ARC sees electric power industry capital expenditure with stark regional contrasts

5 November 2004 – Worldwide capital and operational expenditures for plants in the electric power industry, which totalled more than $374bn in 2003, will exceed $453bn by the end of 2008, expanding at a Compounded Annual Growth Rate (CAGR) of just under four per cent, according to a new study by the ARC Advisory Group.

“While China strains to grow a reliable power infrastructure in support of rapid industrial growth, North American spending continues to decline as the recent bulge of generation development, combined with higher natural gas prices, create both a glut of generating capacity and a squeeze on operating margins,” according to Senior Analysts Harry Forbes and Ravi Murthy, authors of ARC’s Electric Power Industry Plant-Level Expenditures Worldwide Outlook. They continue, “In addition to process improvement, capital budgets are focused on improved asset management as well as better responsiveness to customers.”

Worldwide, the industry will see steady growth as electric power continues to be the point of expansion for infrastructure development worldwide and especially in the developing economies of Asia. Many electric power companies will face new competitors, continued deregulation, and emerging technologies such as distributed generation, renewable, and “clean coal” primary energy sources.

ARC argues that electric power is the lifeblood of developed economies worldwide and, therefore, draws the close attention of regulatory authorities. Major factors that will influence power utilities CapEx are:

” Continued growth in per capita demand for electric power in developing regions
” Compliance with environmental, reliability, and safety regulations
” Reduced requirements in some regions due to recent overbuilding
” The uncertainty of future rate structures and deregulation initiatives
” The potential for conflicts between regulatory agencies
” Stricter operating procedures relating to generation, transmission, distribution, power quality, and reliability

” Continuing evolution of privatization models such as the proposal for Independent Transmission Providers (ITP) by the US Federal Energy Regulatory Commission (FERC)

The purpose of electric power transmission systems also continues to evolve. Originally designed to economically deliver power from monopoly producers to captive markets, these networks are now being driven more and more by trading activities and make-buy strategies of regions and even whole nations. This change brings economical operation and reliability into conflict, as was illustrated by the large 2003 blackouts in North America and Italy. Regulators struggle with the need for more power trading and with the changing definition of reliable service, as digital economies are increasingly dependent on more reliable and high-quality electric power.