KUALA LUMPUR: China’s target of carbon neutrality by 2060 will present significant long term challenges to the coal power sector, according to Moody’s Investors Service.

       In its report on Tuesday, the rating agency said he impact on the sector over the next one to two years will likely be higher leverage pressure because of faster renewables expansion.

       “Over the next 40 years, the impact will be more pervasive, including refinancing and possible stranded asset risks, higher emissions costs and potential bailout risks.

       “Such risks are likely to be mitigated by strong government support, technology emergence and increased financing sources,” it said.

       Moody’s said the 10-year target implies a sharper carbon transition in the long term. The government’s targets over the next five-10 years will likely put China on the path to peak carbon emissions by 2030.

       However, the plan signals a more challenging path beyond 2030 to achieve the 2060 carbon neutrality target.

       As for the decarbonisation plan, Moody’s said it was manageable for coal power generators in the next one to two years.

       Major near-term challenges for coal power generators include higher leverage pressure because of faster renewables expansion and market share loss to renewables.

       That said, the impact on generators is largely manageable, mainly driven by strong power demand.

       “More challenges will arise over the long term. We expect the impact will be more pervasive over the next 40 years, including (1) increasing refinancing risks and emissions costs, possible stranded asset risks, and falling profitability for coal power generators, (2) further leverage increase from renewables expansion for renewables operators, and (3) potential bailout risks for state-owned generators to support failing power generators,” it said.

       Moody’s said however, the impact will likely come gradually and be more significant in latter years.

       It pointed out risks for power generators will be offset by strong government support and other factors.

       Government support mainly stems from the unprecedented scale of the transition, the power sector’s importance in the country's energy mix and state-owned power generators’ significant responsibility for renewables expansion.

       Other mitigants include more funding sources for renewables expansion and technology advancement increasing the economic viability of battery storage facilities.

       On the implications for rated coal power generators, the rating agency said although rated coal power generators will face rising leverage from renewables expansion, higher environmental costs and bailout risks, a significant deterioration of credit quality seems unlikely over the next 10 years because of their high operating efficiency and scale, and high strategic importance to China's power supply security. Beyond 2030, their long-term credit quality will hinge on strong support from the government.