Asia-Pacific power demand will witness stable growth, flat to marginally lower economic growth, and a continuing energy transition, with countries supporting the transition to cleaner energy generation.
FREMONT, CA:There will be a stable operating environment and flat to marginally lower economic growth for the Asia-Pacific power and renewables sector in 2023. Countries will continue to support the transition to cleaner energy generation, though the degree of rigour will vary depending on each nation’s fiscal position. The APAC region will see electricity demand growth in 2023; however, the growth is likely to be marginally lower year-over-year due to slow economic growth and lower and higher commodity prices. The region will continue to electrify to support augmenting power consumption over the medium term. Few countries witnessed high temperatures and, therefore, strong electricity demand in the previous year. This will result in further reduced power demand growth in 2023.
Most APAC countries have long-term targets for adding renewable capacity. There will be a slew of related measures from governments in the short term, such as support for new technology like green hydrogen and offshore renewables. However, stretched fiscal positions may require financial support soon. Few countries plan to increase renewable power capacity to over half of the total installed capacity in the coming years.
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A few countries’ restricted renewable energy portfolios are all operational. Therefore, there would not be an impact from a rise in solar module prices. However, there will be no upward revision in solar tariffs for new projects against the backdrop of higher commodity prices and freight tariffs, and construction will pick up once distribution firms accept the new prices. The tariff should remain competitive, as fossil-fuel prices will be elevated. Although financing possibilities will remain limited, renewable energy projects might score better.
Chargeable power tariffs are fixed for the long term. An increase in operational costs would consume margins, though a hike in taxes can be passed through as a change in the law. However, revenue indexation at coal-fired and geothermal power projects and high operating margins at renewable assets should alleviate the high inflation’s impact.
Furthermore, there will be a fall in coal prices, and fuel costs are passed through in power purchase contracts for thermal projects. However, lower costs will reduce the implications of lower efficiency in rated projects. At the same time, the use of higher offtake and increasing 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, remains above the threshold commensurate with current ratings. However, it will be under marginal pressure due to expected inflation and currency depreciation in a few countries. Inflation and higher taxes will slash profit margins, while currency devaluation will need higher debt service in local currency terms. The rating threshold for power generators is different with technology and off-taker credit quality.
Economic headwinds have dented institutional investors’ demand for renewable bonds, despite growing awareness of environmental, social, and governance issues. With the availability of call options as and when practical, more issuers may turn to domestic markets or other alternative funding sources.