From small rugged diesel engines for rural electrification projects to small gas turbines in cogeneration applications, there is much on offer for OEMs supplying the industrial generation market. Competition remains fierce and will remain so with uncertainty in emerging markets and as deregulation bites in industrialized nations.
The market for small power generating units is not really one single market at all, but a progression of several. It consists of diesel, heavy fuel, gas and dual-fuel engines, and small gas and steam turbines. Technology aside, there is in addition a clear progression of stages through which the small power plant industry develops.
Different regions and countries across the world are at different stages in this development. This is good news for suppliers: the opportunity to get different products and packages to different markets is crucial in a global and highly competitive industry. Caterpillar provides a good example, having succeeded at all development stages from small rugged diesel units for rural electrification to gas engines and gas turbines for cogeneration and embedded generation.
The different stages of the progression are shown in Figure 1. The summit of the pyramid represents distributed generation markets driven by competitive forces rather than regulatory ones, which provides good opportunities for suppliers to:
- Sell small plants to utilities for peak-shaving and embedded generation
- Increase sales through energy service companies;
- Grow in a stable and more predictable market.
Although distributed generation brings increased competition and complexity for suppliers, Datamonitor believes that these advantages far outweigh the drawbacks.
The African nations
Emerging industrial markets are characterised by countries that have a poor electrification system, and rely on low levels of industry. Investment in power plant can come from a variety of sources, but is typically supported by a global investment body such as the International Monetary Fund (IMF).
Diesel plant makes up the majority of small power plant orders for emerging industrial markets, favoured by:
- Low up-front cost
- Reliability and rugged performance
- Simplicity of operation
- Availability of fuel.
Many African countries are in this situation, as are parts of Asia. There are also regions in specific countries for which this is important, such as parts of the Indonesian archipelago. Indeed, prior to the currency crisis in 1997, and the subsequent political instability, Indonesia was one of the world’s largest engine markets. But these events have caused a catastrophic collapse in the market, and one which all major diesel manufacturers have felt globally, from 3200 units in the 200-1000 kW sector to just 1000 units in 1998.
Investment in generating plant in the developing industrial market phase is for the support of basic industries and the development of infrastructure. This represents a strong growth phase for the small power plant market, and is again dominated by diesel gensets. The requirement for on-site power stems from the lack of energy infrastructure, and the inability of incumbent utilities to provide enough electricity for rapid industrial growth. Key sectors are the steel and cement industries which grow rapidly in order to support infrastructure development and are highly energy intensive.
Both Pakistan and India provide good examples of markets going through this phase. Growth has been rapid in these markets, but it has been a bumpy ride. For example, the majority of sectors in the stationary engine market in Pakistan have grown throughout the 1990s, but 1998 saw a collapse of the 2-5 MW sector. This is expected to recover, but the reduction from 48 units in 1995 to two units in 1998 shows the volatility of emerging industrial markets.
Supply is not always meeting demand in emerging industrial markets, which can also hamper growth. In Pakistan there are many textile industries and the participating companies are in a niche position for engine manufacturers for they require engines of between 1.5-1.8 MW. The niche is for small baseload power plants utilising heavy fuel. However, there are few engines available in Pakistan that fulfil this requirement. Many companies are forced to stretch light fuel technology in standby and continuous applications, as HFO engines are unavailable. In fact, the engine market in Pakistan was 100 per cent diesel in 1998, indicating that some opportunities are being missed.
India also demonstrates a rapid growth trend, and the under-2 MW market boomed between 1995 and 1998. Both India and Pakistan also show that it is the industrial market that supports this rapid growth. In 1998, the industrial sector represented 100 per cent of stationary power engine sales, excepting standby applications.
The development of secondary industry has produced a strong market for small power plants in the first world countries. In some industries, such as chemicals, electricity can account for up to 30 per cent of total costs, so the reduced costs of autogeneration can be a strategic advantage. The installation of cogeneration technology is of major benefit to end-user industries that can effectively use heat or process steam, a by-product of the generation process.
