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Utilities Warned Of Risk From Renewables

Pilita Clark, Financial Times

Wind and solar plants are having a “profound negative impact” on Europe’s gas and coal generators, the rating agency Moody’s has warned, in a fresh sign of how quickly the growth of green power is transforming energy markets.

“What were once considered stable companies have seen their business models severely disrupted,” Moody’s said in a report. published on Tuesday.

“Given that further increases in renewables are expected, these negative pressures will continue to erode the credit quality of thermal-based utilities in the near to medium term.”

The report follows a similar warning in July from UBS analysts, who said European utilities risked having as much as half their power generation profits wiped out by 2020 as renewables reshaped the energy landscape. UBS downgraded utilities, including Germany’s RWE and EDF of France, as a result.

Nearly 100 gigawatts of renewable generation have been installed in western European countries since 2006, notably in Germany, Spain and Italy.

This means green power now accounts for more than a third of Europe’s total installed capacity base, Moody’s said, a proportion set to rise to 50 per cent by 2020 when a further 150GW of renewables are expected to be added to electricity networks.

Because wind and solar plants have very low marginal costs, they can displace traditional gas and coal generators, and push down wholesale power prices.

That means the conventional plants face both lower market prices and fewer running hours. This can make them less profitable even though it is critical for them to stay online to make up for the intermittent nature of renewables.

As a result, several European countries, including Germany, the UK and France, are looking at bringing in so-called capacity payments for conventional generators to encourage them to stay online.

But as Moody’s points out, such payments could add as much as 3 per cent to a typical household electricity bill in a country such as Germany, where the cost of subsidising renewables is already politically sensitive.