Grabbing the Tiger by the tail
Industry turns out in record numbers to explore the potential of the Asian power market
By Ann Chambers
All eyes in the power industry turned to the East in September, as POWER-GEN Asia landed in Singapore. The much-hailed Asian power market drew record numbers of attendees, topping 7,000, as industry leaders converged on the premiere event for the electric power market in Asia. Trendsetters have found that rolling up their cuffs and panning for gold in the rich streams of Asia is much more exciting than fishing the stagnant waters found in the developed Western nations which house most of the international power development and supply firms. But, while the need and the potential are visible in abundance, profit is somewhat more difficult to find. Explorers gathered at the three-day conference, comparing notes on profits, losses, experiments, successes and failures.
Adding a touch of drama to the conference was Singapore Power, which literally exploded onto the international scene, announcing its privatization with the impressive punctuation of indoor, overhead fireworks.
“The corporatization of Singapore Power takes place against the backdrop of an industry in transition,” said Ho Kwon Ping, Singapore Power chairman. “Deregulation by governments has over the past few years, transformed the power industry into one of the most attractive growth sectors of Asian economies.”
Rapid economic growth in China, combined with a doubling in per-capita electricity consumption, may allow China to capture 25 percent of the additions to the world`s generating capacity in the next five years, Mr. Ho predicted. He sees India as another attractive investment area, as India has increased its installed capacity by 80 percent in the last decade, outpaced by consumption, which grew 113 percent. New legislation aimed at attracting foreign investors, combined with an increased allowable rate of return, could draw more interest to this area.
“Against this background of high growth, the power players of the West flocked to Asia–all chasing the rainbow for the proverbial pot of gold. Requests for proposals for new capacity drew overwhelming responses. The stakes were high, the risks higher, the reward presumably sweeter,” Mr. Ho said. “Unfortunately, many who have come to Asia are now experiencing a rude awakening. They have had to contend with political bottlenecks, delays, regulatory constraints and unrealistic limits on rates of return.”
China, which caps rates of return and requires central government approval for projects, has proven to be a much more difficult market to master than many had expected.
“There is growing concern that unless these and other obstacles to private power projects can be quickly resolved, not only will investor interest start to wane, but more seriously, there may be a growing shortfall between power supply and demand, with potentially damaging consequences on overall economic growth,” Mr. Ho stated.
He noted three trends in the Asian power industry:
1. The introduction of competition in power generation may lead to other areas being opened. Regulatory barriers to competition in distribution, and even in transmission, may “disintegrate.”
2. Privatization is spurring restructuring of the industry, with vertically integrated monopolies breaking up in search of lower costs.
3. Mergers and acquisitions, joint ventures and strategic alliances are on the forefront, as companies struggle to find optimum sizes and operating mixes.
Yeo Cheow Tong, Singapore`s Trade and Industry minister, also addressed the crowd at the conference`s opening session, saying, “Asia`s dynamism must be adequately powered to sustain its high performance. With rapid development will come an ever-increasing demand for the means to power this growth.”
Minister Yeo estimated that Asia will need to invest up to (US)$50 billion annually in new power stations and transmission networks, which means more than 40 percent of the new power generation capacity to be constructed in the next decade may be in Asian countries. This growth will require importing capital, expertise, technology and manpower into an area where the installed capacity is already unable to fulfill existing demand.
“Increasingly, governments are turning to the private sector not only to build more capacity, but also to own and operate power generation and transmission facilities. National utilities in the region are beginning to be privatized on a larger scale,” he said. “The sheer size of the markets in the region means that there is plenty of the pie to go around. For foreign companies, opportunities abound for participating directly in individual projects, or forming joint ventures and consortia with companies in the region to undertake multiple and larger-scale projects. Regional companies naturally have the advantage of being more familiar with the business environment in their own backyard, and some have now grown into reliable and significant players in their own right.”
Predictions for China
Xu Dayou, China Council for the Promotion of International Trade vice-chairman, predicted that China will make full use of foreign investment in developing its power industry. China`s power development has been growing at 8 percent to 10 percent annually, with more than 12 GW commissioned annually in the last five years. The transmission and distribution infrastructure is keeping pace, and 89.6 percent of the households now have access to electricity. New generation capacity is expected to jump to 16 GW to 18 GW annually in coming years.
Mr. Xu reported 469.33 TWh of electricity generation in the first half of 1995, up 8.1 percent from the same period one year earlier, but that is only 47.41 percent of the planned target. Hydropower contributed 82.64 TWh; thermal, 382.92 TWh; and nuclear, 3.75 TWh. Daily electricity generation is between 2.6 TWh and 2.7 TWh.
