INDUSTRY OUTLOOK: NEUTRAL
TRIS Rating expects the power sector to experience continuing long-term growth of demand for electricity, particularly with respect to economic growth, increased urbanization, and digitalization. The softening economy could slow electricity demand somewhat but only temporarily. At the same time, we believe the supply of electricity will keep pace with the growing demand. The national power development plan (PDP) clearly shows an increase in net installed capacity each year as well as support for renewable power.
We expect operators in the power generation industry to face a few key challenges. Firstly, strict regulations in combination with unclear policies will likely diminish opportunities domestically. Secondly, we expect a transition of the industry towards private power purchase agreements (PPAs). This business model affords lower policy protection than having electricity authorities as
off-takers. Finally, residential consumers themselves may become power producers in the longer term.
MARKET RECAP
Electricity consumption in Thailand generally expands at a similar rate compared with the country’s gross domestic product (GDP) growth. Approximately half of the total demand for power comes from the industrial sector, while the residential and business sectors each account for around 20% of total consumption. The business sector includes commercial properties such as department stores, office buildings, and hotels.
Electricity consumption in Thailand grew by 3.5% per annum on average during 2015-2018. The growth rate in the first 10 months of 2019 also increased by 4.1% year-on-year. The growth was primarily driven by residential and business users, reflecting an overall rise in climate temperatures and expansion of the commercial properties. However, the industrial sector and independent power supply (IPS) users, the majority of which are industrial consumers, have had weaker growth rates due to the softened economy.
KEY FACTORS
Thailand’s electricity consumption in 2020 will likely grow at a lower rate
In 2020, TRIS Rating predicts continued growth in electricity consumption but at a lower rate. We project a slight increase in GDP growth of Thailand, i.e., at 2.7% in 2020. Recovery of global trade growth could increase Thai export volume and production in the manufacturing sector. TRIS Rating forecasts Thailand’s exports of goods and services to grow marginally by 1.4% in 2020. This would increase electricity consumption at a slow pace in the industrial sectors.
Power consumption in the residential and business sectors are likely to grow marginally after a sharp increase in 2019. This is because the private consumption is expected to grow at a lower rate than the past years due to diminishing household income and prolonged household debts. Moreover, we believe the growth of foreign tourist arrivals will support rising electricity demand.
PDP 2018 encourages renewable energy but natural gas to remain the primary fuel source
The power industry in Thailand is subject to tight regulations. Any power supplied via the national grid comes under the full direction of the power development plan (PDP). To support economic growth and energy security, PDP 2018 aims to increase installed capacity to 77,211 megawatt (MW) from 50,932 MW, indicating a compound annual growth rate of 2.1% per year during 2019 and 2037. Natural gas will continue to be the major fuel source in Thailand. In 2019, natural gas contributed 57% of total power generation and by the end of the PDP 2018, natural gas will still generate around half of the country’s total power supplies.
The PDP 2018 also targets a huge increase in renewable energy, mostly solar power. The plan seeks to add 100 MW of household solar rooftops per year during the period 2019-2029. Solar roof projects will receive a Feed-in Tariff (FiT) of Bt1.68 per unit. The FiT is relatively low as the policy seems to encourage self-consumption rather than commercial sale of power. As of September 2019, around 20 MW of solar rooftops had been developed. Given this low number of participants, the government is set to revise the mix of renewable power, with tentatively higher contribution from biomass and waste power plants.
The changes in power policy and structure will affect the performance of power plant operators. To minimize the impact of the changes, we have seen operators adjusting their business plans by diversifying to alternative fuel sources, developing power plants overseas, or creating new business models.
Diminishing domestic opportunities drive overseas power investment
Many solar operators have begun to explore investment opportunities outside Thailand, in countries such as Japan and Vietnam. The move overseas is largely due to the declining FiT rates and a lack of new solar farm projects in Thailand. In our opinion, investing in overseas projects carries higher risk than domestic projects, even for cases where the country is more developed than Thailand.
Japan was the first overseas investment destination for Thai solar operators. Before 2016, Japan promoted solar energy development by offering very high tariff rates of around JPY32-JPY42/unit. Although Japan has highly creditable off-takers and clear regulations, a number of difficulties have been encountered. Strict laws and regulations have delayed many projects in Japan and project costs are also high. Moreover, some power plants have undershot the output estimates due to unfavorable weather conditions. At this moment, it is unlikely that Thai operators will continue to invest in new solar projects in Japan as the tariff for solar energy in the country is currently only JPY20/unit.
