Philippe Joubert, Executive Vice President, Alstom
Today’s world installed power generation capacity is currently estimated at around 3910 GW, and Alstom believes the average value of the overall world power generation market to have been around $160 billion per annum over the last three years. This value can be broken down into service – 44 per cent; new equipment – 43 per cent; and civil construction works – 13 per cent.
Demand for power generation equipment tends to be driven by a variety of complex and inter-related factors, notably economic growth; environmental concerns; refurbishment of aging plants; deregulation and liberalization; globalization and fuel and generation security.
Joubert: the environment and economic growth are key market drivers
Economic growth: Responding to growth in demand for electricity, global demand for new power plants tends to be strongest in those regions where economic growth is high.
Historically there has been a strong correlation between growth in the installed generating base and worldwide GDP growth, although on a short-term basis demand for power
generation equipment can fluctuate. In addition, even where the GDP growth is at a low level, the increasing numbers of old power plants to be retired stimulates the need for new power plants to keep at least the present level of electricity supply capacity. We believe that demand for power generation equipment is also driven by changing consumption patterns that favour electricity as a power source.
Following a period of intense growth in investment in power infrastructure in the USA from the late 1990s until 2001, referred to as the ‘gas bubble’, 2002 saw a sharp drop in the level of new orders. This decline was mainly due to the end of the US investment cycle coupled with a world economic slowdown. 2003 has shown a huge domestic demand in China and a recovery trend in the rest of the world.
Alstom believes that in the forthcoming years the share of Europe, the Middle East and Latin America will remain relatively stable while dominance will switch from North America to Asia and China. As a consequence the world technology dominance will also switch from gas turbines to steam and hydro turbines where we enjoy a strong leadership.
Environmental concerns: Moves to introduce stricter environmental legislation in response to pressure to reduce greenhouse gas emissions drives demand for cleaner power generation technologies. In Eastern Europe, Asia and in the USA in particular, environmental concerns have created increased demand for clean coal technologies which allow inexpensive, low-grade coal to be used as fuel while minimizing emissions. In addition, the ‘Clear Skies’ initiative, launched by the Bush Administration, sets ambitious targets to reduce power plant emissions, and should lead to increased demand for power plant refurbishment and the integration of environmental control systems in existing plants. Similar growth in demand is expected in Western Europe, where new environmental regulations such as the Large Combustion Plant and National Emission Ceilings Directives have established challenging emissions reduction targets for countries and power plant owners.
Refurbishment of aging plants: Alstom believes that the service market is growing rapidly. In recent years, demand for maintenance and refurbishment has been strengthened by a general trend among power producers to seek to increase efficiency, lower operating costs and extend the life cycles of their existing plants. This increase in demand to upgrade facilities has particularly benefited equipment manufacturers, and Alstom believes it will be a significant source of future growth for our service activities due to our large installed base.
Deregulation and liberalization: The deregulation and liberalization of electricity markets have transformed our customer base and also impacted demand, especially in the US, where demand in recent years came principally from merchant developers. However, as a result of high price volatility of fuels and electricity in the US, merchant developers’ assets abruptly lost value in 2002 as power generation overcapacity became apparent, forcing redeployment of power generation assets to larger energy companies.
Liberalization also caused considerable price pressure on power plant costs and increased the demand for more efficient plants with higher operating profitability. Initially, in deregulated markets, the allocation of technical and financial risks changes, with more risks being supported by suppliers such as Alstom. In addition, the increasing number of plants built and owned by private companies which tend to outsource most of their operating and maintenance activities is also driving service market growth.
Globalization: Suppliers with global capabilities are well placed to serve customers who are themselves becoming more global. This globalization has also helped suppliers to cope with major shifts in regional demand.
Fuel and generation security: In the past, determination of power plant type was mainly driven by medium and long-term anticipation of future fuel prices. Improved plant economics, technological advances, environmental concerns and reasonable natural gas prices favoured gas powered stations over coal fired in recent years. However, increasing concerns about the security of energy supplies, higher and more volatile gas prices in recent months and lower and more predictable coal prices make the construction of new coal fired plants with clean combustion technologies a viable option in regions where coal is abundant, such as China.
The power generation market continues to grow, with the key market drivers in environment and economic growth. The tendency in regional growth is moving from North America to Asia particularly China. The tendency in technology trends is a move from gas to steam and hydro turbines. In view of the aging power plants, the service market will be a source of future growth for OEMs.