Coal power plants face “existential” financial risk as early as 2030 and gas facilities will see their profits disrupted by “major changes to markets, regulation, and business mode” through 2050, according to the latest climate vulnerability assessment published by Fitch Ratings.
While the agency’s Climate Vulnerability Scores see continuing demand for coal and gas over the shorter term, as well as continuing uptake for nuclear electricity and carbon capture and storage (CCS), it projects “periodic sharp increases” in risk for corporate and project debt issuers as international climate policies gain momentum.
That’s based on a 2021 assessment by the UN Principles for Responsible Investment (UNPRI) that “projects a more forceful response in most policy areas, reflecting recent market and technological developments and policy commitments made by governments, corporates, and financial institutions in the run-up to COP 26 in Glasgow, UK,” Fitch explains [pdf/regn req’d]. “These policy forecasts reflect the growing focus of regulation on key interim milestones such as 2030.”
Perhaps most significant, Fitch limits its analysis to the financial risk facing the range of energy utility types, without factoring in the front-line impacts of climate-driven wildfires, heat waves, flooding, severe storms, cold snaps that are already hampering their operations.
The vulnerability scores “only reflect transition risks and our view that policy, market, and regulatory risks are likely to be a far more severe threat to corporates as a whole in the first half of this century than physical risks,” wrote David McNeil, Fitch’s head of climate risk, in an email to The Energy Mix. “The most frequent and severe physical risks of climate change are likely to occur from the late 2030s, but the severity of these outcomes is tied to the pace and force of early low-carbon transition from the 2020s.”
He added that “while transition risks are systemic in nature, physical risks of climate change are generally more geographically localized,” and mitigating factors like geographical diversification and insurance coverage :will play a big role in determining the level of vulnerability for most corporates, at least in the near term.”
The seven-page report lays out a sliding scale of sector risk ratings ranging from 10 to 90, with 10 indicating a “neutral to positive” climate trend and 90 representing an “existential threat to core business activities”.
• Coal power plants, responsible for 42% of global emissions in 2019, face existential risk by 2030 in North and Latin America, by 2035 in Europe, the Middle East, and Africa (EMEA), and by 2040 in the Asia-Pacific (APAC) region.
“The process of reducing reliance on coal power will take moderately longer than was previously projected, partly as a result of reduced policy ambition in countries such as India, Australia, Mexico, and Indonesia,” the report states. “As a result of these factors, coal-fired generation will continue to rise until the mid-2020s on the back of new—albeit limited—investment in coal power stations (notably in APAC). Thereafter, coal-fired generation will fall gradually over the medium and long term, as countries implement coal power bans, and financing and carbon costs become prohibitive.”
Fitch sees CCS extending the operating life of coal facilities in Asia. But a release last week by the Institute for Energy Economics and Financial Analysis (IEEFA) concluded that widespread adoption of CCS in Southeast Asia, at least, “remains highly unlikely”.
• Gas plants get a relatively easy ride through 2030. But by 2035, they begin to see threats to their profitability that dictate “material changes to products or production methods,” Fitch writes.
“As with coal, gas-fired power companies—particularly those operating assets in Europe—will seek to reduce risks of asset stranding from low-carbon policies over the medium term by increasing capital expenditures on CCS, potentially weakening profitability given the high costs of these solutions,” the report states. Those costs will land on electricity generation markets that are “already be under pressure due to the impact of increasing energy efficiency efforts on overall demand,” particularly building retrofits—a dynamic that gained prominence in the UNPRI analysis between 2019 and 2021.
Gas-fired “peaker” plants “play a key role in demand-side management of electricity grids, allowing fluctuating demand and supply to be managed, and are expected to become increasingly important as renewables assume a greater share of generation,” the analysts add. But Fitch sees “longer-term vulnerabilities in key markets such as North America from the 2030s with the growth of more sophisticated energy storage technologies, demand management, and regulatory and investor focus on fossil fuel power generation as a whole.” Those trends accelerate in the 2021 forecast, “especially in EMEA, also due to lower availability of domestic gas.”
• Fitch expects a gradual increase in nuclear-generated electricity through the mid-2040s, with most new plants in Europe replacing older ones as they’re phased out, but China and India seeing “sharp increases in investment in new nuclear capacity”. While small modular reactors (SMRs) could play a role, “these technologies remain largely unproven, prohibitively expensive, and subject to approval in many key developed markets,” although the UK government’s enthusiasm for SMRs “could contribute to some derisking of projects”.
• Solar and wind receive the lowest business risk rating across all time scales and geographic regions, and the analysis shows only minimal risk for hydropower, with the renewable share of electricity generation surging from 25% in 2020 to 73% in 2050. “In some jurisdictions, renewables are already price-competitive compared to fossil fuels,” Fitch writes, especially when they’re bolstered by well-functioning carbon markets.
“However, gains in technological efficiency (for turbines and panels, etc.) could be offset by rising inflationary pressures and supply chain fragilities amid rising trade pressures globally,” the analysts warn. “For solar photovoltaic (PV) technology, shipping and equipment costs represent as much as a third of project costs, so the risk to project profitability from supply constraints is significant. Similarly, protracted trade and inflationary pressures could affect metals such as steel and copper, which are key to the deployment of wind turbines.”
