Landscape Evolving For Asian Giants

BMI View : We have slightly revised down our 2014 forecasts for electricity generation in Asia this quarter due to deterioration in the economic outlook for several countries in the region. Our forecasts for Japan experienced the most significant revisions due primarily to a slowing economy and a new energy plan. We also see growing upside risks to our power forecasts for India, while our long-term outlook for the broader Asian power sector remains unchanged and positive.

The near-term economic outlook for Japan and China continues to deteriorate, which is a trend we had highlighted and incorporated in our previous analysis of the Asian power sector ( see 'Slowdown In Major Asian Economies Hurts Regional Power Outlook', April 1). While we have maintained our forecasts for China this quarter, we have moderated our forecasts for Japan due to a worse-than-expected deterioration in its economy ( see 'China, Japan: Further Signs Of Weakening Growth', May 6).

Japan: Economic Risks At The Fore

Disappointing Wage Growth
Japan - Real Wage Growth, % chg y-o-y 6mma

BMI View : We have slightly revised down our 2014 forecasts for electricity generation in Asia this quarter due to deterioration in the economic outlook for several countries in the region. Our forecasts for Japan experienced the most significant revisions due primarily to a slowing economy and a new energy plan. We also see growing upside risks to our power forecasts for India, while our long-term outlook for the broader Asian power sector remains unchanged and positive.

The near-term economic outlook for Japan and China continues to deteriorate, which is a trend we had highlighted and incorporated in our previous analysis of the Asian power sector ( see 'Slowdown In Major Asian Economies Hurts Regional Power Outlook', April 1). While we have maintained our forecasts for China this quarter, we have moderated our forecasts for Japan due to a worse-than-expected deterioration in its economy ( see 'China, Japan: Further Signs Of Weakening Growth', May 6).

Japan: Economic Risks At The Fore

We had highlighted signs of an economic slowdown in Japan in our previous analysis of the sector, and said that this could lead to a slowdown in electricity consumption and generation growth. This risk has materialised, with growing evidence of an 'Abenomics' hangover prompting our Country Risk team to downgrade both their short- and long-term forecasts for the Japanese economy in April. We now expect the Japanese economy to grow at a real rate of 0.9% in 2014 (down from 1.3% previously), with recent weakness in purchasing managers index readings, still-negative real wage growth, and the ongoing widening of the trade deficit all contributing to the revision ( see 'Downgrading Growth As Abenomics Hangover Kicks In', April 24). We also tapered our long-term growth expectations for Japan on the back of negative developments in the business environment and the increasing likelihood for authorities to redouble stimulus efforts to the detriment of wealth creation and financial stability.

Disappointing Wage Growth
Japan - Real Wage Growth, % chg y-o-y 6mma

These revisions have also translated into similar moderations in our power forecasts, and we now expect electricity consumption in Japan to grow at an average of just 0.5% per annum between 2014 and 2023 (down from 0.9% previously). We also moderated our forecasts for the various components of generation. Gas- and oil-fired generation experienced the most aggressive moderation, with coal and nuclear energy generation receiving less aggressive revisions. This is in line with the country's fourth Basic Energy Plan. The plan, approved by the Cabinet on April 11, highlighted coal as an important baseload source, and reversed a plan to phase out nuclear energy ( see 'Nuclear Proves Critical, Coal Remains In The Mix', April 15).

FACT BOX: KEY STRATEGIES OF FOURTH BASIC ENERGY PLAN
Generation type Policy Change
Nuclear This new policy reverses the previous administrations' plans to gradually phase out nuclear energy, and defines nuclear energy as an 'important baseload power source' without specifying the share of nuclear in the nation's energy mix.
Conventional Coal and hydropower were highlighted as important baseload sources, with coal set to play a major role in the policy over the long-term.
Renewables The new policy said that Japan would aim to surpass renewable energy targets in past plans, but did not set any specific targets. The previous target was for renewable energy to account for 13.5% of total power generation in 2020 and around 20.0% in 2030.
Energy Mix Minister for METI Toshimitsu Motegi told reporters after the cabinet meeting that the government might decide on an ideal energy mix within two or three years.
Source: Ministry of Economy, Trade and Industry

We note that Japan's nuclear sector continues to present significant risks to both our outlook for the country's broader power sector. On May 21, the District Court of the Fukui Prefecture ruled in favour of a lawsuit by 189 plaintiffs to block the restart of two reactors at the Ohi nuclear power plant. We previously highlighted the risk local communities and governments pose to reactor restarts, and see this risk coming to the fore. This is a major risk to reactor restarts in Japan as the local authorities must give their approval for reactors in their jurisdiction to be restarted ( see 'Reactor Restarts Threatened By New Legal Precedent', May 23). There is also a risk for a greater-than-expected number of reactors to be restarted, and this poses an upside risk to our forecasts ( see 'Core View In Play: Nuclear In The Mix', March 18).

India: Upside Materialising

We had said in our previous analysis that the outcome of India's lower house elections in May 2014 posed an upside risk to our forecasts, and this has materialised. We expect the election of Narendra Modi and the Bharatiya Janata Party (BJP) to have an impact on the power sector as Modi is keen on addressing the country's chronic shortage of electricity due to its detrimental impacts on economic growth. Modi himself had introduced several reforms during his time as Chief Minister of Gujarat (2001-2014), which are widely credited for helping the state avoid persistent power shortages.

We believe that Modi will try to implement regulations and reforms that are conducive for growth across all parts of the power sector. The Modi administration has already taken a number of direct and indirect steps to boost growth in the renewables sector ( see 'Solar: State- And Federal-Policies Increasingly Conducive', June 24). The BJP will also look to reduce red tape for power projects, improve the fuel availability for thermal projects, and possibly privatise certain parts of the sector to improve competitiveness and access to capital ( see 'Power Sector To Be Modi-Fied', May 22). That said, we have refrained from revising our forecasts for the Indian power sector this quarter as we are waiting for the administration to make progress in passing legislation on the sector.

Beyond 2014: Outlook Stable And Sanguine

Our outlook beyond 2014 remains relatively stable and we are forecasting electricity generation in the region to grow at an average rate of 5.1% per annum between 2014 and 2023. This is notably higher than the global growth average, which we attribute to several reasons:

  • Economic and demographic growth: We believe that emerging Asia is set to outperform the global economy over the medium- to long-term due to positive demographic and structural factors, and this is set to drive electricity consumption growth over the long-term.

  • Low electrification rates: Electrification rates in Asia are relatively low, and are set to increase alongside economic and technological development in the region. Several countries in the region have already initiated programmes to improve electrification rates, with Myanmar's first 500kV line being a key example ( see 'Myanmar Transmission Project Desperately Needed', March 6).

Electrification Rates Still Low
South East Asia - Electricity Access In 2009, %
  • Positive regulatory developments: The majority of governments in Asia are pushing for greater competition, transparency and sustainability in their power sectors through various reforms. A number of countries have already allowed electricity prices to increase, and we see room for price increases and reforms in the future ( see '2014: Upward Pressure On Electricity Tariffs In Asia', January 10).

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Related sectors of this article: Utilities - Power, Power, Gas - Power, Coal - Power, Hydropower - Power, Regulatory - Power
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