Asia-Pacific power demand growth to stabilise, energy transition to continue

Fitch Ratings expects a stable operating environment for the Asia-Pacific (APAC) power and renewables sector in 2023, Fitch Ratings expects a stable operating environment for the , as most of the region will see flat to marginally lower economic growth. The countries will also continue to support the transition to cleaner energy generation, though rigour will vary with each country’s fiscal position.

We forecast most of the APAC region to see electricity demand growth in 2023; however, the growth is likely to be marginally lower YOY due to muted economic growth and lower but still elevated commodity prices. The region will continue to electrify to support rising power consumption over the medium term. India saw high temperatures and, hence, strong electricity demand in 2022. This is likely to result in a further lower power demand growth rate in 2023. On the other hand, Fitch expects the demand growth rate in China to pick up as the country recovers from Covid-19 pandemic-related lockdowns.

Most APAC countries have set long-term renewable capacity addition targets. We expect a slew of related measures from respective governments in the short term, including support for new technology, such as ‘green’ hydrogen and offshore renewables. However, stretched fiscal positions may cap financial support in 2023. China and India plan to increase renewable power capacity to over half of the total installed capacity by 2025 and 2030, respectively. Indonesia aims to add 41 gigawatts in the next decade, with renewable energy making up the majority of installed capacity for the first time. Vietnam intends to add around 70 gigawatts of capacity in the next decade, with renewables accounting for 36%-39%. We expect continued support from the respective governments in the medium term to achieve these targets.


Fitch-rated Indian-restricted renewable energy portfolios are all operational. Hence, there would not be an impact from a rise in solar module prices. However, we do expect an upward revision in solar tariffs for new projects against the backdrop of higher commodity prices and freight tariffs and for construction to pick up once distribution companies accept the new prices. The tariffs should remain competitive, as fossil-fuel prices will remain elevated, albeit lower than in 2022. Financing options will remain tight, but renewable projects should score relatively better.

Chargeable power tariffs are usually fixed for the long term. An increase in operational costs would eat into margins, though a hike in taxes can usually be passed through as a change in the law. Nevertheless, revenue indexation at coal-fired and geothermal power projects and high operating margins at renewable assets should mitigate the impact of high inflation. We expect better receivable positions at rated Indian renewable energy issuers in 2023, after cash collection deteriorated in the financial year ended March 2022, supported by measures already taken by the government. We believe the government’s planned budgetary support and reform measures will improve the situation further.

Fitch expects hedging strategies to offer considerable protection against risks associated with the Indian Rupee’s depreciation for their portfolio of Indian renewable infrastructure issuers. The Rupee has depreciated by about 10% year-to-date against the five-year annual depreciation of 1.8% up until end-December 2021. Coupon payments for eight of the 11 transactions are fully hedged. Adani Green Energy Limited’s two restricted groups roll over coupon hedges annually. JSW Hydro Energy Limited hedges its coupon payments up to at-the-money-forward and then has exposure. The scheduled amortisation payments, mandatory cash sweeps, and bullet or balloon payments are substantially hedged. The cash exposure of bullet or balloon payments will only begin to materialise from 2024, as that is the earliest maturity.

We expect the coal price to fall in 2023 from the peak in 2022. Fuel costs are passed through in power purchase contracts of Fitch-rated thermal projects; however, lower costs will reduce the implications of lower efficiency at our rated projects. On the other hand, the benefit of higher offtake and soaring power-exchange prices at renewable projects in the case of lower thermal power generation should be moderate.

The sector's primary credit metric – the debt service coverage ratio (DSCR) – stays above the threshold commensurate with current ratings; however, it will be under marginal pressure because of anticipated inflation and currency depreciation. Inflation and higher taxes will lower profit margins, while currency depreciation may require higher debt servicing in local-currency terms. The rating thresholds for power generators vary with technology and off-taker credit quality.

Economic headwinds have dented institutional investors’ appetite for renewable bonds, despite rising awareness of environmental, social and governance issues. The earliest maturities of Fitch’s rated portfolio are in 2024, but the persistently high cost of debt will increase refinancing pressure. More issuers may tap domestic markets or other alternate funding sources, availing call options as and when feasible.

Our outlook on the ratings of issuers in our portfolio has been mostly stable over the past few years. We expect limited rating changes over the next year, with all but one of the issuers on stable outlook, supported by either contractual or regulatory protection from demand risk. All 17 transactions have sufficient liquidity to withstand shocks, and cash collection is improving.

For more details, please check Fitch Ratings’ report "Asia-Pacific Power and Renewable Projects Outlook 2023". It can also be accessed at Fitch’s official website.

Authors:

1. Rachna Jain, Director, Asia-Pacific Infrastructure & Project Finance, Fitch Ratings
   
2. Sajal Kishore, Managing Director, Head of Asia-Pacific Infrastructure and Project Finance, Fitch Ratings