IE Forum underlines importance of finance and highlights industry growth opportunities

Independent power elite gather in New York to mull the problems of the present and the promises of the future

By Ann Chambers

Assistant Editor

International power development and generation companies are increasingly following the mighty dollar into the emerging nations in desperate need of infrastructure. Credit and financing are easier issues in the more developed countries, but the rewards of an active market outweigh the risks and hassles for many.

More than 300 movers and shakers in the independent power field, including bankers and attorneys dealing with the financing side, were in attendance for the Fourth Independent Energy (IE) Forum in New York, USA.

“Financial firms and developers alike examine the risk of development and the potential returns,” said Don Marier, IE executive editor. “Since the trend toward developing private power projects around the world began three years ago, an increasing portion of the transactions reported has been outside the United States. When IE first started the financial rankings six years ago, virtually all the transactions reported were in the United States. Then, in the first half of 1993, 17 percent of the deals reported were outside the United States. By the first half of 1994, it went up to 40 percent; and in the most recent rankings, it went up to 62 percent.” Discussion of impending deregulation in the United States was also a hot topic, with mergers and acquisitions on the minds of many.

“The goal of power companies–utilities and generators alike–will be the need to be the low-cost provider of power,” Marier said. “The paths taken in the past are no longer the best route to a successful future. Restructuring will most likely lead to an overall lower capacity reserve margin. What will result is a restructured power industry with fewer large utilities which are now positioning themselves for a place in the market. They are planning to meet competition from independant power producers, marketing companies and other utilities head on, through cost-cutting and economies of scale.”

Carlos Riva, Inter-national Generating Co. president and CEO and co-chairman of the IE Forum, noted two worldwide trends in the industry. First, there is a “new breed of competitor,” large companies that are becoming fully integrated energy providers. Many have global expertise and have already established niches in a variety of countries and are using their own assets to finance projects. Second, there are “commodity-style markets,” with spot power and short-term contracts. New sites under construction often must survive without the long-term power purchase agreements that were once a standard part of doing business.

Joseph Sutton, Enron Development Corp. president and COO, issued a challenge to financial sources, calling for more risk-taking and quicker financial closings. “The biggest problem for developers is money. No matter how you structure the deal, the bank wants something different,” he said. “It would help if there were more risk-takers in the financial business. It takes too long, the requirements are too stringent, the money is not enough and it`s not cheap.” Sutton predicted that suppliers and contractors will be forced to bring financing to the table in order to win contracts in the future.

Hazel O`Leary, US Department of Energy secretary of energy, campaigned during a luncheon address. O`Leary called for the electric power industry and the government to work together overseas to bring both democracy and light to emerging nations. “There should be a strong partnership between industry and government in these markets,” she said. “In some of our strategic planning, we`ve clearly looked at the ties between the opportunities for business development for US firms and the clear understanding that US capital drives in new and open free markets, so that we see democracy.” She called for environmental responsibility when building in emerging nations to ensure a net improvement in the quality of life for the residents.

A look at Asia

With the recent adoption of the Ninth Five-Year Plan in Beijing, China, Robert T. Sherman Jr., Cogen Technologies Capital Co. vice president, noted, “Covering the period 1996-2000, the plan offers some hope that the Chinese central government will, after two years of severe austerity measures directly affecting the development of power projects in the People`s Republic of China (PRC), ease restraints on approval of new power generation projects.”

The plan also calls for easier credit for infrastructure projects, as it allocates more than (US)$3 billion to the State Development Bank for infrastructure projects. “Clearly $3 billion is not enough to construct the 15,000 to 17,000 MW needed annually to meet project power demands in the PRC,” Sherman said.

Another positive occurrence in the Asian market is the opening of a US ExIm office in Beijing, with an announced policy of aggressively seeking energy projects in China. “Talk of doing billions of dollars of deals has not yet materialized into completed transactions, but the direction of US ExIm Bank policy was established. Time will tell whether the bank has the political will and congressional support to get the job done in China,” Sherman said.

