Recent news stories of power project developers struggling to come to terms with bidders for contracts out to tender, are signalling a changing market in power plant construction.
The economic trade winds are shifting and with them comes the possibility of a swing in the balance of power among participants in power projects. No longer can developers assume that finance will be available for infrastructure development; the presumption that commodity prices will inexorably rise much faster than core inflation is being questioned, and contractors may find that their ability to shed risk is increasingly diminished. In addition to the changing fundamentals, comes the challenge of new competition, this time in the form of the Chinese market.
China’s phenomenal growth in its power sector may now have peaked leading the industry to look overseas for opportunities Source: China Electric Power Publications; Merrill Lynch Utilities Research Estimates
There is little doubt that engineering, procurement and construction (EPC) contractors have had a good run. The last few years have seen a worldwide boom in power project development, driven by an ever increasing demand for electricity and a need to replace an aging fleet of power plants. This has proved to be a boom time for EPC contractors who have been in much demand and, due to the general expansion across the entire heavy industrial market, most have had the luxury of being able to choose between sectors and projects.
The main beneficiaries of the scarcity in experienced and well qualified EPC contractors have been the firmly established European, Asian and US firms, with an increasing sector of the Middle East market being taken up by local contractors either alone or in consortia. The market conditions have also provided fertile ground for the emergence of Chinese EPC contractors and many in the industry regard this as the start of a trend that will see the Chinese players becoming an influential force in international power project development in future.
The prospects and influence of Chinese EPC contractors was high on the agenda of the power professionals who gathered in Malaysia last month for the annual POWER-GEN Asia conference and exhibition as, not surprisingly, Asia is the one market where Chinese EPCs are already a real influence. It is apparent that the unprecedented expansion of China’s power generating capacity, (China built one new power plant every week in 2007), has given its domestic industry enormous experience, particularly in coal fired plant construction, which it is able to export to foreign projects.
“Chinese EPCs now have 27 per cent of the market in Africa and 17 per cent in Asia,” said Dr. Hoewai Cheong, managing director of Black & Veatch’s Asia Region. He added: “Their competitiveness has brought them success, especially in regions where Chinese financing is a factor and a requirement to use Chinese EPCs is part of the deal.” Alan Chan, chairman and CEO of independent power producer Meiya Power pointed out that the slowdown in China’s growth rate is another influencing factor now that the government is actively dampening down the rate of expansion in the power sector. “Latest figures show that China’s growth rate has dropped from 14 per cent to 9 per cent. The authorities are therefore permitting power projects less and, as a consequence, Chinese EPCs and equipment manufacturers are now actively looking for overseas projects.”
Mark Takahashi, managing director of CLP subsidiary One Energy agrees that Chinese EPCs have a cost advantage but says it is narrowing and that they have had some notable failures as a result of rising commodity prices. He said that engineering labour rates in China had increased significantly and were now approaching double those of India. “You would have to consider a Chinese EPC if building a coal plant,” says Takahashi.” He also made the point that with finance getting tighter in China, its banks will be less willing to back foreign acquisitions as they have been recently in the Philippines. “I do not see them becoming a major player in the short-term à‚— but in the longer term, yes.”
Both CLP and Black & Veatch said that they source balance of plant equipment from China and that by being selective, it is possible to find the right quality there. Much equipment is being manufactured under joint-venture agreements with western suppliers, with the fabrication being done in China. The question remains whether Chinese manufacturers can make money at the prices being quoted for equipment and projects.
State-controlled companies may be willing to participate in the market on these terms in the short-term under central direction and with the ability to access interest-free loans, but this is not viable in the long-term.
Despite the gloomy prognostications for world economic growth and the potential threat to their dominant position from the east, the news from certain major western players remained upbeat.
Alstom, for one, is seeing no slowdown in the boom conditions, according to its technical director of plant business, Michael Ladwig. He said: “We are doing our best to reduce prices and diversify production capabilities, including adding to production facilities in China, but overall we are adding capacity and have no plans to reduce this.”