In 1993, per-capita electricity consumption was 692 kWh, one-fourth of the world average figure. In daily life, residents used an average of only 62 kWh per capita.
Mr. Xu predicts that thermal power and hydroelectric power will remain the mainstay of power generation for quite some time, but he expects nuclear and other technologies which are not yet common in China, to carve their own niche.
The sheer volume of proposed projects and needed funding are forcing the Chinese government to look for international funding in the development of the power industry.
“Among the total investments, 20 percent will utilize foreign investment. That is to say, (US)$20 billion in foreign investment is needed. The domestic capacity to manufacture electric power generating equipment cannot meet China`s needs.
The government is putting its support of foreign capital into writing, with the “Guide Catalogue for Foreign Business Industry” stating foreign business investing in the construction and operation of thermal, hydro and nuclear facilities is encouraged. Mr. Xu also noted that the Power Act to improve the investing environment will soon be submitted to the Standing Committee of the National People`s Congress. He gave no details of the act`s contents.
“China`s power industry is a cooperation area with lowest risk and stable profit for foreign investors. The 64 operating power joint ventures in China all gained reasonable return. We believe that in the principle of `Share profit mutually, administrate market together,` foreign investors will gain profit through cooperation in China`s large market,” Mr. Xu said in closing.
India is a jewel with a glimmer to outshine the black mark of the scuttled Enron project at Dabhol. The once-canceled project is being renegotiated in London at the time of this writing, and most delegates at POWER-GEN Asia seemed confident the project will come back on-line. India is seen by many as second only to China in potential for electric power development.
C.V.J. Varma, Council of Power Utilities secretary general in New Delhi, India, reported on “Power Trends and Requirements in India.” In its 14th Power Survey, the government of India has forecast up to 2010 using recent growth rates. In the year 1999-2000 India will require 517,000 MWh, with a peak demand of 91,191 MW; 2004-2005 should see requirements of 726,096 MWh, with a peak demand of 127,401 MW; and 2009-2010 should reach 986,777 MWh, with a peak demand of 172,262 MW.
Present domestic consumption is approximately 0.7 GWh per 1,000 consumers. Approximately 42 percent of the present total domestic and commercial electricity consumption in India is for lights and fans. After lights and fans, refrigerators are the biggest users. India used 43,724 GWh of electricity in 1970, 83,367 GWh in 1980, 190,357 GWh in 1990 and 254,026 in 1994.
“The expansion envisaged in India is so large that the funds and organization resources have to be massive to achieve the target within a short time. This requires the existing structure from being monopolistic/monolithic to being unbundled and capable of competition in an open economy,” Mr. Varma said.
R. Vasudevan, former Indian Ministry of Power secretary, said, “When we scan the Indian power sector, there are two striking realities. First, what we have achieved since the planning process began is undoubtedly remarkable. Second, what we need to achieve is mind-boggling.”
When India gained independence, it had an installed capacity of 1,362 MW and only 3,000 villages with electricity. In 1995, 496,000 villages have electricity, and per-capita consumption has jumped from 15.5 kWh to 310 kWh. However, India has a power shortage that is only getting bigger. In 1991 energy and peaking shortages were 8.5 percent and 19 percent respectively. Now they are closer to 14 percent and 28 percent. With current trends toward industrialization and urbanization, this gap is likely to continue its growth.
“The tasks ahead are formidable and call for a comprehensive strategy encompassing all sources of energy, modes of generation and optimality of use. Such a strategy has to lay equal emphasis on supply-side enhancement and demand-side management,” Mr. Vasudevan said. “On the supply side, efforts have to be mounted to increase generation and to improve the hydro-thermal mix essential for optimal power management.”
Efforts to increase capacity must be balanced with energy conversation and efforts to increase the role of renewable energy, he said.
“Any careful look at the power sector calls for bifocals,” Mr. Vasudevan said. “The short term is important, but equally important is the medium-term outlook, as power projects have a long gestation period, both in terms of formulation and implementation. Studies indicate that the 15 year`s perspective of the Indian Power Development Plan should consist of additional power plant capacity of the order of 142,000 MW along with a matching transmission and distribution system.”
The Indian government is working on several items to improve the climate for international firms. Current projects include:
– World Bank guarantees and escrow arrangements and state government guarantees can be used.
– State electricity boards are being strengthened with increased technical and financial skills, making them more qualified to work through complex negotiations. Power purchase agreement guidelines have circulated, standardizing this step.
– Guidelines for private investment in renovation and modernization in generation and transmission projects are being developed.
– Competitive bidding became mandatory in February. Complete guidelines are available.