After Japan, Thai solar operators shifted their focus to Vietnam. In 2017, Vietnam concluded solar farm PPAs totaling 4,000 MW with a FiT of US$0.0935/unit. However, Electricity of Vietnam (EVN) is assessed as a less creditable off-taker relative to key power off-takers in Thailand. Vietnam also needs to improve its transmission capacity. Recently, Vietnam urged solar operators to connect to the grid system by the end of June 2019. This rapid addition of 4,000 MW of power caused grid overloads in some areas. Renewable power plants in areas like Ninh Thuan and Binh Thuan were subsequently required to cut their output to accommodate grid safety measures. This curtailment will impact the revenues of power plant operators until upgrades to the transmission system are completed. The upgrades are scheduled for completion in 2022 under existing plans.
Independent power supply will expand under the current policy
Independent power supply or IPS is a power generation mechanism independent of the national grid. It is based upon private PPAs and self-consumption. The key players in IPSs include small power producers who sell electricity to industrial users (IU-SPP) and operators of solar rooftop installed over factories and department stores, etc. According to the Energy Policy and Planning Office (EPPO), the total installed capacity of IPS stood at 9,063 MW as of June 2019. The majority was IU-SPP, contributing 4,298 MW or nearly half of the total.
TRIS Rating expects the number of independent power suppliers to continuously increase for two main reasons. Firstly, Electricity Generating Authority of Thailand (EGAT) will reduce power purchases from SPP replacement projects to 30 MW from 60-90 MW. Thus, SPP replacement power plants need to sell more electricity to industrial users. Secondly, we expect more solar rooftops to be developed on factories and department stores. The recent PDP 2018 does not promote solar farms, prompting solar operators to expand into solar rooftops and enter into private PPAs with building owners.
However, IPS is subject to higher business risk. They cannot maintain stable and strong margins as in the case of regulated power producers. Private PPAs also do not have fuel cost pass through mechanism, so the operator will likely be exposed to a higher level of risk from fuel price volatility. Most private PPAs will link their prices to the nation’s retail electricity price, which does not reflect their costs. Solar rooftop operators, in particular, have to offer a 10%-25% discount from the retail price to compete with others. It is therefore possible for the retail price to fall, while the costs of power plants remain.
Potential disruption from regulatory changes as well as technological advancement
Advancements in technology can lead to increases in the efficiency and reliability of renewable power plants. For example, solar radiation and wind speed are uncontrollable factors which limit power generation in these types of plants to just 6-8 hours a day on average. New technologies enable renewable power plants to generate larger amount of electricity in that limited time period and store a portion for transmission throughout the rest of the day.
Apart from technology itself, policy direction is also a significant factor. Most power operations require permission from the authorities. The PDP 2018 is the first PDP that allows the sale of electricity from residential solar rooftops to the national grid. Yet, the PDP 2018 still does not allow electricity transactions between households. However, the government plans to develop a smart city in Pattaya as a pilot project which will include energy storage systems and smart meters. This could later be developed into peer-to-peer electricity sales.
There may be additional costs for private PPAs or peer-to-peer electricity transactions in the future. In Thailand, investment in the grid system is undertaken by state enterprises, which receive their returns through electricity sales. If future policies reduce the role of state enterprises in the retail market, the policy makers may add new charges to cover the investment costs of the state enterprises. The charges could be in the form of wheeling charges or electricity backup charges.
FINANCIAL HIGHLIGHTS
Stable return but heavy leverage
TRIS Rating expects the average adjusted pretax return on permanent capital (ROC) of rated electricity producers to remain at around 9% in the next few years. In general, revenue and profit in the power industry are relatively stable in comparison with other industries. The stability comes from the distinct power purchase contracts that characterize the industry. The risk of lower-than-expected returns might arise from external factors, such as curtailment in Vietnam, or irregular weather patterns in Japan. Operators with higher returns than the industry average benefit from old subsidy schemes, which provide much higher tariffs than more recent projects. Currently, new renewable power plants tend to receive lower tariff. However, we also expect power plant costs to decline, offsetting the lower subsidies. It is unlikely that ROC will increase in the foreseeable future, unless new projects are developed with more favorable tariffs.
Although power operators benefit from a stable income, they tend to carry high levels of debts. TRIS Rating forecasts a rise in the ratio of average adjusted net debt to earnings before interest, tax, depreciation and amortization (EBITDA) of rated electricity producers to nearly 5 times in the near future. The ratio is relatively higher than other industries as power plant projects are around 75% funded by debt on average. This typically resulted in high debt obligations at the project level during the early stage of project. The leverage ratios of some operators are higher than the industry average due to their weighty investments in many new projects. In addition, the debt levels of power producers can vary depending on the country where they invest. In the past few years, many operators have invested in solar power plants in Japan, which have higher debt levels and take longer lead times to develop. Meanwhile, power plant projects in Vietnam could benefit from a unique scheme in which contractors will finance the project during construction phase, receiving repayment from the project revenue after plant commissioning. These contractors could charge the project owner at a premium of up to 20% of the project cost.