Moody's Is Looking at these Risks when Rating Utility Credit

08 Nov 2017

Utility bonds that are popular among pension funds for their steady and reliable returns face a growing threat in the not-too-distant future from batteries paired with rooftop solar to fuel cells.

Moody’s Investors Service is looking into how new technologies threaten to disrupt the electric grid of the future as it analyzes the industry’s credit risk. This so-called death spiral scenario, as it’s know in the industry, is now being seen as a risk factor for assessing long-term bonds.

Moody’s says it’s responding to investor concern about the long-term risks of owning utility bonds. The agency is flagging the pairing up of battery storage and rooftop solar as well as using fuel cells at home to produce power from hydrogen or natural gas. While there’s no immediate threat, the current regulatory framework stops utilities from adapting to customers’ needs.

“It would take a lot of time and costs would have to come down,” Toby Shea, a New-York based credit analyst at Moody’s, said in an interview. “This is a very low probability, but the consequences are extremely severe if it actually happens.”

That one of the biggest credit agencies is even watching these developments underscores how they can upset the industry’s reliance on investment-grade credit ratings to keep borrowing costs down. The utility business model is based on spending money to earn money and those stable returns are used to pay back bonds over time.

It may take a decade or more before solar and fuel cells are cheap enough, if at all, but they’re the type of technologies pension funds and insurance companies are asking about now for utility bond investments typically held for 20 or 30 years, Shea said.

Utilities are already grappling with slower demand as a shift toward more efficient light bulbs and appliances takes place. New York is overhauling its utility rate structure to pave the way for distributed energy. Environmental considerations are the biggest drivers, and storage backing up rooftop solar and fuel cells could push customers to cut the cord with utilities altogether, Shea said.

“Everyone can agree that in the near-term the risk is low but these are insurance companies and pension funds and they want to get a sense of the long-term risks,” he said.

Bloomberg |