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Pandemic has accelerated transition to low-carbon economy: Moody's

Highlights

Calls changes in consumption still 'far reaching'

Says state policies are driving renewable energy demand

Houston — The transition to a low-carbon economy has been accelerated by the coronavirus pandemic, as governments tie progress on environmental priorities to financial support for troubled sectors, according to a report released Oct. 22 by Moody's Investors Service.

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The report said that efforts by "governments and society" to transition towards the use of low-carbon energy sources present, however, "a substantial risk" to the demand for oil and natural gas over the medium to long term.

Moody's also said it believes US state policies will "anchor" long-term US renewable energy demand over the next few years, and said, "These policies should lead renewable power to grow by around 65% to at least 28% of the US power supply by 2030 from around 17% in 2019."

The credit ratings agency said that the impact of the coronavirus continued to be a key driver of many rating actions during the third quarter.

"While an economic recovery is underway, its sustainability will be closely tied to containment of the virus. We project a 4.6% contraction this year in G-20 GDP, followed by 5.3% growth in 2021."

Infections, it said, are beginning to rise again in parts of the US and Europe as cooler weather sets in, "raising fears that renewed outbreaks will hinder the pace of the recovery."

"Changes in consumption are far reaching," it said.

Many sectors, such as travel and tourism are unlikely to fully recover to precoronavirus volumes until 2023 "at the earliest," because of health concerns, government-mandated restrictions and a decline in disposable income for many households.

Carbon transition

Moody's said in its report that natural gas is "increasingly being called into question" over environmental and greenhouse gas emissions.

"Permitting difficulties related to new pipelines, local government mandates favoring electrification and state carbon reduction commitments raise operating risks and cost of capital," it said, but argued that technological advancements, including the use of renewable natural gas or even hydrogen gas, "could help" support the existing natural gas infrastructure.

It argued, however, that competing technologies such as battery storage for electric generation could accelerate the decline of gas assets.

"The ability of consumers to absorb the cost of implementing such changes and public policy decisions will dictate the pace and profile of the carbon transition," Moody's said.

The ratings agency said it has sent out a request for feedback for a carbon transition assessment framework for electric utilities and power generators. "The final publication, along with additional sector frameworks, will be published in the fourth quarter," Moody's said.

Such a transition will rely increasingly upon state policies, Moody's said, given the lack of a federal policy. It noted that 26 states and the District of Columbia represent "around 47% of the total US electricity demand," and will likely drive renewable energy policy goals after 2020.

It called this a "credit positive" for renewable energy developers in the US.

"Growing cost competitiveness along with environmental, social and governance (ESG) and economic development considerations further incentivize industry growth especially in states that do not have renewable energy goals or have exceeded them," Moody's said.

It said that ESG and economic development considerations are likely to contribute to renewable energy growth even in states without "specific renewable portfolio standard, or RPS, objectives."

"Utilities' own corporate-wide policies to reduce carbon emissions should lead to new renewable energy in their service territories," Moody's said.

It added, however, that corporate policies are "less effective" than state mandates given that they lack penalties for noncompliance. Moreover, a utilities' ability to sell assets that reduce its own emissions "does not necessarily change" the overall regional carbon emissions level.