OREANDA-NEWS. The 2016 sector outlooks for integrated utilities across most of EMEA remain negative, Fitch Ratings says. Companies face a long period of upheaval that continues to gradually reduce earnings from power generation and sale, limit the incentive for investment and drive a strategic shift towards renewables and network operations. The sector outlook for utility networks is stable.

The rapid roll-out of renewables in many European countries will continue to disrupt the electricity generation mix in 2016, pushing gas and coal out of the merit order and reducing the share of earnings that utilities make from their generation arms. A stronger push for renewables along with big changes to regulated electricity prices contributed to a revision of the sector outlook in France to negative from stable. The outlook has also weakened in Poland due to government pressure to support expensive coal mining and expected lower margins in generation and distribution networks, and in Kazakhstan due to uncertainty about tariffs and the potential for privatisations.

But we revised the sector outlooks in Iberia and Italy to stable from negative, helped by a recovery in energy demand and a more predictable regulatory framework following recent reforms.

The transition to renewables will cause increasing disruption to power markets. In the long term, wholesale power markets will be dominated by low-marginal-cost producers and will be highly dependent on the weather. This is unlikely to support investment for large utility-scale installations, which will eventually be impossible without a capacity market or other forms of support. In response, utilities are likely to shift their strategies further towards renewables and networks, as a network connection will be a necessary form of redundancy even in a future where rooftop solar panels and battery storage are common.

Diversification is therefore a key benefit. Utilities highly exposed to thermal generation are at the most risk, while those operating in just one country may be more exposed to still-high political and regulatory risks.