Addressing the Dabhol project, he said, “Enron does deserve plaudits as they adopted the policy of `Be daring, be different and be first.` Based on hindsight, it is arguable that the protracted and arduous negotiations could have been on a somewhat different wave length to make the end product more attractive, accessible and above all, accountable. There is also the lesson that one cannot pursue too much privacy about private enterprise in the public domain.”
Mr. Vasudevan predicts 57,000 MW of electric capacity will be installed in India between 1997 and 2002 and 67,000 MW between 2002 and 2007. “Changes, as become necessary, in the policy will not significantly erode the attractiveness of the framework but will seek to invest it with a greater degree of accountability and acceptability, which, in turn, will reduce the political risk entailed in such projects,” Mr. Vasudevan said.
Pakistan is coming into its own as a country on the verge of a boom in power use. In 1990 Pakistan used 28,760 GWh, by 1994 use had jumped to 42,308 GWh, and by 2000 electricity consumption is projected at 70,971 GWh. Electricity use is predicted to hit the six-figure mark in 2005, with total consumption of 106,024 GWh. Per-capita consumption in this country is quite low at 350 kWh. Peak electricity demand, however, exceeds supply by 25 percent, squeezing the growth of the gross domestic product (GDP).
The Water and Power Development Authority (WAPDA) is working steadily to increase installed capacity, but once power demand began climbing due to industrial and agricultural developments, demand has steadily outpaced generation additions. In 1994, 43 percent of the country`s capacity came from hydroelectric stations, which are subject to variations in snow-melt and loss of flow to irrigation. Recognizing the need for outside assistance and diversification, the government began working to attract private-sector participation in the late 1980s.
The Planning Commission`s Perspective Plan for 1988 to 2003 predicts diversification in energy source and supply. “The structure of economic growth, together with social changes including urbanization, preference for more energy-intensive lifestyles and increased manufacturing further accelerate energy demand, particularly for conventional forms of energy,” said Dr. Mohammad Yusuf, National Development Finance Corp. senior executive vice president, based in Pakistan. “Indigenous resource development is a prominent policy objective, which includes accelerating exploration and development of indigenous commercial resources to gradually reduce energy imports.”
Total investment of (US)$9 billion in the energy sector is expected by 2003.
“Assuming a continuation of past GDP annual growth rate of 6.5 percent, the average annual load growth is projected to be 8.33 percent. At a 65-percent target system load factor this corresponds to 29,600 MW by the year 2010 and 49,700 MW by 2018,” Dr. Yusuf said.
Pakistan has an estimated 30,000 MW of hydroelectric power potential, with only 15 percent of that in use. The government is looking to increase hydroelectric development through private sector participation. Coal deposits are also being explored. However, private-sector help may be needed to develop this resource. Pakistan is open to renewable options including wind, tide, agricultural waste, bagasse and geothermal sources. The government is encouraging research in renewables to better evaluate commercial viability of the various technologies.
The government recently announced a policy framework and package of incentives to increase power generation projects in the private sector. A few incentives are: investors can freely propose sites, technologies and fuels for projects; WAPDA will purchase power under long-term contracts; and projects exceeding 100-MW receive a premium rate during their first decade of generation.
“The utilities are already committed to an extensive program of generation expansion, which together with the required supporting investments in transmission and distribution, will more than absorb the funds available for investment under a scenario of only moderate tariff increases,” Dr. Yusuf said.
Singapore Power, the newly launched private electric utility, literally exploded onto the scene, announcing its plans to become a major player in the Asian power market, punctuated with fireworks zinging through the convention hall over the heads of astonished spectators.
Ho Kwon Ping, Singapore Power chairman, formally announced the privatization of Singapore`s electric power generation through Singapore Power.
POWER-GEN Asia 1995, held for the first time in conjunction with DA/DSM(TM) Asia, drew record numbers to Singapore`s convention center. More than 6,100 delegates attended the international events.
Asian opportunities in 1996
The China Electric Power Industry Forum will be held April 22-26, 1996, as a Regal China Cruise down the Yangtze River. The cruise will include a technical excursion to the Gezhouba Power Station, which will be part of the Three Gorges Project. Zhang Shaoxian, China Electricity Council president, is scheduled to open the conference, followed by keynote speeches from officers in the Ministry of Electric Power, China Yangtze Three Gorges Development Co. and Huaneng Group.
POWER-GEN Asia will return Sept. 17-19, 1996, in Pragati Maidan, New Delhi, India. It promises to be an even larger forum covering generation, transmission and distribution experiences and projections in Asia.
More information on either event is available from Times Conferences & Exhibitions Pte Ltd. in Singapore at (65) 284-8844 or by fax at (65) 286-5754. In America, call (713) 621-8833. In Europe, call 31 (0) 30 650963.