Moody's says that India and China's rapidly-rising investment in renewable power capacity will bring long-run sovereign credit benefits

Moody's Investors Service says that the ramp-up in renewable power capacity in both India (Baa2 stable) and China (A1 stable) will ease potential energy supply constraints and aid structural economic advancement for both economies.

Moody's report explains that China and India among the largest carbon emitters have emerged as two of the largest investors in renewable power globally. This shift to renewables, underpinned by emission reduction goals, has been further facilitated by rapidly falling production costs in the sector.

China and India expect to increase their renewable energy capacity to 34% and 40% of total installed capacity by 2020 and 2030 respectively. In both cases, achieving these targets implies sustaining a robust pace of investment.

For both economies, a greater reliance on renewable power and lower reliance on fossil fuel can relieve potential energy supply constraints and boost growth potential. Because of their finite and depletable nature, fossil fuels as a source of energy potentially constrains growth for emerging markets with fast-growing energy needs.

In addition, the direct fiscal costs of a shift to renewable energy, which include financial support to the sector through tax breaks, subsidies and tariffs are limited.

However, one fiscal risk relates to contingent costs that could arise from the need to support state-owned enterprises (SOEs) and possibly other corporates that carry out the investment in renewables. Moody's says that this risk is more relevant in China, where SOEs are taking on some share of the investment.

Moody's finds that quantitative benefits to the balance of payments from lower coal and oil imports will be limited, however there will be advantages derived from greater energy security and predictability, through a shift towards domestically-produced and a more easily controlled energy source when compared with imported fossil fuels, with the price for such fuels set globally. Health and welfare benefits should also materialize over time.

That said, while Moody's expects strong growth in investment in renewable energy in both countries, hurdles remain, including an evolving regulatory framework, land acquisition, leverage risks, and access to funding capacities. In the near term, these hurdles will limit the credit benefits of the shift to renewable energy for both sovereigns.

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