Heather Johnstone, Senior Editor
In the International Energy Agency’s World Energy Outlook 2008, world gas fired generation reached 3800 TWh in 2006, representing around 20 per cent of total electricity generation. It is forecast to continue to increase, reaching 4700 TWh by 2015 and 6400 TWh by 2030, although its growth is expected to be constrained because of high gas prices in the longer-term. A key technology in gas based power production is the gas turbine, often described as a workhorse of the power industry.
According to research by market analysts Frost & Sullivan (F&S), in recent years the global market for gas turbines has grown substantially, primarily driven by the growing demand for electricity in countries experiencing rapid economic growth and the need to add generation capacity within a relatively short time-frame.
Siemens Energy’s SGT5-8000H is set to offer more than 60 per cent efficiency in combined-cycle operation Source: Siemens Energy
Revenues came close to doubling between 2005 and 2007, rising from $10.7 billion to $19 billion. The latter can be seen as a ‘boom year’, with many regions around the world, especially the Middle East, adding significant amounts of gas fired capacity. In 2007, the gas turbine market grew by a phenomenal 53 per cent, compared to 2006.
According to F&S’ analysis, in 2008 the gas turbine market peaked at $20.5 billion, marginally up (7.5 per cent) on 2007. F&S believes this smaller increase reflects that fact that in the last quarter of 2008, some of the effects of the global economic downturn began to materialize. Some utilities like Iberdrola or Endesa are cutting or delaying their planned investments, while independent power producers, particularly those reliant on the capital markets, are disposing of assets. One such example is Welsh Power Limited in the UK, which sold its Severn Power gas fired power station development asset in March of this year to Danish energy company, DONG Energy.
Although the F&S research clearly indicates that the growth rate in the gas turbine market will slow down, the global market is still anticipated to grow at a projected compound annual growth rate of 4.7 per cent between 2008 and 2015.
In the longer term, the anticipated doubling of energy demands to 2030, driven by the world’s continued economic development and a growing population, all bode well for the future growth of the gas turbine market.
Current Economic Situation
Although the energy sector is often perceived by many to be amongst the more resilient industries in terms of the effects of the global recession, even the power generation industry is not immune to the current economic turmoil.
Let us turn our attention to how the gas turbine market is likely to fare in the current economic climate. Harald Thaler, who is energy industry director at F&S, recently penned an article exploring exactly that topic. His main conclusion was that although the world will face turbulent times in terms of an ongoing economic slowdown and persisting credit problems in global financial markets, the gas turbine market would remain relatively resilient. This, according to F&S, reflects the fact that gas turbines have been the technology of choice for new installations in many parts of the world for some time the main drivers of this market are not expected to be significantly affected by the current state of the world economy.
Market drivers and restRaints
The key drivers of the gas turbine industry identified by F&S are: higher efficiency of combined-cycle gas turbine (CCGT) plants, growing environmental concerns, and shorter construction time.
CCGT plants are expected to remain the favoured technology for new power stations because of their operational flexibility and their greater efficiency. Siemens Energy is currently testing its SGT5-8000H gas turbine, which it says will offer an efficiency in combined-cycle operation of more than 60 per cent.
From an environmental point-of-view, CCGT plants run cleaner than alternatives such as coal fired power stations, and they do not incite such strong public opposition as the former does in many countries. In Germany for example, SWB, a Bremen-based utility had planned on build a coal fired plant for quite some time, but faced major public opposition. According to Thaler, the utility recently decided to switch to building a gas fired plant.
Gas fired power plants are also a lot faster to build than either coal or nuclear plants a CCGT plant can be up and running in three years.
F&S also identified a three key restraints to the growth of the gas turbine market: increasing gas prices; limited equipment supply base; and gas availability. In light of the current market conditions, these restraints however, F&S believes are becoming less important.
For example, access to gas reserves may not be as big a problem as many perceive says Thaler. There are a number of pipelines being proposed, such as North Stream that will link Russia and the European Union via the Baltic Sea. Other supply routes are also being considered, such as LNG. Further, a number of utilities in Europe are looking to integrate upstream to get their own gas supplies in place. Some, like RWE, have been doing this for a while, with its RWE Dea subsidiary, while others are now looking into it. For example, F&S recently spoke with Enel, which confirmed it wanted to pursue a greater upstream gas strategy to secure gas reserves for its future power generation needs and to hedge risks.
The key drivers of, and constraints to, the growth of the global gas turbine market Source: Frost & Sullivan
Thaler also anticipates that equipment prices will fall by between 10-20 per cent over the next two to three years. This has not fully fed through yet because most OEMs still have significant backlogs. Further, the established power equipment supply industry are likley to to see growing competition from OEMs from countries such as China as they look to capitalize on oversees markets.
