Many U.S. electric utilities have made significant strides in reducing or developing plans to reduce power plants' carbon emissions. However, the Environmental Protection Agency's (EPA) recently finalized rules covering existing coal plants and new natural gas plants could create financial and operational pressures for utilities relying on thermal generation resources, which might negatively affect credit metrics. Furthermore, the EPA's ongoing consideration of how to regulate emissions from existing natural gas plants adds to operational and financial uncertainty.
| Select Highlights Of EPA Carbon Pollution Standards | ||
|---|---|---|
| Technology | Directive | Implementation date |
| Coal-fired electric generating units that plan to operate beyond Jan. 1, 2039 | Capture 90% of carbon dioxide emissions | Jan. 1, 2032 |
| Coal-fired electric generating units that plan to retire by Jan. 1, 2039 | Dispatch must include 40% natural gas co-fire | Jan. 1, 2030 |
| Coal-fired electric generating units that plan to retire by Jan. 1, 2032 | No additional emissions reduction directives | Not applicable |
| New baseload combustion turbines (capacity factor above 40%) | Capture 90% of carbon dioxide emissions | Jan. 1, 2032 |
| New intermediate load turbines (capacity factor of 20%-40%) | Emissions must match those of a simple-cycle turbine | Not specified, but effective as of May 2023 release of proposed rules |
| New low-load turbines (capacity factor less than 20%) | Emissions must match those of a low-emitting fuel | Not specified, but effective as of May 2023 release of proposed rules |
| Existing combustion turbines | To be determined in separate EPA proceeding | To be determined in a separate EPA proceeding |
What's Happening
On April 25, 2024, the EPA released four final rules that collectively: target reducing or capturing power plants' carbon dioxide emissions; impose significantly more stringent limits on power plants' mercury and toxic metal emissions; further tighten limits on power plants' effluent discharges; and extend federal oversight of coal ash disposal.
Why It Matters
The Energy Information Administration reports that in 2023, fossil fuel-based electricity generation accounted for 60% of U.S. utility-scale production: Coal represented 16% and natural gas 43%.
S&P Global Ratings believes the new rules will compel material reductions in electricity production from natural gas and coal fossil fuels within a decade because of technology limitations and high compliance costs. For example, under the rules, reliance on coal-fired units and new gas-fired units for electricity production will require installing carbon-capture technologies at power plants, developing an extensive network of pipelines and pumps to transport captured carbon into geologically suitable caverns, and securing land-use rights for storage. Each of these components will likely present meaningful financial and operational hurdles as utilities invest in upgrades to existing generation to facilitate compliance with the rules or invest in replacement generation. The number of utilities that have the technological and financial capacity to make the extensive changes the rules contemplate within the prescribed time frame remains uncertain, particularly because the commercial viability of large-scale carbon dioxide capture has yet to be demonstrated. The Inflation Reduction Act's tax credits for capturing carbon dioxide could temper some of the financial exposures.
Although many investor-owned utilities have received regulatory approval to shutter most of their remaining coal fleets by 2032, which should allow for continuing routine operations at these plants pending closure, the rules' imposition of carbon-capture requirements for new gas plants could weaken financial metrics. The EPA has stated that it plans to determine the treatment of existing natural gas plants' emissions in a separate proceeding.
For public power and electric cooperative utilities with plans to operate coal units beyond January 2032, requirements that they either retire legacy thermal generation or install carbon-capture technologies will likely weigh on credit metrics.
Utilities and grid operators are warning that retiring dispatchable generation could create diminished grid reliability. We believe that an unreliable power supply could lead to consumer dissatisfaction with their electric providers and resistance to the rate increases that will be needed to support generation investments. In addition, after years of stagnant national electric sales, utilities and grid operators are projecting substantial load growth tied to beneficial electrification mandates and the proliferation of data centers. Load growth will add to generation resource needs and especially the need for dispatchable generation.
What Comes Next
The EPA's rules have triggered legal challenges like those that followed the release of 2015's Clean Power Plan. The outcome of any litigation is uncertain but will influence the degree to which utilities' financial metrics will come under negative pressure. Based on construction lead times, while litigation is pending, the ambitious implementation dates EPA has adopted (see table) could compel utilities to make expensive resource decisions to either remediate or replace existing thermal generation in preparation for a potential legal determination that upholds the validity of the rules. A ruling that validates the EPA's rules could pressure operations, financial metrics, and possibly credit quality within the electricity sector.
This report does not constitute a rating action.
| Primary Credit Analysts: | David N Bodek, New York + 1 (212) 438 7969; david.bodek@spglobal.com |
| Gabe Grosberg, New York + 1 (212) 438 6043; gabe.grosberg@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software, or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced, or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees, or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness, or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment, and experience of the user, its management, employees, advisors, and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.spglobal.com/ratings (free of charge), and www.ratingsdirect.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.spglobal.com/usratingsfees.