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Outlook: stable

Going into 2004, the good news is: there seems to be less bad news. If until now the roller-coaster has been in free fall, finally there is evidence that although we may not be on the way back up just yet, we are at least at the bottom of the ride.

The power industry has probably always been cyclical in nature but the last two years have been dire. I recall at Power-Gen International in Orlando in 2002, Mike Barrett, president and head of Alstom Power’s newly formed Turbo Systems sector noting: “The market is in a terrible state. Developers have disappeared, the gas market has collapsed; the steam market is at a low level; credit is not easily available and customers are facing financial stress.”

Alstom was soon to face its own crisis; the slump in Asia continued, highlighted by failed privatizations in the Philippines and Korea; then huge blackouts across Europe and the US. It had definitely been a bad two years and things were not getting any better in 2003.

At last month’s (December 2003) Power-Gen International in Las Vegas, the mood was just slightly more hopeful ” perhaps more of a wake than a funeral. Patrick Kron, Chairman and CEO of Alstom said: “The sale of our T&D division to Areva is expected to be finalised in January and our financing package of J3.2 billion has been approved and is being implemented. We are a long term player and the [power] market will grow along with GDP drivers. Yes there will be growth but it will be cyclical. The IEA (International Energy Agency) predicts three per cent average growth in power demand though 2020.”

During the keynote session at the conference, David Walker, senior vice president of Bechtel noted that “future markets will not be in the US”. This view was separately echoed by John Rice, CEO of GE Energy who said that in 2004 about 75 per cent of GE’s business would be outside the US.

But make no mistake, the US market is still important. What happens in the US, in many ways influences what happens overseas. For example, the issues surrounding deregulation in some states and the credit downgrades of power companies has affected restructuring moves in parts of Asia, taken liquidity out of the European energy markets and reduced the number of power companies available to develop power projects globally.

It is not to say that the US power market has to recover before the rest of the world follows but its recovery would certainly have a positive global impact.

One of the first things that has to happen is the passing of the new energy bill. Rice commented: “Many are hoping that the bill will be passed before too long. What people want is clarity and the certainty that rules won’t change.”

Equally importantly, the power companies have restored their creditworthiness and there has been positive news on this front. In a recent report published by Fitch Ratings, the outlook for US investor-owned electric utilities and for the competitive energy energy sector, including generators, diversified energy merchants and energy traders, is stable. This is at least a halt in the previous downward trend.

In 2003 there were 53 downgrades in the US, less than half the number in 2002 and offset by 25 upgrades against seven in 2002. The 2004 rating outlook is also stable (or neutral) for wholesale energy market participants, albeit at considerably lower credit ratings. Meanwhile in Europe, expansion activity ” possibly the single greatest credit risk for the European marketplace ” seems to be over.

Richard Hunter, managing director, Global Power, Fitch Ratings, commented: “The list of US utilities doing business internationally is not a very long one. Capital spend will be tight across the board whether they are internationally or domestically active. But the statistics for rating downgrades show last year was far better than in 2002. Things are definitely better. I think we’ve reached the bottom and this may feed through into the capital spend plans of the companies.

“One thing we are seeing is that people are shifting capital expenditure from the generation side to the transmission and distribution side where they think they can get a much more stable recovery. On the T&D side [as opposed to generation] it is a lot more straightforward to get assets back into rate-base. Also the regulators will have a much more sympathetic ear to anyone who comes in with a distribution plan or transmission upgrade. New transmission lines are always a nightmare but if you are going to build more substations or revamp your control centre for the transmission network you are not going to get any grief from the regulator and you can get up to a 12 per cent return on equity.”

So it seems the downgrades were in some ways a blessing in disguise in that they are forcing utilities to look at much needed transmission and distribution. Perhaps the future is bright but don’t reach for the shades just yet.

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