A brave new world?

With pen at the ready to make notes at this year’s bi-annual CEPSI conference in Shanghai, I found I had nothing to write on. Fortunately, a colleague was on hand to spare a few sheets of paper so I could bring you a few words of wisdom from the East.

By the time most of you read this, the US will have gone through an election and it will not be long before US energy policy is back in the public spotlight. Whether things are done differently during the next presidential term remains to be seen. But whatever happens in the US, the concerns surrounding US-UK style electricity deregulation are being aired in public with much more frequency.

Speaking at CEPSI, Gerald Doucet, secretary general of the World Energy Council (WEC), provoked debate when he noted: “US policy is in disarray… the goals set in the UK White Paper are unachievable… The WEC has looked carefully at the [competitive market] models and we should re-visit some of the things done in the industrialized world.” Doucet was by no means suggesting that we throw out the baby with the bath water, noting that the WEC continued to support the goal of competition and customer choice. However, he did point out that electricity is not like other commodities and therefore electricity markets could not be modelled in the same way. “We haven’t got it right and we need to go back to school…,” he added.

Christopher Seiple, senior director at CERA concurred: “We are 20 years into the restructuring debate, without any consensus. Competition can deliver benefits to customers but a badly deregulated market can do more damage than a regulated market.” One of the main problems is providing incentives for investment in new generating capacity. Sieple noted that parts of the US are experimenting with offering capacity payments for new plant. With global growth resuming, power markets around the world have to find a way of attracting investment for new capacity. “We are seeing that need is not enough to attract new capital,” said Seiple; a fact which is particularly true in much of Asia.

According to the International Energy Agency, the global electricity infrastructure needs $10 trillion invested over the next 30 years. This is a huge number, but Doucet explained that there are many things that we should be looking at before privatization and unbundling. “Globally, we can save $80 billion a year in new plant just by bringing [under-performing] plant up to scratch. A further 25 per cent [of the $10 trillion] could be obtained through end user savings.”

This makes a great deal of sense, especially in India and China where most of the investment is needed. In a separate interview, Steve Fludder, president and CEO, China Region, GE Energy said: “In the next 15 years, China will add 50 per cent of the current US installed capacity. This represents about 550 GW. There isn’t a deregulated market, but it is their vision. This is creating a competitive mindset in our customers and we can now have a value discussion with our customers as opposed to just a price discussion. This means we can now have asset value discussions; look at maintenance agreements, discuss how to improve fuel performance and ways to increase the power output of machines. Previously, owners had no incentives to improve plant performance.”

When mentioning China it is always difficult to stick to the subject at hand. Clearly, here is a country which always requires broader discussion. So Fludder continued: “Two years ago GE did about $100 million in China, today it is a $1 billion business. There is no country like China. It’s like the development of the US 150 years ago ” when the US was at the start of its industrial development. Back then the West was largely unexplored. Today in China the government is providing incentives to develop the western regions. They are building pipelines from west to east; most of the hydro resources are in the southwest and they are transmitting energy or electricity from west to east. They are also trying to revitalise the old industrial base in the northwest ௿½ sounds like development of the northeast in the US, right?”

The opportunity in China is phenomenal and Western companies realise that they have to embrace a different culture in order to succeed. “In China, you have to win with China,” explained Fludder.

Clearly a new world order is at hand ” perhaps the sun rises in the West and sets in the East. If so, we will need to re-visit our current electricity market models and learn to adapt our approach to local needs and styles.

The front page of the October 19th edition of the Shanghai Daily made interesting reading. It reported that 15 Chicago public high schools now teach the Chinese language. Chicago’s mayor Richard Daley noted: “We feel it’s very important to learn Chinese.” The message was that China matters and America needs to be positioned to take advantage of it. “It’s a changing society, an emerging economy, and it’s going to change much faster. Now we’ve got the language in schools, we need to expand,” said Daley. So, my US counterparts, what’s next? Maybe you can begin to integrate the cuisine. How about: “Chicken McNuggets ” Peking style”?

Junior Isles, Publisher & Editorial Director

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