Crowded field could leave casualties

02 February 1996

The world's leading power equipment suppliers can look forward to the millennium with more confidence than most engineering companies. The need for their services is not in doubt. Demand for new generating capacity is growing at unprecedented rates, particularly in the developing economies of Asia, while deregulation and technological advances are creating all manner of new opportunities. The only danger seems to come from the fierce competition to win international business and the low prices that are resulting from the contest.

The global demand for new generating capacity in the next 10 years is estimated at about 550 gigawatts. To put this in perspective, it is the equivalent of adding the entire generating capacity of the UK every year.

Other estimates paint an even more bullish picture. The US' General Electric Company (GE) forecast demand growth of 2.8 per cent a year throughout the 1990s and anticipated orders for 925 gigawatts in the 10 years to 2001, with 575 gigawatts installed in the same period.

Historically, load growth tracks the growth in gross national product (GNP) and it is the rapidly expanding economies of Asia that will account for most of the capacity additions.

According to US energy company Enron Corporation, 45 per cent of the capacity added from 1993 to 2002 will be in Asia. Europe and the former Soviet Union will account for 21 per cent and there will be a 17 per cent addition in North America. The Middle East will account for 6 per cent of the new global capacity, according to the same forecast.

Japan's Mitsubishi Heavy Industries (MHI), unimpressed by all the hyperbole about growth rates, foresees an annual increase of about 3,000- 4,000 MW in the Gulf states over the next 10 years.

Despite this seemingly modest share, the Middle East and North Africa are a hive of power engineering activity. At a mid-January industry conference and exhibition in Dubai the UAE Water & Electricity Minister Humaid Bin Nasser al-Owais claimed that $100,000 million would be spent over the next 15 years on new generating capacity in the Gulf area alone. Faced with such a huge challenge the minister called for the privatisation of electricity and water utilities. This would open the way for independent power producers (IPPs). Although much talked about in the area, IPPs have so far made only a small impression.

The competition for this business is fierce.

The challenge for the power engineering industry is to win contracts without bidding prices down so low that they lose money.

Power systems was one of only two divisions of GE, the largest company in the US, that saw its profits fall last year while net income for the whole group rose by 13 per cent.

Blame for the disappointing performance was laid at the international competition which is squeezing margins and depressing prices.

Another industry contest now reaching a peak is the pursuit of higher thermal efficiency. Progressive improvements to gas turbines have boosted performance to unprecedented levels. Thermal efficiencies of 55 per cent are now commonplace compared with rates of about 40 per cent in the early 1980s. Further improvements much above this level are unlikely, due to the high nitrous oxide (NO,) emissions they would cause although Zurich-based Asea Brown Boveri (ABB) has introduced a new range of turbines with a claimed 58 per cent efficiency and low NOx levels.

Power plants fired by gas and liquefied natural gas (LNG) are the most popular world-wide. Enron expects gas to account for 26 per cent of all new capacity additions to 2002, ahead of coal on 25 per cent and hydropower on 22 per cent. In the Middle East the percentage claimed by gas will be far higher.

The region has also taken advantage of combined-cycle technology to boost output.

Conversion of existing plants to combined cycle can improve performance sharply. In a project due for completion in April, ABB is converting the existing Jebel Ali E station into a combined-cycle plant, which will increase output by 60 per cent. ABB says the conversion of the single-cycle plant to combined cycle will boost efficiency from 30.2 per cent to 48.3 per cent.

The single-cycle plant at Jebel Ali, consisting of two Frame 9E gas turbines, was rated to produce a total of 232 MW. After conversion the Dubai Electricity & Water Authority will have an additional 108 MW at its disposal from the plant with no additional fuel requirement. ABB has also installed a 700-MW combined-cycle plant at Aluminium Bahrain, done a 140-MW conversion at Dubai Aluminium and built the 600-MW combined-cycle plant at Rabigh in Saudi Arabia.

Combined-cycle has found favour right across the region from North Africa to Pakistan due to the speed and simplicity it affords in boosting production. The first North African combined-cycle plant, the 357MW station built by the Anglo-French GEC Alsthom at Sousse in Tunisia, was linked up to the grid in 1995 only 31 months after the award of the contract. GEC Alsthom also completed a 340-MW combined-cycle conver sion at Kot Addu in Pakistan in the middle of last year.

The biggest opportunities for new business are expected to come from Saudi Arabia, Egypt and Iran. In a sign of the times, banks have just been approached for the commercial financing of the 2,400-MW Ghazlan expansion in the Eastern Province of Saudi Arabia. This is the first time a Saudi utility has had to seek commercial funds for a power scheme - Sceco-East is hoping to raise about $500 million, or about a third of the cost of the project. ABB and MHI of Japan were the two low bidders for the scheme.

Political risk Opportunities in Iran, which could require up to 10,000 MW of new capacity in the next five years, will depend on its financial capacity, the willingness of suppliers to take on the political risks of dealing with the Islamic republic and the impact of US efforts to further isolate the country. Egypt is offering a wide range of opportunities from build-own-operate-transfer (BOOT) to more conventional options (see page 11).

Capitalising on future opportunities may involve suppliers in significant new risks if privatisation and BOOT options take root.

Opinions in the industry and perceptions of the risks vary widely. Not all suppliers are prepared to get involved in BOOT ventures as equity partners. MHI took a stake in a Turkish coal-fired power project, which has since lapsed, but is no longer keen to become an investor in similar schemes.

GEC Alsthom has adopted a different tactic and has a 10 per cent stake in the Turkish registered Birecik Company, which will build a 672-MW hydroelectric power plant in Urfa province in the south east of the country. GE enjoys the considerable advantage of a huge financing arm, GE Capital, and was willing to take on the PP9 project in Riyadh on a deferred payments basis (see page 10).

Experienced generators rather than power engineers are more likely to become equity investors in private projects in the region (see page 13). But the ability to offer attractive financing as well as the most efficient technologies will be an essential ingredient for contract success. There is clearly no shortage of projects although the funding for them is less certain. There is also some uncertainty about whether so many suppliers can survive the competition. The US' Westinghouse, for example, is well on the way to reinventing itself as a media company. Yet, despite the restructuring of recent years, power engineering is still a crowded field, giving the customer every opportunity to drive prices ever lower.

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