Australia’s utilities and agriculture sectors have been told they are among the most exposed sectors if El Niño emerges.

In a new study Fitch Ratings has warned these exposures pose a huge threat to the nation’s infrastructure.

The Bureau of Meteorology (BOM) says El Niño is becoming more likely as sea-surface temperatures in the central tropical Pacific continue to warm. Hotter and drier conditions would increase water stress, weaken agricultural output, raise peak electricity demand and heighten bushfire risk, although impacts would vary by region.

“We believe utilities will be directly exposed,” Fitch added. “The drier conditions associated with El Niño can reduce water storage levels and inflows, which may weaken revenue and increase water utilities’ operating expenditure through greater use of desalination plants and chemical treatment.

“Drought-response measures, such as water restrictions and drought pricing, that are typically triggered as dam levels fall under regulators’ demand volatility adjustment mechanisms, will help support cash flow. Hotter weather could also increase electricity demand, putting pressure on spot prices and grid stability while raising bushfire-related risks for transmission and distribution assets.”

The report added for energy retailers, a combination of higher spot prices and unplanned outages could translate to short-term earnings volatility, especially those with retail loads exceeding their owned or contracted generation output and when hedge cover is insufficient. However, for regulated utilities, regulatory frameworks in place will limit most of the credit impact through revenue cost recovery in subsequent years.

Agriculture has fewer protections against prolonged drought conditions, and is likely to be among the most affected sectors, as El Niño typically brings lower rainfall, weaker pasture growth, lower crop yields and irrigation stress. Farm output could fall, pressuring food supply chains and increasing food price volatility. Australian wheat and barley production volumes fell by an average 28% and 18%, respectively, in El Niño years, according to Australian Bureau of Agricultural and Resource Economics and Sciences and BOM. El Niño would also add complexity to the agricultural sector’s exposure to the Middle East conflict amid volatile energy and fertiliser costs.

“Weaker planting activity may weigh on volumes and revenue for agrochemical producers, although demand for some drought-management products could remain relatively stable,” Fitch explained. “Lower agricultural production could reduce export volumes, but ports and logistics operators are unlikely to see widespread disruption, with heat, bushfires and drought more likely to create localised rather than sector-wide impacts.”

Thermal coal producers could be one of the few clear beneficiaries. Drier conditions are generally more favourable for mine operations than La Nina-related flooding. They lower the risk of weather-related disruptions and could lead to higher supply volumes. Hotter weather across Asia and lower hydropower availability could also support seaborne thermal coal demand and lift prices, benefiting Australian exporters. However, greater reliance on thermal generation would increase energy-transition challenges. In the near term, lower hydropower availability may require more fossil-fuel generation, complicating delivery of decarbonisation targets. Higher electricity demand would also reinforce the need for storage, firming capacity such as batteries, transmission investments and climate resilience, making El Niño a practical stress test for the energy transition.

Fitch concluded: “Credit effects are likely to be limited for sectors with contractual protections or strong operational resilience. Hyperscale data centres are likely to face very low credit risk because power costs are passed through to tenants, and many facilities use air-based cooling systems and have redundancy to maintain uptime during grid outages.

“Insurers could face bushfire-related claims if hotter and drier conditions lead to a more severe fire season, although credit effects will also depend on losses from other natural perils such as flooding, reinsurance protection and the sector’s ability to reprice risk.”