Coal, Gas

Report highlights growing power sector service market in CEE

11 November 2004 – Increasing liberalisation of electricity markets and privatisation of public sector utilities are creating exciting growth opportunities in the power plant services market of central and eastern Europe (CEE) says a new report from Frost & Sullivan.

However, the report warns that to realise the full potential of this emergent market, participants will need to develop flexible strategies that address regional particularities even as they must attempt to overcome a long tradition of in-house maintenance.

“The electricity markets are still in an embryonic stage, and hence flexibility in contract terms and conditions is of paramount importance,” says Frost & Sullivan Research Analyst Anurag Khetan. “Contracts attuned to the region’s regulatory, economic and political particularities along with the patience to deal with a multitude of stakeholders, is the main factor that will determine success or failure in the market.”

With adherence to the old business model of retaining every activity in-house persisting, another key challenge for service providers is to alter this approach in favour of efficiency, operational rationalisation and lean size. Already, enabling forces such as deregulation are expected to motivate utilities to discard this traditional, inward focused business model and embrace outsourcing.

Market growth is set to receive impetus from the increasing liberalisation of the electricity markets in CEE and the region’s gradual move towards the standards of competition, regulation and environmental concern in line with those in western Europe. By 2007, the final electricity consumers in Europe are to be provided with the freedom to choose their electricity supplier, thus fostering competition and efficiency in the upstream sectors.

This is likely to open up new business opportunities for the specialised third-party service providers with well-developed, comprehensive procedures and standards and experience of working in a deregulated environment.

Along with the liberalisation of the sector, the rising privatisation of the state/public sector utilities in CEE is also expected to encourage market expansion, since, in general, private utilities are more likely to outsource the maintenance, repair and overhaul activities than public sector entities.

Rehabilitation and refurbishment of plants has been motivated by a need to improve their environmental performance and boost their efficiency. The introduction of new technology through such activity is expected to make it difficult for the internal staff to provide most of the associated services independently, thereby underlining the growing importance of collaborative endeavours with the third-party service providers.

Poland and Bulgaria are anticipated to retain their respective positions as the largest and smallest power plant services market in CEE over the long term. Above-average growth is forecast for the Baltics region, Hungary and Turkey, while the Czech Republic and the former Yugoslavian region are expected to be among the slowest growing regional markets.

Frost & Sullivan estimates CEE power plant services market annual revenues at $494.3 million in 2003. Growing at a compound annual growth rate (CAGR) of 7 per cent over the period 2003-2010, the market is forecast to reach $796.2 million by 2010.

The share of boiler servicing – the largest segment in the market – has undergone contraction owing to significant recent additions to the gas-based capacity in the region and due to the fact that unlike boilers, gas turbines are generally outsourced to a third-party for maintenance.

With a growth rate of 8.5 per cent, the gas turbine servicing segment is the smallest yet fastest growing one. It is poised to expand its share of the total market from 29.7 per cent in 2003 to 32.8 per cent in 2010, still trailing the boiler servicing segment but overtaking the steam turbine servicing segment from the second position.

At 42 per cent, market concentration is relatively low signifying a fragmented market. The current market leader is Alstom, followed by GE, Siemens AG and Dalkia plc. Local and Russian original equipment manufacturers (OEMs) and service providers such as Rafako, Slovenske Energeticke Strojarne (SES), Technopromexport, Transelektro, Skoda, and Leningradsky Metallichesky Zavod (LMZ) are other important market participants with Wartsila also an active competitor.

“As the market gains momentum in the long run, competition is expected to intensify but be largely confined to the top layer as the new technology makes it harder for the local OEMs to use their expertise on the existing equipment to win service mandates,” remarks Mr. Khetan. “Also, over time, rising technological barriers will force increased collaboration and partnerships and eventually mergers and acquisitions, giving birth to the slow process of industry consolidation.”