EU CO2 rules could cost utilities up to 2.5 bln eur in 2016-S&P

Thu Oct 25, 2012 2:39pm BST

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* EU carbon market rules set to tighten from 2013

* Most CO2 permits auctioned, not given free to utilities

* Auctioning to increase costs, pressures for utilities

By Nina Chestney

LONDON, Oct 25 (Reuters) - Complying with stricter European Union rules on carbon dioxide emissions from next year could cost European utilities as much as 2.5 billion euros ($3.24 billion) in 2016, a report by Standard & Poor's Ratings Services said on Thursday.

S&P Ratings Services studied nine rated European utilities and estimated their carbon liabilities under the third trading period of the EU's Emissions Trading System (ETS), which will run from 2013 to 2020.

Calculations assumed an EU carbon price of 14 euros ($18.16)a tonne, almost double the price on Thursday.

The EU's ETS caps the emissions of some 12,000 utilities and industrial firms in the 27-nation bloc, forcing them to pay for carbon permits to cover their emissions' output if they exceed the limit.

The ETS has been criticised for giving out permits for free to power companies, leading to huge windfall profits as they cashed in on free allocation.

But the scheme's rules will tighten from next year in the third phase, when around half of the permits will be auctioned.

This could increase costs and profit pressures for all Western European power generators, the report said.

"From a credit perspective, all the utilities are struggling to maintain their current ratings," Standard & Poor's credit analyst Michael Wilkins told Reuters. "They are anxious not to see any further deterioration," he added.

The cost of complying with the ETS from 2013 will vary for each company according to their mix of energy generation and as some move more towards renewable energy.

Germany's RWE could face a cost of 2.5 billion euros in 2016, up from almost 2.4 billion in 2010, while E.ON could have to pay an extra 1.27 billion euros in 2016 compared to almost 1.24 billion euros in 2010, the report said.

On the other hand UK-based Centrica could see a reduction in cost to 92 million euros in 2016 from 107 million euros in 2010 and France's EDF could see a cost of 852 million euros in 2016, compared to 956 million in 2010.

Carbon liabilities are likely to have the most significant effect on the earnings before interest, tax, deprecation and amortization (EBITDA) of Drax Power, RWE, Vattenfall , and E.ON.

Even if utilities are able to pass on 80 percent of the cost to their customers, liabilities could cost nearly 20 percent of EBITDA in 2016 for Drax Power, 5 percent for RWE, 3 percent for Sweden's Vattenfall and 2 percent for E.ON, the report said.

"Although we expect next year's tougher regulations to eventually put pressure on utility profits, currently low carbon prices may delay that reckoning for a while," it said.

"The rules governing utility carbon emissions are tightening. And sooner or later, utilities or consumers, or perhaps both, will end up paying the price."