In a new report, Fitch Ratings said it expects energy demand in the region to grow quickly, driven by robust economic growth and long-term government targets for electrification.
Although coal will continue to dominate the fuel mix across most of the region, Fitch Ratings said there is a steady shift toward renewables, particularly in developed economies, that could create competitive pressures for some coal-based power projects.
Government policy will support renewables, it said, but improving economics in the sector will allow the gradual withdrawal of subsidies, favourable feed-in-tariffs, and generous tax and accounting treatment. “Offshore wind is likely to be the major addition to non-hydro renewable generation capacity in the near-term,” the credit rating agency said.
Its report echoes the findings of research from Wood Mackenzie that suggests the Asia Pacific region’s offshore wind capacity will rise 20-fold to 43 GW by 2027 and that future prices will be competitive with conventional thermal energy.
Coal’s contribution to electricity generation in the region is well above the global average of less than 40% in most countries and is as high as 75% in India and 68% in China. However, Fitch Ratings said the share of renewables is rising, and will be boosted further by falling technology costs and greater availability of cheaper finance for renewables issuers.
“Coal-fired projects that are exposed to the merchant market or unprotected by contractual termination compensation could face a risk of lower electricity sales or, in a worst-case scenario, early termination as a result of rising competition from renewable projects,” Fitch Ratings said. Fitch-rated issuers sell all of their electricity to the state utility under long-term take-or-pay power purchase agreements (PPAs) with robust termination provisions, insulating them from these risks.
Most of the rated projects also have PPAs that protect them from the current high price of coal, by allowing them to pass through fuel cost increases to off-takers. Fiercer competition for higher-calorific-value coal could still lead to some uncompensated increases in fuel costs, if it undermines a power plant's operating efficiency, but any impact is likely to be limited.
Renewables issuers – particularly in the wind and solar sector – are likely to tap the bond market increasingly over the next few years, with their access supported by longer operating histories, larger scale and improved credit profiles. “The success of Asian thermal power issuers in raising project finance has also laid the groundwork for renewable issuance,” the ratings agency said.
“We expect continued innovation in financing options from renewable issuers, such as project bonds, asset-backed securities, green bonds, and infrastructure trusts, in addition to traditional debt instruments,” it concluded.