Cogeneration has grown strongly in western Europe during the 1990s, and Datamonitor expects further development of the technology. Primarily used by industrial generators, cogeneration technology is also used in district heating plants across Europe, primarily owned by regional municipalities.
Although such owners will find it harder to compete for the largest customers following deregulation, they should be able to keep hold of smaller ones, especially residential, and therefore be able to continue funding new projects where required. Large combined cycle cogeneration plants are also becoming more common (although this technology is excluded from the data shown in Figure 2).
France has been Europe’s fastest deployer of cogeneration technology during the 1990s. This is due to the market only really starting following a change in regulation, which in the past did not favour industrial plants. The prices which plants were paid for electricity delivered to the grid were based on the long-run marginal cost of the electricity system, and thus differed from the actual costs incurred by the generator.
In January 1995, and again in March 1997, this system was changed when the Ministry of Industry introduced a purchase contract system with Electricit
The price includes a variable constituent to reflect the price of natural gas – thus reducing the risk of gas price fluctuations for the generator – and the new system helps to provide greater price security for the generator.
It is the impact of this regulation that is the major driver behind growth in the French and other cogeneration markets. This helps to make the market highly unpredictable as regulatory changes can cause either a boom or bust in the small power plant industry.
This means that such markets offer no better revenue stability than emerging industrial markets. A major consequence of revenue instability is that the leading suppliers must be active in global rather than regional markets if they are to produce a consistent performance. This is the primary driver behind globalization rather than the product of it.
The development of distributed generation provides the answer to unpredictable revenues, and is the final stage in the development of the small power plant industry. The key difference between mature industrial markets and distributed generation markets is that the latter are driven by deregulation rather than regulation.
The concept of electricity market deregulation is designed to give customers the choice of who they purchase their electricity from, or to allow them to generate it themselves. As electricity suppliers compete to provide their customers with the lowest cost supply, one of their major weapons is the use of on-site supply to offer lower costs than their competitors.
Almost all US electric utilities have set up energy service companies (ESCOs) in order to take advantage of the benefits of deregulation in this country. The concept of the ESCO is founded upon performance-based contracting, meaning the reimbursement the ESCO receives for the project is based upon the savings realised. In some projects it is energy savings that pay for the project, gained for example from the fitting of electricity efficient drives and motors. In others it is the cost savings that can be achieved through autogeneration and energy demand management.
Furthermore, to increase electricity market competition, spot markets created in countries such as the USA and the UK mean that electricity prices fluctuate dramatically according to supply and demand constraints. There is a clear competitive advantage for companies which can start up smaller plants to take advantage of high prices and switch them off when prices are low.
The use of small power plants in the distribution network, known as embedded generation is becoming an increasingly feasible option in many countries. Embedded generation allows distributors to relieve congested distribution networks, increase the flexibility of the network, remove transmission losses and costs, and improve power quality for their customers.
All these drivers for distributed generation, and the innovative vehicles of delivery, stem from deregulation of the electricity market, and are aided by the deregulation of the gas market.
This means that once a market has been deregulated, small power plant equipment suppliers should be able to forecast the market potential with far more comfort than in a market where one regulatory decision can make or break it.
The key market driver has moved from regulation to competition in the move into a distributed generation market.
New technologies have also been produced that give further strength to distributed generation. The commercial release of the microturbine increases the possibilities for distributed generation down to smaller energy consumers than ever before. Microturbines will be competing directly with reciprocating engines for such business, but offer considerable advantages, which will drive the total market forward:
- Lower power outputs;
- Reduced emissions;
- Increased reliability;
- Significantly reduced maintenance costs
- Lower requirement for auxiliary equipment.
There has been a massive interest in microturbines across the world, and especially in the USA, and with companies such as GE, Kohler and EDF becoming involved in the industry, it must be seen as credible. The sales and marketing strategies used by microturbine suppliers will prove to be the key for the success of the technology. The microturbine-ESCO fit is very strong and the major technology developers will have to cede some control of the market to these third parties in order to grow the industry as they would like.