Filling the supply gap

19 October 2009

Suppliers of portable generating equipment are enjoying booming business as electricity producers struggle to keep up with demand

Residents of Sharjah endured a sweltering summer this year as air-conditioning units shut down for long periods because of a series of power cuts.

The electricity outages were an uncomfor-table reminder that large tracts of the Gulf still have insufficient power capacity to keep air-conditioning units running. Demand for power is growing at an average rate of 6 per cent a year in the UAE and Saudi Arabia, for example.

Long-suffering Sharjah residents could either put up with the humidity or move to neighbouring Dubai, where rents have dropped by up to 50 per cent over the past 12 months. But for companies engaged in energy-intensive business projects, that option is not available, and many have had to buy or rent generators.

The problem is not unique to the UAE. Across the region, businesses in a variety of industries have turned to temporary generators, which are more typically found on construction sites not connected to the electricity grid. The UK’s Aggreko, Perkins and FG Wilson, the US’ Caterpillar and Cummins, Italy’s Iveco, Deutz of Germany, and Sweden’s Volvo and Scania brands dominate the Gulf generator market.

Stand-by power

The equipment comes in a range of capacities. Aggreko, whose global hire fleet comprises 13,500 generators, with a potential combined capacity equivalent to more than 5,600MW, supplies equipment ranging in output from 30 kilovolt-amperes (kVA) to 1,500kVA in single units, plus multi-megawatt packages using units linked together. FG Wilson provides diesel-fuelled generators ranging from 5.5kVA to more than 2,200kVA, and gas-fuelled generators from 10kVA to 2,000kVA.

The bulk of Middle East generators are in the 240-500kVA range but, when emergency stand-by power is required, they can be supplied with significantly higher capacities. Cummins provided three 2,250kVA generators in 2008 to produce standby power for the Royal Air Wing of Dubai International airport, the terminal used by the Dubai royal family. Cummins captured a sizeable share of the UAE market in 2007 when it struck a deal with the energy division of Al-Faris Equipment Rentals, a UAE-based lifting and construction services provider, to provide hundreds of generators, ranging in capacity from 30kVA to 1,250kVA.

Generator providers enjoyed booming business as the Gulf’s electrical power supply failed to keep up with demand during the economic boom. But with the slowdown in the economy, demand has slackened in key markets such as construction.

In the summer, the rental market was busy across the UAE, but a general slowdown has been evident over the past year. “Activity has shifted,” says Colin Cave, northern Gulf general manager at Rental Solutions & Services (RSS), a global provider of temporary power and cooling services. “In Dubai, it has definitely died off, but other parts of the GCC, like Qatar and Saudi Arabia, have picked up.”

Even within the UAE, the power rental markets in Abu Dhabi and Dubai are very different. “Dubai has certainly gone through a slowdown over the past year, while the market in Abu Dhabi has grown phenomenally as its construction boom gains momentum,” says Phil Burns, managing director of Aggreko Middle East, which has 10 outlets in six countries in the region. “Smaller power rental markets such as Qatar and Kuwait have performed very well, while Saudi Arabia has remained relatively unchanged.”  

There are seasonal trends. Typically, demand for power is greatest in the summer months all across the Middle East, as the heat increases and air-conditioning and chillers are switched on.

Demand also varies between sectors. While demand from the construction industry has slowed, other sectors remain more reliable. “Demand from the oil and gas sector has remained steady, despite the fluctuating oil price, and manufacturing has likewise remained stable,” says Burns.

Suppliers have been able to leverage their size to good effect. “Most players in the hire market have large equipment fleets, so when things really slowed down they were able to mobilise these fleets from one contractor to another,” says Wassim Aboushaar, general manager at Cummins Middle East.

Manufacturing is a growth area for temporary generators. Many new manufacturing plants opening in Saudi Arabia and Qatar are yet to be connected to the local grid and generators are the ideal way to supply power in the interim.

