Moody's: In Italy, low gas prices and weak demand expected to drive down electricity prices

London, 30 June 2015 -- Moody's Investors Service expects that Italy's wholesale power prices will stay in a range of EUR42-47 per megawatt hour through 2020, down from EUR48-51/MWh currently. The expected decline is mainly driven by a combination of lower gas prices, weak demand and oversupply.

"Declining electricity demand, following a greater focus of consumers on energy efficiency, is further increasing downward pressure on prices", said Alessandro La Scalia, Moody's Vice President and Senior Analyst. "We expect that the electricity system will remain oversupplied, notwithstanding the closing of several older thermoelectric plants", added Alessandro La Scalia.

Moody's notes that ENEL S.p.A. (Baa2 stable), A2A S.p.A. (Baa3 stable), Edison S.p.A. (Baa3 stable) and Compagnia Valdostana delle Acque S.p.A. (CVA - Baa1 stable) have sizeable power generation activities in Italy and will be negatively affected by a further decline in prices. Hera S.p.A. (Baa1 stable) and ACEA S.p.A. (Baa2 stable) are less exposed. However, several elements mitigate the impact of declining electricity prices on Italian utilities' credit positioning: (1) business diversification, strategic flexibility and reduced exposure to domestic power generation; (2) hedging strategies, including significant exposure to energy retail sales in a low-competition, semi-regulated market; and (3) balance-sheet strengthening, through disposals and capacity reduction.

However, the rating agency notes that there is not yet any solution to the crisis in conventional generation. Oversupply conditions and weak demand have driven domestic power producers to cut losses and close down plants. Whilst positive for companies' operating cashflows, the closures will have a very limited effect on prices, as most of the plants on the shut-down list are already idle or running only as a system back-up. In addition, Moody's does not expect the oncoming capacity market to have a material impact on electricity prices and companies' cashflows, as the cost of the auctioned capacity will likely be covered through the discontinuation of existing cost-coverage schemes for certain eligible power plants.

Barring volatility in gas prices and hydroelectric generation, in Moody's view, a reform of the EU emissions trading scheme would have the most significant price impact. A material increase in CO2 costs would be negative for coal producers, positive for hydroelectric generation, and roughly neutral for gas-fired plants. In that scenario, CVA and Edison would take advantage of higher wholesale prices, whilst the negative impact on A2A and ENEL's thermoelectric fleets would be broadly offset by their hydroelectric production (A2A) and relatively higher exposure to clean power sources in Spain (ENEL).