He noted that, although the mood of developers and financiers is somewhat pessimistic, the Chinese economy is still growing at double-digit rates, the foreign exchange balance has risen more than (US)$10 billion in 1995, inflation is falling to less than 15 percent annually at the retail level, and there is a growing appreciation of the project financing requirements in the country.

Sherman called for the commercialization, rather than politicization, of the power generation market. “The answer, however, is not necessarily all-source competitive bidding. Competitive bidding, contrary to popular notions, does not eliminate corruption, speed up development, or even necessarily get the best long-term price and terms. Foreign developers need clearer goals and guidelines, not complex and time-consuming competitive bidding that stifles creativity in fuel and equipment selection, as well as deal structuring.”

Central Europe

Central Europe is a region with a variety of upcoming power needs, including improving and modernizing existing facilities, providing replacement capacity for decommissioned plants, and building new greenfield facilities, according to Horst Meinecke, NRG Energy Inc., managing director for Europe.

The six “key” countries in Central Europe have a population nearing 100 million, more than 90 GW of power generating capacity and improving growth rates. Annual gross domestic product (GDP) growth rates range from 1 percent to 5 percent and power demand growth is between 1.5 and 2.5 percent, according to NRG statistics.

“Most Central European countries rely on nuclear power to a large extent. Bulgaria, Hungary and Slovakia are already dependent on nuclear power for more than 35 percent of their needs, while in the Czech Republic and Romania, nuclear power will soon play an increased role. Poland is the exception,” he said.

There is little potential for replacement of nuclear with conventional generation because of shortages of capital for alternative facilities and the absence of clean domestic energy sources.

Aging thermal generation facilities can be found throughout the region, with most facilities between 20 and 25 years old. Many plants, especially in Bulgaria and Romania, have not been adequately maintained, and their performance rates poorly. Modernization throughout the region is seen from an environmental, not an energy efficiency, standpoint.

“Some governments, such as in the Czech Republic and Poland, have programs well under way to set up flue-gas desulphurization equipment and to install circulating fluidized-bed combustion units in place of older and dirtier pulverized coal-burning units,” Meinecke said. “Bulgaria, Romania and Slovakia are considered to have facilities most in need of future rehabilitation efforts.”

Limited access to capital is a constraint for many of these countries, impacting the extent and scheduling of power generation investments. Borrowing ability is most limited for Bulgaria, Romania and Slovakia. This region, like much of the globe, is looking toward deregulation and privatization, although each country has its own plan.

“I can say that private sector participation in power sectors tends to lag behind the pattern seen in Central European economies overall,” he said. “Clearly, these countries are interested and want privatization but not at any price.”

To the future

Overall opinion of the experts gathered at the IE Forum leaned slightly toward optimism. These past few years seem to be the lean, learning years, with a more profitable future waiting just around the bend.

“The power industry of the future will be shaped through finding new capital sources, continuing development progress and restructuring in existing markets,” Marier said. “These key areas of change are central to setting the stage for the progressive, highly competitive power industry of tomorrow. Those players who demonstrate an awareness of the change and the ability to adapt to it will find success.”

Barriers to international private power projects

The World Bank has identified eight major constraints to enhanced private participation following a review of global experiences, country-level work in Asia and a survey of the private sector. The constraints are:

1. a wide gap between the expectations of governments and the private sector regarding what is reasonable and acceptable;

2. lack of clarity regarding government objectives and commitment and complex decision-making;

3. need for more conducive sector policies such as pricing, competition and public monopolies;

4. inadequate legal and regulatory policies;

5. need to unbundle and manage risks and increase credibility of government policies,

6. under-developed domestic capital markets;

7. need for new mechanisms to provide large amounts of long-term finance at affordable terms from private sources; and

8. need for greater transparency and competition to reduce costs, assure equity and improve public support.

The constraints do not apply equally to each country in the Asia Pacific region, according to the World Bank report, “Infrastructure Development in East Asia and Pacific,” available from the bank`s external affairs office, 1818 H. Street N.W., Washington, D.C., USA 20433, (202) 458-0358 (phone).

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Carlos Riva International Generating Co. President and CEO

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Joseph Sutton, Enron Development Corp., President and COO

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Hazel O`Leary, US Department of Energy, Secretary of Energy