Outlook for public power utilities good despite regulations, renewables

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Municipal power utilities and electric cooperatives are well positioned to cope with near-term challenges including recently enacted carbon regulations, persistent rate pressures and long-term threats to the traditional utility model, according to Fitch Ratings' 2016 Outlook report.

The Environmental Protection Agency's final rules mandating the reduction of carbon dioxide emissions will present long-term challenges to the sector. Although mandated reduction goals do not take effect until 2022, limiting the near-term effect on utilities, the rules are expected to influence strategic decision much earlier as utilities consider the expanded reliance on natural gas-fired generation, development of new renewable energy resources and application of demand-side energy efficiency necessary to comply.

Low and stable fuel prices should continue to support the sector Outlook. Fitch's 2016 projection for natural gas prices was lowered to $3.25/mcf during 2015, with our long-term price falling to $4.00/mcf, reflecting increasingly efficient production and lagging demand growth.

Declining cost curves for renewable energy resources also present opportunities for public power and electric cooperative utilities, as well as risks. While lower costs should allow utilities to more economically meet renewable energy mandates and carbon-reduction goals, declining costs related to residential photovoltaic systems and battery storage could dampen consumption, pressure unit costs and challenge the traditional utility model longer-term.

Overall, public power utilities and electric cooperatives should continue to benefit from favorable economic and market conditions, as well as robust access to capital markets. The Outlook for the sector and its ratings are Stable.

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