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Moody's raises red flags on climate risks for dozens of US utilities

Dozens of regulated electric utilities in the U.S. are at a high risk of climate change-related physical or financial impacts over the next decade or two due to rising average temperatures and more intense and frequent storms, rainfall and floods, Moody's Investors Service said in a new report.

Using analysis from its affiliate Four Twenty Seven, the Moody's report focused primarily on the risk exposure of regulated utilities related to heat stress, water stress, extreme rainfall, flooding and hurricanes. But Moody's also acknowledged that some utilities may face climate-related risks due to wildfires, sea-level rise and cold weather.

"The consequences of climate change will affect every aspect of an electrical power system, from generation, transmission and distribution to end-user demand," Moody's wrote. Regulated utilities are currently well-positioned to manage near-term climate-related hazards thanks to regulatory support, Moody's said.

However, as climate change increases the frequency and severity of extreme weather events, "anticipation of these hazards will be increasingly reflected in the capital investment programs of utilities." Moreover, the need for utilities to maintain some financial cushion to absorb the sudden impact of severe storms and flooding will be imperative, Moody's said.

Heat stress risks biggest in Midwest, Florida

Higher temperatures decrease the efficiency of power plants by reducing their cooling capacity and can potentially even force plants to shut down temporarily. Heat can also increase transmission losses, and sustained high heat can drive up customer demand for electricity and cause additional fuel and purchased power costs.

However, Moody's added that utilities are usually insulated from higher fuel prices through their ability to pass those costs on to retail customers.

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Utilities in southern Florida and the Midwest, including in Illinois, Missouri and Iowa, have the highest level of heat stress risk and include Ameren Corp., Empire District Electric Co., Evergy Inc., NextEra Energy Inc., Alliant Energy Corp., AES Corp.'s U.S. utilities, Exelon Corp. and Entergy Corp., Moody's said.

Moody's estimated that utilities that operate in regions with a red flag level of heat stress risk, which is the highest risk level, have about $31 billion in exposed rate base with a 21-year average depreciation life. Moody's defines total rate base as the sum of the utilities' allowed rate bases multiplied by the percentage of their service area that is classified as "red-flag." Depreciation life is "net property, plant and equipment divided by depreciation expense."

Water supply risks in regions with high wind, solar resources

As for water stress risk in which demand for water exceeds supply, utilities in Rocky Mountain states, the Colorado River region and California face the greatest exposure, Moody's said. Water is used to cool fossil-fueled and nuclear plants and help them operate. In water shortages, operators have had to curtail output from or shut down plants, Moody's said.

But many of the high-risk locations also have a high concentration of wind and solar resources that use little to no water to produce power, the report added.

For water stress risk, Moody's gave 11 utilities red flags and said they have a combined $31 billion in exposed rate base with a 22-year average depreciation life. In order of risk, those utilities are Edison International, Xcel Energy Inc., Sempra Energy, Fortis Inc., Berkshire Hathaway Energy, Black Hills Corp., Pinnacle West Capital Corp., Exelon, IDACORP Inc., American Electric Power Co. Inc. and Alliant.

Extreme rainfall, flooding and storm risks on the rise

The possible credit risks related to flooding, hurricanes and extreme rainfall are somewhat tempered by flood insurance and supportive regulations, Moody's wrote. That said, those kinds of events are expected to become more intense and happen more often in some regions.

About two-thirds of U.S. utilities are at high risk or red-flag risk of intense rain and flooding risk in their service territories, Moody's said. Parts of the Midwest, Southeast and Pacific Northwest are projected to face the sharpest increases.

Utilities facing red-flag risk represent almost $21 billion in rate base with a 23-year average depreciation life, the paper said. Those utilities include AEP, AES' U.S. utilities, PPL Corp., FirstEnergy Corp., Duke Energy Corp., Avangrid Inc. and Dominion Energy Inc.

Another type of extreme weather event, hurricanes, are projected to continue to put critical infrastructure such as power plants and transmission substations at risk along the East Coast and the Gulf of Mexico, Moody's wrote.

The six utilities serving regions with red flag hurricane risk represent over $55 billion in rate base with a 20-year average depreciation life, Moody's said. Those utilities are NextEra, Dominion, Duke, Entergy, Cleco Corp. and Southern Co.