March 1, 2012 / 10:16 AM / 5 years ago

TEXT-S&P reports on effect Of drought on U.K. utilities

(The following statement was released by the rating agency)

March 01 - Climate change and water scarcity could have a significant effect on the economy, industry, and electricity prices in the east of England over the coming decades, according to a report published by Standard & Poor's Ratings Services.

The report, "Credit FAQ: How Water Shortages In Eastern England Could Increase Costs For U.K.-Based Utilities," outlines the results of a study carried out in conjunction with Trucost, an environmental data organization, and the Global Sustainability Institute at Anglia Ruskin University. As the study points out, the east of England is likely to face severe water shortages over the next 20 years due to significant changes in rainfall patterns, a steadily increasing population, and the growing impact of climate change. These are likely to lead to increased energy prices and create additional operating and financial challenges for utilities and energy-intensive businesses operating in the region, which in turn means increased risks for investors.

Key findings of the study are that:

-- Water shortages may increase both the cost of power and electricity tariffs. For example, EDF Energy PLC (A/Negative/A-1) could incur water scarcity costs totaling an additional GBP1.7 million per year for Sizewell B, the largest power station on the east coast in Suffolk, based on 2010 water consumption. RWE Npower PLC (part of RWE AG ; A-/Negative/A-2), which owns the second-largest power station in the region, Tilbury B in Essex, could face added costs of more than GBP51 million annually, based on the power station's estimated water usage in 2010. Water scarcity costs reflect the financial impact that water extraction has on freshwater replenishment, ecosystem maintenance, and the return of nutrients to the water cycle.

-- Based on data from Trucost, if all nine power plants operating in the east were to internalize water scarcity costs and pass them through in higher power prices, median industrial electricity prices could increase by about 6% from 2011 levels.

-- Infrastructure investment alone may not be sufficient to resolve predicted long-term water shortages. Without increased national and local focus on the management of water demand, water and power companies operating in the region are likely to face both continued water shortages and increasing operating and capital costs. These costs could in our view harm the utilities' credit quality over the longer term if not appropriately mitigated.

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