November 23, 2021 (MLN): Fitch Ratings in its report issued today, expects an improving operating environment for the APAC power and renewables sector in 2022, as most of the region continues to experience a gradual economic recovery and countries boost measures to support energy transition.
“We expect power demand to grow across most of APAC as economies continue to recover, supported by significant improvement in vaccination rates for most countries over 2H21,” the report said.
The report noted that APAC accounts for more than half of the world's energy consumption, while a substantial population still lacks access to basic electricity. The region will continue to electrify to support rising power consumption over the medium term.
As per the report, electricity demand in India and China not only recuperated to pre-coronavirus levels within 2021, but also saw tight power supply against a higher-than-anticipated rise in electricity demand and fuel shortages. Electricity generation is an essential service; hence it was less severely affected by the pandemic. Fitch-rated issuers are also supported by contractual take-or-pay obligations at coal-fired and geothermal issuers, and a ‘must-run’ priority at Indian renewables issuers.
The rating agency expects energy transition to cleaner technologies should accelerate, supported by policy push, sectoral reforms, newer technologies, cost-effectiveness and 'green' financing. However, the pace and magnitude will vary by country. Most of the countries have set long-term renewable capacity addition targets.
“We expect a slew of measures on this from respective governments in the short term, and also to support newer technologies such as green hydrogen and offshore renewables,” it said.
Fitch's portfolio of rated power and renewable issuers has ballooned from 10 in 2020 to more than 15 in 2021. Their performance has been mostly stable over the past few years, and Fitch expects limited rating changes over the next 12 months.
China and India plan to increase their renewable power capacity base to over half of the total installed capacity by 2025 and 2030, respectively. Indonesia plans to add 41GW of capacity in the next 10 years, with renewable energy making up the majority for the first time. Vietnam also plans to add around 70GW of capacity in the next decade, with renewable accounting for 36% to 39%. Fitch expects continuing support from respective governments in the short term to achieve the targets.
Steps taken by China and India to bolster domestic coal mining and supply will help maintain lower coal price levels over 2022 on average. However, the rating agency expects some volatility to continue in the first half. The coal price has already tapered off from its peak in September-October 2021. A pass-through construct in Fitch-rated thermal projects insulates the credits from any coal-price volatility. On the other hand, the renewable projects benefit from higher off-take and soaring power exchange prices in the case of lower thermal power generation, the report noted.
With regards to higher inflation, taxes and duties, the agency said there would not be an impact from a rise in solar module prices as Fitch-rated Indian restricted renewable portfolios are all operational.
Furthermore, rising awareness of environmental, social and governance (ESG) issues should continue to support strong institutional investor appetite for bonds in the renewable sector. “We expect more renewable developers to tap the bond market and look to refinance as they establish a record, increase scale, and improve their credit profiles. The low-interest-rate environment will also support funding for these issuers, supporting cost competitiveness against fossil fuels,” the report cited.
In general, Fitch expects the overall stable performance to continue into 2022, with a further recovery in wind power generation. Fitch-rated issuers have been largely unaffected by the pandemic thanks to contractual take-or-pay obligations at coal-fired and geothermal issuers and a ’must-run priority at Indian renewable issuers, the report added.
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