In addition to the key market drivers above, F&S has said it expects the following specific factors to support the gas turbines market during this time of economic uncertainty: lower capital costs; less construction and operation risk; established technology; and falling gas prices.
Lower capital costs
In the current market environment, high upfront investment costs are deterring investors, and this is expected to affect investments in large coal fired power stations much more than gas based generating options, says Thaler.
This is because coal fired power plants, in particular those operating on supercritical or ultrasupercritical technology now the vast majority in development require significantly greater capital costs per MW than those for combined-cycle power plants.
In addition, coal fired plants tend to be much larger than CCGT plants, with a typical new coal based power station being in the range of 1000-1600 MW. This means they require very large amounts of finance at the outset, something that has become more difficult to obtain for certain developers, and also has become significantly more expensive. Thus, according to F&S, only the utilities with strong financial backing, high credit ratings and access to bond markets will be in a position to build coal fired power stations in the short term.
Gas turbines, with their lower upfront costs, therefore are expected to benefit from this. The greater interest in gas fired power generation can alrady be seen. According to Thaler, there is evidence that currently most of power projects proceeding are CCGT plants. In the Netherlands, for example, the 870 MW Enercogen CCGT plant was recently given the go ahead, and is scheduled to go online in late 2011.
Lower construction & operation risk
Another important factor with combined cycle plants is they carry a lower construction and operation risk. On the construction side, they are typically built on a turnkey EPC basis and therefore the turnkey contractor, whether it be the OEM or an independent contractor, carries the construction risk. On the operations side, it is also possible to devolve some or all of the risk to the OEM because many long-term service and operations and maintenance (O&M) agreements are available.
In contrast, for coal fired power stations the developers frequently have to share the construction and operation risk. Thus, gas turbine technology’s lower risk profile clearly gives it a competitive advantage in the current climate.
Falling fuel prices
Gas turbines are also expected to get a further boost as gas prices continue to fall. Following a prolonged period of rising prices an overall decline is now underway, and Thaler believes gas prices are likely to remain low for some time.
In many European countries, gas prices are index-linked to oil prices, and the rapid decline of oil prices in the second half of last year is forcing gas suppliers to slash prices. Further, the fall in industrial output is also having an effect on gas prices. Even in the UK, where the market for natural gas is less regulated, wholesale gas prices are now much lower than before.
According to F&S, such price development across Europe is expected to boost the development of on-site generation, and the industrial gas turbine market in particular.
A proven technology
Gas fired generation is a well-established generation technology, which in these turbulent economic times makes it a safe bet.
Although coal fired technology has also been in use for a long time, environmental regulations require that future plants must be based on new technologies that have little track record and are unproven, or even uncertain such as ultrasupercritical technology, integrated gasification combined cycle (IGCC) and carbon capture and storage (CCS).
F&S expects the credit crisis to have an impact on the development of clean coal technologies. While these technologies are expected to take off in the medium to longer term, research and development, as well as the establishment of pilot, and more importantly demonstration plants, is likely to be slowed down as a result of funding problems as both governments and private investors reign in spending. In addition to being an established technology, gas turbines are a relatively clean generating option, are therefore likely to benefit from delays and possible doubts over the development and implementation of clean coal technologies, such as CCS.
Although the Russian-Ukraine gas dispute earlier this year had a profound effect on European gas supplies F&S does not believe it will significantly affect the overall position and importance of gas fired generation. Certainly it is likely to lead to a much greater focus by Europe on diversifying gas supply sources and also an accelerated expansion of gas storage facilities in some countries such as the UK.
Renewed calls for greater investments in renewable energy are likely but even if faster growth in renewables becomes possible despite credit problems affecting many independent developer this will not adversely affect the gas turbine market because the technology is needed to counterbalance a growing presence of intermittent generation sources such as wind.
A positive future
F&S therefore expects global gas turbine demand to remain resilient in the current economic climate. In fact, Thaler believes that at least in the short term we may see once again a ‘dash for gas’, albeit at a very much slower pace than seen in the frenzies in the 1980s in the UK and in the USA in the 1990s.
The factors identified by F&S clearly make the prospects for gas turbines somewhat better than those of other critical power equipment such as steam turbines.
However, given the highly volatile and fast changing nature of the market, Thaler warns that it is important for all players right across the value chain to keep a close eye on market developments.
The author would like to thank Harald Thaler, energy industry director at Frost & Sullivan, for his invaluable contribution to this article.