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Increasing Renewables in Capacity Markets: A Credit Perspective

The Capacity Market structure is facing several challenges – incorporating subsidized clean energy resources, efficacy with regards to incentivizing new generation, and questions whether Capacity Markets are truly competitive in nature. Capacity Markets provide some measure of cash flow stability; however, the majority of the cash flow earned by merchant generators (those without long-term contracts) in Capacity Markets remains subject to the volatility of prices (capacity and energy) and generation levels. All else being equal, as renewables increase, merchant power generators will see their revenue streams change and potentially be financially affected, which in turn may affect the credit quality of merchant power projects. There are several key aspects that DBRS Morningstar uses to assess credits in Capacity Markets for merchant generators that include forecasts for market fundamentals (macro as well as regional), a financial risk assessment based on conservative financial metrics with the project’s ability to withstand downside scenarios, and other project-specific details.