Regulatory risk for utilities mounts as climate policies squeeze ratings agency warns

Regulatory risks for global utilities have risen significantly since 2020 as a result of tightening climate policies according to rating agency, Fitch Ratings.

In a report updating its Climate Vulnerability Scores or the utilities sector, Fitch said key developed markets are experiencing heightened risks to fossil fuel assets out to 2030 due to increasingly frontloaded policy measures. And while regulatory risks in emerging markets such as China and India are peaking later than the previous outlook, there is convergence with global trends long-term.

Fitch said the scores reflect the UN’s latest Inevitable Policy Response scenario, which “captures long-term (2025 to 2050) policy, market and technological risks under a scenario consistent with implementation of the Paris Agreement on climate change.”

Fitch said its analytical view of risks to creditworthiness that are likely to emerge from that scenario include changes to demand for goods and services, business models and the need for material changes that could disrupt profitability.

The scores, Fitch said, reflect regional characteristics in the structure of energy markets, such as emerging fossil fuel assets in the Asia Pacific region, the influence of falling renewable energy costs on established assets, and a renewed focus in Europe Middle East and Africa on balancing low-carbon transition concerns with energy security.

Fitch said it expects greater dependence on carbon capture and storage as a means of reducing the risk of asset stranding, but hydrogen and nuclear will also play a growing role in the energy mix in key markets.

Natural gas, it said, is likely to be key in supporting the energy transition in coal-dependent emerging economies, but falling costs and the rising viability of low-carbon alternatives will prompt global convergence by 2040 and increase risks to gas assets across all geographies.