How Key European Economies and Utilities are Revisiting their Electricity Generation Portfolios
This commentary discusses how selected European economies – Germany, France, Iberia, Italy, and the United Kingdom – have been revisiting their generation portfolios over the last five years. It also discusses future expectations for these countries, utilities, and power producers, in the context of the most recent multilateral efforts that resulted in the signing of the Glasgow Climate Pact on 13 November 2021.-- In these economies, while coal-fired generation has been constantly phased down, investments in the renewable energy sector have been increasing exponentially. The phasedown of nuclear power generation is a controversial topic. In the medium to long term, gas-fired generation will continue to play a pivotal role in enabling the current energy transition, which will be also supported by the entrance and development of new technologies, such as energy storage.
-- Electricity generation portfolios have been changing and will continue to change through new investments, asset rotation, acquisitions, and divestments. Over time, such initiatives could potentially change the risk profile of utilities and power producers.
-- DBRS Morningstar makes credit risk assessments on a case-by-case basis, assessing the: (1) regulatory environment and/or market structure, (2) contractual and/or hedging position, (3) diversification, (4) operational expertise and operating efficiency, (5) size and cost competitiveness, and (6) asset conditions and complexity, among others. DBRS Morningstar also assesses the size, stability, and sustainability of the cash flows generated by renewable and traditional energy assets, as well as the companies' capital expenditure, financing plans, and construction risk (if any).
Giuseppe Fresta, Vice President at DBRS Morningstar, notes that the 2021 United Nations Climate Change Conference “resulted in the adoption of less stringent resolutions than previously anticipated”, noting that “the pathway to the decarbonisation of the energy system means that electric utilities, in order to be competitive and successful, need to continuously revisit their generation portfolios with an ever-increasing share of renewable energy sources”.
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