June 23, 2025
Credit risk: the uncertainty of government policy is a looming financial risk and could be an interference to meeting cleaner energy objectives
One of the most problematic issues facing electric utilities today is the uncertainty about the direction of governmental policy. The current transition of the US electric industry is being affected by the start and stop of federal and state policies and the uncertainty about whether expansion of clean energy sources and reliability can be achieved. Will today's policies be clear enough to pave long-term investment decisions? Should state energy plans be reformed to incorporate stronger affordability and reliability standards? The electric industry is not on the same page today, which sows potential risks for both investors and end use customers.
I couldn't help to be struck by the contrast in the recent announcement In favor of natural gas expansion by the Federal Energy Regulatory Commission (FERC) while the US Congress is on the verge of eliminating the Inflation Reduction Act (IRA)’s federal tax credits to encourage clean energy development. The FERC order is to make it easier for construction in the US of new natural gas infrastructure with the waiver of FERC Order No.871, as FERC underscores its position of the importance of natural gas to electric system reliability as renewable energy growth is destabilizing the grid.
Across the globe, there are similar examples of the uncertainty of energy policy. For example , the recent Spain government study stated its affirmation it was not the dominance of renewables that impacted reliability but the misjudgments of grid operators in Spain and Portugal that caused the unprecedented April 2025 blackouts there. Spain has achieved nearly total dominance of its electricity supply from renewable energy. Given the significant role of renewable energy there, it may be instructive to better understand an electric system built out on renewables whether it can be managed without new fossil fuel based balancing resources. The Spain's government said that the massive April power blackout across Spain and Portugal that disrupted businesses, internet connectivity, transit systems and other critical infrastructures were caused by a surge in voltage that triggered a chain reaction across the grid. It was misjudgments by the grid operator that they reached a point of no return with an uncontrollable chain reaction" that could only have been managed if steps had been taken beforehand to absorb the overvoltage problems. Spain’s regulator stated that “ It was not the renewable energy dominance that created the dangerous situation and called for an improvement in grid management”.
The reports since have been the Spanish right-wing political opposition has questioned the Socialist-led coalition government's phase-out of nuclear energy and full reliance on renewables, saying they made Spain more vulnerable to blackouts. But the government said there is no evidence to suggest "an excess of renewables or the lack of nuclear power plants" caused the crisis and doubled down on expanding renewable policy.
Utility management in the US or elsewhere can't explain away a blackout because they failed to plan correctly because of inconsistent or changing state and federal policies. There is financial risk inherent in the continued uncertainty in the US about the role of balancing resources and how much renewable energy can be managed.
For example, today my lights and internet flickered on and off as the 100-degree weather approached. I am in New Jersey. This, as an average 20% electric bill increases are being implemented in New Jersey because of a combination of rising demand and a failure to secure reliable electrical supply. New Jersey state policy has been focused on an offshore wind energy plan that the federal government supported then turned away from and which was deemed too much of an investment risk by several private sector developers. This was done as the state banned in-state natural gas projects and ignored the investment in the state’s nuclear generation assets.
Credit risk has been growing as federal and state policies remain splintered and there is a glaring lack of direction. Investors need more certainty.
Dan Aschenbach
AGVP Advisory
AGVP Advisory provides consulting services on assessment of strategic financial risks and credit impacts.
AGVP Advisory, and its years of financial and credit risk assessment experience, can provide you with an external view of the risks facing your organization.