Moody’s has just published a new report looking at how some of the largest US utilities, including over 50 of the largest power generators in the US, are positioned for the carbon transition. James Leaton leads Moody’s carbon transition work and discusses the new report and what Moody’s analysis can tell us about how different sectors are responding to the energy transition.
Before we speak about your most recent report, how are you assessing the speed of transition more generally?
There are a lot of long-term policy commitments, with the majority of the world’s economies now aiming for net zero emissions in 30-40 years. That is a long journey so we are focused on who is most advanced in positioning themselves to mitigate risks, or to make the most of the opportunities the energy transition will bring. 2050 is many Presidents and CEOs away, so we need understand the credit implications of the first legs of the journey.
For example, the context of the European Green Deal, the US Green New Deal and China’s 14th five year plan are all critical to driving investment in the energy infrastructure of tomorrow which are aligning now. Having the three main economic blocs aligned on tacking climate change does present the opportunity for a significant step-change in investment in clean energy, as greater competition leads to technological advances critical to achieving the long term ambitions of these nations.
What is your analysis telling you about how different sectors are responding to the energy transition?
We have just looked across some of the largest US utilities, including over 50 of the largest power generators in the US to score them using our carbon transition assessment framework. We saw a wide range of results, from those such as NextEra Energy Partners (CT-2), which are aligned with the energy transition, to Vistra Energy and Talen Energy (both CT-8), which are poorly positioned at present. For a while now we have expected the decline of US coal generation over the next decade, and that trend is only likely to accelerate if federal policies are aligned with state level measures. However many of these utilities also have significant transmission and distribution businesses which are less exposed to transition risk, diluting the credit impact.
In the Auto sector, the electrification challenge is coming to a head this year, as European compliance with fleet CO2 emissions becomes real. 2020 has been a test of who can execute their strategy in terms of producing significant volumes of new models. Companies like PSA have shown they can roll out new electrified models from a common platform across brands, although they are set to take on a further challenge if they merge with FCA as planned. Battery supply is one of the areas where China has dominated in recent years, with other parts of the world playing catch up.
There are also a number of sectors with limited differentiation and no immediate technological solution, such as airlines or steel and cement. The basic maths of climate change continue to present a challenge. If you are aiming for net zero then either some things will have to stop, new technological advancements will have to be proven at scale, or there will be a need for major offsetting to occur. Gas is also likely to get squeezed in this calculation as shrinking emissions targets leave no room for market expansion.
How has the COVID situation affected the energy transition?
Well it still is affecting it! 2020 has obviously not been a normal year, and the second wave visible in western economies is resulting in back-to-normal in 2021 scenarios being discarded. We looked at different oil demand scenarios back in June and included one where oil demand was still several million barrels short of 2019 levels going into 2021. The situation is clearly giving many people the chance to rethink their way of operating as a business and living their personal life. This year has given us a chance to experience what a lower carbon future might mean. Our analysis of refinery resilience in a future low demand scenario has been brought forward in time and is providing insights now, given the overcapacity situation has been exacerbated by COVID.
What direction do you see the transition moving in next?
There are a lot of moving pieces, and policy and technology are the obvious vectors to monitor. However the cost of capital is also critical to delivering a rapid energy transition, and continued low interest rates and market sentiment not favouring traditional energy players is the right mood music for the transition to accelerate.