The World Cup has been a stressful event for Ghana’s electricity industry. When the national team was playing, the country had to import 50 megawatts of electricity from neighbouring Ivory Coast and cut consumption at Valco, the state-owned aluminium company, in an effort to prevent blackouts.
Throughout the tournament, Ghana’s utilities have been told by regulators to run all available generators in order to power the country’s televisions and consumers have been urged to switch off power-hungry appliances such as freezers and air conditioners.
Those strains are a sign of the enormous unmet potential demand for electricity worldwide, and of the huge opportunity for companies manufacturing power generation equipment.
This year a wave of consolidation has swept through the industry, as the leading companies, including General Electric, Siemens and Mitsubishi Heavy Industries (MHI), take advantage of a cyclical downturn to position themselves for expected long-term growth. GE, in particular, has moved to address its weaknesses and develop new strengths with its deal to buy most of the energy businesses of Alstom of France, for a net $10bn.
While the GE-Alstom deal hit the headlines, there have been several smaller deals in the industry. Siemens, thwarted by GE in its bid to buy Alstom’s gas turbine business, is paying £785m for Rolls-Royce’s operations making smaller gas turbines used in the oil and gas industry and for distributed power. Shanghai Electric announced in May it would pay €400m for a 40 per cent stake in Ansaldo Energia, the Italian power equipment manufacturer, and said the two companies would set up manufacturing joint ventures in China to serve Asian markets (such as Shenzhen, China, pictured).
Before that, Japan’s MHI and Hitachi formed a 63/35 joint venture in gas-fired and coal-fired generation equipment, which was announced in 2012 and started operating in February. MHI also last year bought the Pratt & Whitney small and medium-sized gas turbine business from United Technologies of the US.
One factor behind this spate of power equipment deals has been a prolonged period of weak demand that has provoked some weaker competitors to seek partnerships.Utilities’ capital spending peaked in 2007, according to Andreas Willi, an analyst at JPMorgan Cazenove, and it has yet to recover fully. Global power equipment sales in 2013 were a little higher than in 2012, but still 27 per cent below their 2007 peak in terms of megawatts of capacity ordered, Mr Willi says.
That weakness has taken its toll on manufacturers. Siemens, for example, booked €13bn in orders for fossil fuel power generation equipment for the year to September 2008, but only €10.7bn in its most recent financial year to September 2013.
Sluggish economic growth in developed economies has led to weak electricity demand, meaning there is little need to invest in new capacity. Utilities are often subject to regulations compelling them to invest in renewable generation, limiting their appetite for new gas-fired and coal-fired plants. They also face uncertainty over what has been described as the “existential threat” to the traditional utility business model posed by distributed power generation, particularly rooftop solar.
Yet while all those problems are still present, the long-term future looks much brighter.
While developed world demand is weak and likely to grow only slowly, countries in the developing world are desperate for more electricity. Nigeria, for example, with total generation capacity of about 4 gigawatts, will need 55GW in 2030, according to the Center for Global Development, a Washington-based think-tank.
The biggest sources of new demand are likely to be China and India, which have per capita electricity consumption respectively one-third and one 15th that of the US. If per capita consumption in those two countries were to reach US levels, that alone would more than double world electricity use.
The result is that in the long term, demand for turbines will be skewed towards low and middle-income countries. The IEA estimates that in 2014-35, the world will spend about $2.58tn on gas and coal generation capacity, two-thirds of it outside the members of the Organisation for Economic Co-operation and Development, the rich countries’ group.
The companies that prosper will share certain characteristics, analysts and industry executives say. They must be able to offer steam turbines used in coal-fired plants, because countries that have coal will want to exploit it. They need smaller turbines used for off-grid power, because distributed generation is likely to grow faster than centralised supply in countries that do not have well-developed electricity networks.
Companies need to be large, so they take advantage of growth opportunities worldwide, and so they can spread the costs of research and development across the broadest possible revenue base. They also should offer a range of technologies including gas, coal, nuclear and renewables, so they can sustain that research spending through the cycle as different forms of generation move in an out of favour.
On those counts, the GE-Alstom deal scores highly. It strengthens GE in steam turbines, where it was relatively weak, and in countries where Alstom has strong customer relationships, including China and India. It also adds sales to support R&D spending for both products and services, as Alstom has a large base of about 350GW of installed turbine capacity, to add to GE’s base of about 1,000GW.
Steve Bolze, GE’s chief executive of power and water, pictured, told analysts on a call when the Alstom deal was announced: “As you grow a service business, the number one thing you need is installed base.”
Brian Langenberg, an industrial sector analyst, says the deal makes GE “significantly bigger and stronger”. He adds that it “will better compete in fossil fuels with Siemens and at higher rates of profitability and increased capability”.
Julian Mitchell, an analyst at Credit Suisse, said in a note the GE-Alstom deal was “likely to particularly weigh on second-tier players such as Ansaldo”. He suggested that some of the Chinese companies such as Harbin and Dongfang, which are among the leading manufacturers of steam turbines for coal plants because the country accounts for much of the world’s investment in coal-fired generation, might also now feel the pressure for further consolidation.
For now, though, GE’s leadership has given the company a significant strategic edge. They now need to show they can capitalise on it.
Need for back-up ‘when wind doesn’t blow and sun doesn’t shine’
One of the strongest pressures on manufacturers of gas turbines is the need for them to fit in with growing capacity on the grid for renewable energy sources such as wind and solar.
The International Energy Agency estimates that almost half of the investment in generation capacity over the next two decades will be in renewable energy, including onshore and offshore wind, and solar.
As Robin West of the Center for Strategic and International Studies in Washington puts it, that creates an opportunity for natural gas, especially where prices are low thanks to the North American shale boom.
“As renewable energy grows, it becomes more and more important to have back-up power for when the wind doesn’t blow or the sun doesn’t shine. You need gas turbines that are as flexible as possible, so they can cycle up and down rapidly to balance out the fluctuations in renewables.”
What manufacturers have to try to do is deliver the most flexible gas turbines possible, which can be ramped up and down while remaining efficient in their use of fuel.
General Electric in March launched its 9HA gas turbine, which it describes as the “world’s largest, most efficient gas turbine”. With a maximum output of 470MW, it is the company’s attempt to capture a slice of the market for the very largest gas turbines, which until now has been dominated by Siemens and Mitsubishi Heavy Industries. Two of the key selling points of the GE machine are that it can be ramped up quickly, reaching full power in 30 minutes, and that it has a low “turndown level”: output can be turned down to 40 per cent of its maximum level while still meeting emissions standards.
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