Equipment surplus

The slowdown in construction has at least had the effect of improving the availability of generators. During the peak of the construction boom of 2006-08, the lead time for supply of generators could be as much as 20 weeks.

But lead times have shortened over the past 12 months. In the current market conditions, suppliers are often able to get generators out to customers within days.

The supply of new equipment from manufacturers has improved too. “Some 12-18 months ago, there would typically have been a waiting period of nine months to buy new equipment from our suppliers,” says Cave. “With the global slowdown, there has been a surplus of new equipment, so we have been able to increase our fleet very quickly, simply by buying off the shelf.”

Clients are faced with the choice of either renting or buying their generator equipment. In the construction sector, the preference is to rent. This is better suited to building projects, which have specific programmes. 

Many customers are now looking for ways to avoid putting down large, lump-sum payments for equipment. “A permanent power package is a huge investment, and it makes good financial sense for companies to look to rental solutions,” says Burns.

Renting also gives customers the flexibility to increase or decrease capacity, depending on their needs. Service agreements with the hire company cover breakdowns and repairs.

The regional economic downturn has increased the attraction of renting, rather than buying, generators. “During the boom, a number of customers decided to buy rather than rent,” says Cave. “But with the slowdown, the first thing people did was to stop purchasing large pieces of capital equipment. And that has been good for us as a rental firm.”

The fuel of preference for generators in the Middle East is diesel, which is readily available and cheaper than in other regions. But heavy fuel oil and gas-powered units are also used. The latter are becoming increasingly popular because, while they are more expensive to buy, they are cheaper to run and emit less carbon dioxide than diesel generators.

Caterpillar offers clients in the UAE, Kuwait, Qatar, Bahrain and Oman gas-powered generators ranging from 87kVA to 8,150kVA at a 50Hz specification, and 85kVA to 6,520kVA at a 60Hz specification.

Aggreko says a large percentage of its generators still run on diesel. But in 2005, it diversified into natural gas power and says demand for gas-powered products is growing in the region.

“We are working with customers to determine how they can use gas resources in their regions and are developing new technology that will reduce their energy costs,” says Burns. “One of these is the ADDGas system, which allows customers to substitute natural gas for a significant portion of diesel fuel, giving a considerable saving on running costs.”

Aggreko also offers customers the option of using biofuels in most of its generators. “The generators vary with regard to the percentage of biofuel each type can handle, but we have 350kVA and 500kVA units that can run entirely on biofuel,” says Burns.

Beyond the Gulf, demand is increasing in conflict-hit areas, where power provision has fallen behind consumption. Iraq, where lengthy power outages are a fact of life for businesses across the country, is a particular growth market. Many Iraqi customers have bought high-quality generators capable of running continuously. Iraq’s growth has given suppliers the opportunity to expand in the region. Cummins, for example, has a local distribution agreement in Iraq.

The same applies elsewhere in the region. “RSS is very focused on developing markets,” says Cave. “We have been very active in the GCC but there is room to grow in new markets, and also in new sectors within those markets.”

Yet these markets can be highly competitive. Egypt, potentially lucrative by virtue of its size, has proven a tough market for the global suppliers to crack. “It is very difficult to compete with local companies, which assemble their own kit but don’t have to meet our safety standards,” says the Cairo-based manager of one European generator manufacturer. “Egyptian producers can secure a 30-40 per cent price reduction compared with our products. They source a cheap stock of engines from Italy, then assemble the kit over here.”

But business conditions in the Middle East are generally favourable for the large generator suppliers. “We believe that the power rental market in the region will remain strong as demand for power continues to rise,” says Burns. “This rise in power demand will be driven largely by the changes that will occur as industrial sectors across the Middle East continue to grow and average energy consumption per person rises.”

Companies in the generator market expect conditions to improve next year. “There is still some uncertainty, but my gut feeling is that things will get better next year, even if it only amounts to a couple of quarter-on-quarter percentage increases,” says Aboushaar.

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