could be a catalyst for considering steeper renewable targets, the agency said.

"In an environmentally conscious state like California, political momentum for these initiatives is often determined by a temporary reversal in the emissions trends, even if it's caused by point-in-time events like a drought or the closure of San Onofre," Pidherny said.

Eight of the 14 public power issuers that Fitch rates receive between 10% and 32% of their power supply from hydroelectric resources, according to a Fitch report from July 2013.

These hydroelectric-relate power agencies may be forced to use more expensive generation and purchased power to replace the potential shortfall in hydropower output for the third year in a row, according to the ratings agency.

"While we expect to look back at California's emissions in 10 years and see meaningful reductions, the ultimate cost to ratepayers remains a great unknown," Pidherny said.

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