Bonds

Public power sector outlook is negative, S&P says

The public power sector’s outlook was revised to negative from stable by S&P Global Ratings due to factors including inflation and government mandate pressures.

Inflation diminished customers’ ability to afford electricity rates, said David Bodek, S&P sector leader.

Retail electricity prices in recent years have outpaced inflation as utilities also face increased cost, Bodek said in a webinar Wednesday. Delinquent accounts are more common and S&P is concerned they will become more so as COVID-pandemic protections are phased out.

Public power’s ability to autonomously set rates has been a credit strength, but city councils, boards, and regulators increasingly focus on “affordability” when approving rates, David Bodek said.

While public power’s ability to autonomously set rates has been a credit strength, this has deteriorated as city councils, boards, and regulators increasingly focus on “affordability” when approving rates, Bodek said.

Carbon-based fuels provide about two-thirds of all electricity in the United States, but many states mandate decarbonization by 2045. The transition to other electricity sources will be costly for utilities, he said.

In May, the U.S. Environmental Protection Agency “essentially” proposed the shutdown of thermal generation of electricity by 2035 except for hydrogen-based production and production whose carbon emissions are sequestered under ground, said S&P Director David Panger. The rating agency is unsure if this proposed rule will be finalized and implemented. Achieving it would be “very difficult,” he said.

Alternatives to thermal production have problems, Panger said. Geothermal and hydroelectric are geographically dependent. Nuclear is but costly. Wind and solar are the biggest candidates but their power is intermittent.

Electric power issuance has grown while municipal bond volume overall contracted in the last two years.

The use of batteries can help the reliability of wind and solar, but they store power for only short periods and are costly, said S&P Associate Director Doug Snider. While some observers have pointed to small modular reactors or off-shore wind as solutions, both are very costly and tend to need long-construction periods. Some projects have been cancelled recently for these reasons.

It takes about five years to get transmission lines approved, and this leads to higher costs, Snider said.

With the increasing adoption of electric vehicles, the distribution system is being stretched beyond what it was designed for, Bodek said. Upgrading it will be costly.

S&P announced its public power outlook change in a report released Tuesday.

Fitch Ratings has a stable outlook on the public power sector.

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