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Energy consumption growth will continue, but only at a moderate level, driven by lower economic growth, Moody’s Investors Service said in its 2023 forecast for the energy sector. “We expect energy consumption in Asia-Pacific (APAC) to continue to grow at a low single-digit rate, given its importance and the low economic growth of the countries involved,” Moody’s said.
The regulatory framework will balance the pressure on revenue caused by the increase in fuel costs as the standard tariff is adjusted, although in some cases not fully due to the increase in costs in markets such as China and Korea. Affordability concerns could limit the ability of APAC utilities to weather higher costs in a timely manner. Transmission and distribution networks will continue to benefit from regulatory support.
The path to net-zero will increase investment in renewable sources and put pressure on financial indicators. Many issuers are planning multi-year investment projects, which tend to be partly debt. However, this is unlikely to weaken the credit quality of most utilities over the next 12 months. Government support, in the form of subsidies or favorable policies, will be key.
Forecasts say the new technology will support the carbon transition and improve energy stability over time. Development of batteries and storage to increase the stability of renewable energy supply, and new nuclear power projects with improved safety features will be positive for the region’s path to net-zero. Improving the cost competitiveness of renewable energy will further challenge the base heat generation fleet.
Providing flexible financing is needed to manage market volatility, the forecast said while pointing out that APAC’s energy sector has been less affected by the region’s credit tightening than other sectors. However, weak issuers may face pressure from rising borrowing costs due to reduced investor appetite and higher interest rates. An issuer with a more prudent hedging strategy will be in a better position against currency risk.
For India, estimates say that the country has a well-developed regulatory framework with a history of more than 20 years (since 1998) of tariff setting. The framework allows transmission companies to generate a return on equity of 15.5%, which is linked to the availability of their network and does not depend on demand risk. International transmission operators in India also benefit from the revenue pooling mechanism, which is designed to reduce exposure to financially weaker counterparties.
Under this mechanism, the Power Grid Corporation of India Limited is responsible for collecting revenue on behalf of all interstate lines, and disbursing the revenue collected to each operator in proportion to their revenue pool. India’s regulated power generators such as NTPC Limited can pass on fuel price increases through tariffs and are thus protected from recent increases in thermal coal and LNG prices.
Tata Power Limited’s regulated electricity business can pass on fuel price increases to consumers, but the unregulated coal-fired power generation business has limited capacity to offset fuel costs and therefore faces the current high fuel price environment. . However, the company has benefited from high coal prices through its coal mining business, which has partially led to a recovery in its power generation business. India’s renewable energy providers face delays in tax payments from their state-owned distribution company counterparts, which typically show weak financials, a situation that is expected to continue in the next 12-18 months, the forecast said.
In the past, several state distribution companies and the respective state governments (Andhra Pradesh and Punjab) have acted alone to try to renegotiate the power purchase agreements (PPAs) signed with renewable companies. However, these efforts have not been successful and there are some positive developments on this front, with Andhra Pradesh clearing the previous costs for renewable IPPs in installments and sticking to the tariffs in the original PPAs. The issue of renegotiation of PPAs in Punjab was put on hold after the election of a new government in the state.
In India, the priority of renewable generation in the delivery will lead to a further reduction in the use of coal power. In particular, we expect coal power usage to drop from 56% in the past 3 years to below 50% if the country meets its renewable generation target of 500GW by 2030. This will weaken profits in the coal power sector and create further pressure. to consumers because they will continue to buy renewable energy while making capacity payments for thermal capacity, which usually have PPAs based on availability.
Despite the residual currency exposure under their chosen hedging strategy, rated project issuers in India have been able to withstand the INR’s decline so far. However, sustained and material depreciation going forward could pressure issuers to adopt call spread strategies if the USD/INR rate falls below the mid-to-high 80s. In such a scenario, we will have to readjust our forecast to capture the increased risk of currency depreciation beyond the forecast range.
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