POWER-GEN takes on upbeat feel as industry eyes end of doldrums
By Ann Chambers, Associate Editor
An estimated 13,000 participants and more than 850 exhibitors gathered in Orlando, Fla., to hear the predictions of industry leaders and to see the latest in equipment offerings
The general atmosphere at POWER-GEN International was much more positive this year than last. It seems the industry has decided Chicken Little was wrong. Deregulation marches on, but the sky is not falling. Change is in the air, and change is never easy or comfortable, but it`s not the end of the world either.
New capacity remains at a near standstill in the United States as industry leaders continue to watch the nation`s reserve margins narrow, but this year talk was of the upcoming promise of construction and capacity additions instead of last year`s gloomy predictions of sweeping brown- and black-outs due to overstressed grids.
Leading the keynote session of the conference, C.O. Woody, Florida Power & Light Co.`s senior vice president-power generation, said that by looking at the 10 reliability regions in the country, it can been seen that the large differences in costs and reserve margins will play a role in both pricing and new construction in the evolving market. He noted three major forces on the industry–market, regulatory and technological. Geographical and regional factors must also be considered.
z Market–“The customer is seeking and sometimes demanding choice. Some false expectations have been raised. I personally do not think we can deliver a 25 percent price drop to all customers.” The focus is on price de spite 13 years of declining prices. Some utilities have an advantage in the race for low price, as marginal generating costs range from less than 1 cent per kWh to 7 cents per kWh.
z Technology–“Utility information technology services and value-added services will be the determinants of success in the future.” Woody predicts the coming of a “whole new industry” as power generators ally with telecommunications, cable and other service firms. Woody also predicted that the 60 percent efficiency barrier will be broken by the year 2000. “Radical technological innovations will rewrite the rules.”
z Regulatory–Regulations are shifting, following a broad wave of public opinion. There is a whole new segment emerging through independent power producers and power marketers exploding onto the scene. Power marketers have grown 25-fold in the United States in two years. He noted that 38 states have wheeling regulations under consideration, although not all are anxious for full wheeling the next few years.
Existing capacity is being used more and better with higher use of existing capacity, up from 60 to 70 percent to 80 to 90 percent use, and less forced outage time. “We`re getting the most out of the assets,” he said. “Retire, repower, replace or upgrade–now is the time to get on with it.”
Current forecasts see new capacity of 92 GW in the next decade, but Woody noted the forecasts were similar five years ago, yet very little has been built. “Utilities will only commit money to new capacity when the rules are decided.”
The trend of U.S. companies looking globally for growth opportunities stems from the stagnant domestic market. But Woody sees more activity on the home front in the coming years. “By 2000, certain regions of the United States will see a very busy market,” he predicted. Merchant plants are also coming. Calpine`s 240 MW plant in Texas is the first example, but other deals are in the works. “Aging baseload will be replaced with more efficient plants as economically needed.”
H. Rhem Wooten Jr., Duke/Louis Dreyfus` wholesale electric power marketing managing director, noted four phases of deregulation: full regulation, transition hybrid, competitive acceleration and market-driven competition. He said the key attributes of winning energy services companies in the emerging market will be:
multi-fuel product mix,
world-class risk management and valuation skills,
regional, physical hubs,
an entrepreneurial culture and
brand name recognition and marketing research.
He called for leaders in the power industry to develop the mentality of the top retail companies. In distribution, regionally focused gas, electric and combination companies will proliferate. On the wholesale level, large, nationally focused integrated energy marketing and conversion companies will dominate. And in retail energy services, new and “radically different” competitors will emerge, with retailing and systems capabilities differentiating the winners.
“A natural convergence of electricity and natural gas will take place among suppliers and in the retail services businesses,” noted Dale A. Landgren, Wisconsin Electric director of business planning in a presentation during the conference. “Retail experiments in electricity and natural gas are providing opportunities for merchants to learn how to acquire energy customers who can choose their suppliers. Electric utilities of today will be among the list of players trying to compete tomorrow.” Energy marketers and energy service companies are entering the field. There is also potential for telecommunications, banking, oil and other related companies to enter play because of their access to customers and marketing experience.
Mergers are another reality of restructuring. Most of the current merger activity stems from industry initiatives to consolidate for efficiency and are between vertically integrated utilities. A few mergers are combining electric and natural gas entities to form a one-stop source for customers` energy needs. “In the future, horizontal mergers will replace vertical mergers as the big news. Consolidations will occur between distribution companies, between transmission companies, between generating companies and between retail service companies as they seek efficiencies of scale and to focus on a particular segment of the business to improve their ability to compete,” Landgren said.
Jean-Louis Poirier, Hagler Bailly consulting director, presented a paper on the global power market, based on data Hagler Bailly has collected for the last five years on global power transactions and project announcements. Hagler counted 200 global power financial closings in 1995, representing $49 billion of transaction, much higher than the $27 billion seen in 1994. “The largest contributor to this increase was a near four-fold increase in distribution system privatizations, which jumped from $6 billion in 1994 to $22 billion in 1995. Greenfield generation closings did not increase significantly in 1995. At the same time, privatizations of generation assets remained somewhat low, at $4 billion in 1995. Privatizations in 1996 have been more active, with up to 23 GW of privatization anticipated by the end of 1996.
“On the generation side, the global power market activity continues to grow exponentially. At this point, we estimate that more than 90 percent of the world power sector is open to IP (independent power) activity compared to 30 percent in early 1993. The database shows 2,100 generation initiatives, including both greenfield projects and privatization possibilities. This amounts to 750 GW of proposed activity in 96 countries.
About 21 GW, 50 percent of the operating greenfield capacity, is found in Asia. Next is Europe with 17 GW, 40 percent of greenfield facilities, followed by 3 GW in South America.
More than 1,665 greenfield projects are in market development, again with Asia dominating. About 90 percent of the greenfield capacity is fossil fuel fired, with coal seeing approximately 50 percent. Oil and gas projects have a 4 percent share. Only 15 to 20 percent of the announced projects are likely to see completion, according to Poirier.
Hagler is projecting a total market of up to $250 billion in closings through 2001–including up to $75 billion in generation activities, both greenfield and privatizations.
“The competition overseas is not only bigger, it is also more diverse and smarter, and is following different business models,” Poirier said. There are more than 300 multinational players with equity in power projects exceeding 278 GW. They include 102 developers, 76 utility affiliates, 32 fuel suppliers, 24 equipment vendors and 73 others. This includes 128 U.S. players, 10 more than last year, who hold 99 GW, a 36 percent share of the international action.
“The caliber of newcomers in the industry is imposing: companies with wide geographic presence and history, networks and assets, deep pockets and substantial trading, dealmaking and currency handling experience,” Poirier said. “Sophisticated new entrants are combining insights into energy and capital markets to create innovative offerings. Other players are combining generation and distribution holdings to secure energy retailing positions in sufficiently deregulated markets.”
He predicts that the global power companies of the future will have to be “multi-local.” This means:
local customization of a company`s basic business model,
involvement in the local market formation process,
use of local capital markets,
reliance on local alliances and
local recruitment and deployment of skills.
“The industry is not yet global, but it will be in a matter of a few years. However, it is time for any global power player to ask itself why it deserves to make money in the world power market,” Poirier said. z
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Power Engineering`s Publisher, Robert Smock, presented the Power Engineering and Power Engineering International “Project of the Year” awards during the keynote session of POWER-GEN International in Orlando, Fla.
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POWER-GEN International featured a huge display of power generation and delivery equipment focused into seven pavilions under one roof. An estimated 13,000 visitors and more than 850 exhibitors from more than 75 countries attended the event.