India only market in APAC region with negative power sector outlook, says Moody’s

• Most rated issuers' cash flows will improve or stabilize supported by power demand recovery or manageable cost passthrough mechanisms

• Carbon transition risk is manageable in the near term; while India will face difficulties on several fronts

New Delhi: India is the only market in the APAC region with a negative power sector outlook, because of weak power demand, additional payment delays by state-owned distribution companies and policy actions aimed at reducing stress for end-users, said Moody's in its outlook report for 2021 on Wednesday. At a macro level, the power sector, which has witnessed a substantial impact on their operations because of the Covid-19 pandemic, is set to see some improvements in the months to come, said the report. It added that while cash flows are set to improve for many companies, they would face difficulties from global regulators. 

The cash flow of most rated issuers will recover or stabilise in the next 12-18 months. This will be supported by power demand recovery or manageable cost pass through mechanisms but partly offset by falling power prices and regulated returns, as well as payment delays by off-takers, said Moody's. "Stabilising or improving cash flows amid power demand recovery, the gradual pace of regulatory change and a manageable transition to a low carbon economy underpin Moody's Investors Service's stable outlook for the APAC power sector in 2021," said Moody's.

APAC power sector outlook stable, but India faces challenges: Moody's

"Our outlook for the APAC power sector is stable for 2021, as it has been since 2009. While the sector faced challenges this year as a result of the pandemic, they have been manageable overall and we expect broadly supportive business conditions across the region as economies recover," said Boris Kan, a Moody's Vice President and Senior Credit Officer.

"That said, we do see some challenges in India's power sector and, to a lesser extent, unregulated utilities in Australia, China and Japan, driven by evolving operating conditions," added Kan.

Cash flow for coal-driven power generators will weaken in long-term

"The cash flow of coal driven power generators will weaken in the long term because of increasing renewable competition and environmental compliance costs. Capital spending on renewable capacity expansion will rise in several countries. However, these risks are manageable over the near term as coal power will remain important to the region. The sustained low interest rate environment will also be positive for power utilities by lowering their cost of funding," the Moody's report said.

China & Japan: Moody's Outlook

In China, power demand recovery and falling interest rates will offset likely tariff declines as a result of increased market liberalization, but there will be delays in subsidy payments for renewable energy operators. Meanwhile, Australia's regulated utilities remain transparent and predictable but unregulated utilities will face ongoing challenges from policy uncertainty and price volatility.

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In Japan, further decline in the utilities' market share from retail competition will be limited and they will maintain leading positions in their home markets. But growing overseas investments will increase their business risk and capital spending in the long term. Meanwhile in Korea, newly commissioned power plants, low fuel costs and improving nuclear power utilization will offset delays in the pass-through of fuel and environmental compliance costs. 

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