The U.S. electric power industry is in transition, seeking to decarbonize its fuel sources for environmental stewardship, regulatory requirements, or financial and economic reasons.

In its report published today, "Managing renewable risk is increasingly essential to U.S. Power Utilities Credit Quality," S&P Global Ratings noted that adding renewables could present operational and technological impediments depending upon the pace and scale of adoption, which could jeopardize reliability, raise power and capital costs, and potentially pressure rates, financial metrics, and credit quality in the long term.

While many utilities are proactively developing decarbonization strategies, others are taking a cautious approach.

"Utilities that have plans to add renewables are better positioned to preserve credit quality and absorb transition costs," said S&P Global Ratings credit analyst Jeff Panger. "On the other hand, utilities with reactionary management could face operational disruptions and spikes in electric rates rather than a glide path to higher costs."

S&P Global Ratings evaluates a utility's fuel mix against the backdrop of a variety of risks that could affect financial metrics that underscore a utility's credit quality. Although we have not lowered ratings on carbon-intensive utilities in the U.S. to date due to energy transition risks, their emission profile has generally limited positive rating actions. However, we believe that pressures to decarbonize are mounting, and this could lead to downward credit pressure as regulatory measures are adopted and deadlines approach.