Power consumption growth will continue, but only at moderating levels, driven by lower economic growth, Moody’s Investors Service says in its 2023 outlook for the power sector. “We expect power consumption in Asia-Pacific (APAC) will continue to grow at a low single-digit percentage range, driven by its essentiality and the lower economic growth of respective countries,” the Moody’s said.
Regulatory frameworks will balance earnings pressure caused by surging fuel costs as benchmark tariffs are adjusted, although in some cases not to the full extent of recent cost increases in markets such as China and Korea. Affordability concerns may constrain APAC power utilities’ ability to pass through higher costs in a timely manner. Transmission and distribution networks will continue to benefit from regulatory support.
Path to net-zero will increase investments in renewables and put pressure on financial metrics. Many issuers are planning multiyear investment programs, which are likely to be partially debt funded. However, this is unlikely to materially weaken most utilities’ credit quality over the next 12 months. Government support, in the form of subsidies or favorable policies, will be key.
The outlook says that new technologies will support carbon transition and improve power stability over time. Batteries and storage development to enhance renewable power supply stability, and new nuclear power projects with improved safety features will be positive for the region’s path to net-zero. The improving cost competitiveness of renewable energy will further challenge thermal baseload generation fleets.
Flexible financing needed to manage market volatility, the outlook says while pointing out that APAC’s power sector is less affected by regional credit tightening than other sectors. However, weaker issuers may face pressure from rising refinancing costs because of investors’ reducing risk appetite and higher interest rates. Rated issuers with more prudent hedging strategies will be better positioned against currency risks.
For India the outlook says that the country has a well-developed regulatory framework with a more than 20-year history (since 1998) of setting tariffs. The framework allows transmission companies to generate a return on equity of 15.5%, which is linked to the availability of their networks and is not subject to demand risk. Interstate transmission line operators in India also benefit from a revenue pooling mechanism, which is designed to reduce their exposure to financially weak counterparties.
Under the mechanism, Power Grid Corporation of India Limited is responsible for collecting revenue on behalf of all interstate lines, and to disburse the collected revenue to each operator in accordance with their proportional share of the revenue pool. India’s regulated power generators, such as NTPC Limited can pass on fuel cost increases through tariffs and are thus protected from the recent surge in thermal coal and LNG prices.
The regulated power business of Tata Power Company Limited is able to pass on the increase in fuel costs to consumers but its unregulated coal-based power generation business has limited ability to pass on fuel costs and is therefore exposed in the current environment of high fuel costs. The company, however, benefits from the high coal prices through its coal mining business, which partly makes up for under recovery in the power generation business. India’s renewable operators face tariff payment delays from their state-owned distribution company counterparties, which typically exhibit weak financial profiles, a situation that is likely to continue over the next 12-18 months, the outlook says.
In the past, some state-owned distribution companies and their respective state governments (Andhra Pradesh and Punjab) have unilaterally taken steps to attempt to renegotiate signed power purchase agreements (PPAs) with renewable companies. However, these attempts were not successful and there have been some positive developments on this front, with Andhra Pradesh clearing past dues to renewable IPPs in installments and adhering to the tariffs in the original PPAs. The issue about renegotiation of PPAs in Punjab has been put to rest after the election of the new state government.
In India, renewables’ priority in dispatch will lead to a further decline in coal power utilization. Specifically, we expect coal power utilization will decline from 56% over the last three years to below 50% if the country meets its renewables capacity addition targets of adding 500GW by fiscal 2030. This will weaken profitability in the coal power sector and put further pressure on off-takers because they will continue to buy renewable energy while at the same time making capacity payments to thermal capacity, which typically have availability based PPAs.
Despite the residual currency exposure under their chosen hedging strategies, rated project finance issuers in India have been able to withstand INR depreciation to date. However, a sustained and material depreciation going forward could exert pressure on the issuers that have adopted the call spread option strategy if the USD/INR rate depreciates to the mid to high 80 range. In such a scenario, we will need to recalibrate our projections to capture the increasing risk of currency weakening beyond the projected range.