In the 1990s, independent power producers (IPPs) were operating in a very competitive market environment and therefore rarely communicated or even co-operated with each other in the pursuit of common interests. This communication and co-operation deficit became apparent when in the wake of the Asian Financial Crisis the global market for private power projects started to dwindle from a high of $46 billion in 1996 to just $15 billion in 2003.
The Independent Power Producers Forum (IPPF) was founded at the end of 2000 in Hong Kong by industry leaders in direct response to this turmoil in the private power investment market in order to provide a communication and co-operation platform for IPPs.
Originally the IPPF focused on China only, but today it operates extensive networks of competence and communications around the globe, connecting markets, industries and decision makers for the purpose of facilitating a sustainable energy future across Asia.
PEi: Why are IPPs important to Asia and its future development?
Normen Kegler, Advisory Council Convener of the Hong Kong-based Independent Power Producers Forum
NK: According to the World Economic Outlook, about 80 per cent of the global GDP growth and more than 50 per cent of energy demand will occur in non-OECD countries, and Asia will be the gravitational centre of this shift. To meet projected energy demand, the transition economies will need to raise about $140160 billion of investment in new power generation projects each year.
Assuming that around 50 per cent of this investment need will be self-financed, this still leaves policy makers needing $70 billion to $80 billion per annum, which they would seek to attract from the private sector. The core competence of IPPs is their ability to accumulate private investment of a large scale from the international markets, so their services will be in demand.
But money isn’t the only driver of the private power business. IPPs are also catalysts for new energy trends, bringing new, efficient and clean technologies together with advanced managerial competences into their host markets, and therefore stimulating modernization and sustainable development of the power sector as a whole.
PEi: Can you give me an idea of who your members are?
NK: As mentioned, the IPPF started as a platform for IPPs, responding to their specific needs. Over recent years our membership basis has broadened significantly. It now includes 43 market leading corporations from the power, oil and gas industries, equipment manufacturers and service providers, consultancies, law firms, securities and insurance companies, banking and investment corporations. So unlike most energy industry associations, which focus on particular sectors, the IPPF grew organically to encompass literally every perspective of the energy business, including the related expertise and competence through the people, which form our membership basis. This makes it a unique knowledge and competence resource for policy makers, business leaders, institutions and organizations.
PEi: One of the IPPF’s objectives is to increase global awareness of investment opportunities in Asia’s power sector. Which IPPs outside of Asia are demonstrating the greatest interest in the region?
NK: We see a growing level of inter-regional and intra-regional investment in Asia. Investors from the Middle East are looking into infrastructure projects in Asia, including power generation. Talking about the Middle East, we see the growing role of Islamic finance for energy projects in Asian countries that have a significant Islamic business community. Companies whose core markets are in North America and Latin America are now expanding into Asia in order to diversify and grow their business globally. As India and China are co-operating economically on a broader scale, we expect significant bi-lateral energy sector investment between these two emerging economic giants.
The European utilities are still concentrating on creating and consolidating the single European power and gas market. So we probably won’t see them here anytime soon. However, companies can consolidate themselves into stagnation after their markets have reached a certain level of saturation and maturity. So, someday they will look abroad to unlock new growth potentials for their operations rather later than sooner, I presume. But there is a motive that could bring them into Asia sooner than expected, which is the opportunity to generate carbon credits on a large scale. This could lead to a rise of clean energy projects in Asia with significant technology transfers involved.
PEi: For IPPs, how does investing in the power sector in Asia differ from, say, investing in Europe or the US?
NK: Emerging markets naturally involve a broader variety of insecurities stemming from their development processes and their alignment. Experienced IPPs have learned to adapt to these challenging business environments. This adaptation is reflected by the emergence of new types of IPPs.
These new IPPs differentiate their investments within the energy sectors and across countries and regions, and therefore create multiple revenue streams, which make them less sensitive to market risks. By doing so, they unlock synergies between their various operations, e.g. by linking their coal and gas investments with their power operations.
Another variation we see is the formation of Public Private Partnerships on a project basis. These models differ significantly from the ‘classic’ models of IPP operations.
PEi: One of the IPPF’s key purposes is to promote and support best business practices in related government policy and regulation for the power industry in Asia. Can you explain in more detail what this involves?
NK: Promoting a stable rule of law across the region has been a prime task of the IPPF since its conception. A stable regulative environment and a reliable legal system are basic prerequisites for any private investment in infrastructure. As fuel prices tend to be volatile, and as the preferences of investors change towards shorter timeframes for their return of investment, we need to find new forms of contracting in order to ensure the stability of private power project development over time. In the end we are talking about projects which have an economic and technical lifetime of 30-40 years and which serve the national communities across generations.
Safeguarding the project development over this long time is not only in the interest of investors, but also of the host country and the local community. Power plants create jobs not only within their own perimeters; they serve the wider business sector and unlock economic development options for entire regions.
As you have previously asked for a comparison of the market environments in Asian and European countries, please understand there is no one-bullet solution for the successful development of a power market. Different settings require tailor-made solutions. So attempting to transfer regulations from one market to the other will not work. But as most of our member companies have operational experiences in various markets and regulative environments, and as they encompass a wide array of competences in various sectors related to energy, the IPPF is a valuable resource for policy makers.
PEi: The IPPF works with international bodies, educational institutions and leading academics. Can you elaborate on these partnerships, how they work and what benefits they bring?
NK: We believe that academic institutions play a vital role in the analysis and in the evaluation of energy sector trends and in the development of new concepts for the energy business. The IPPF is committed to the concept of sustainable development and to defining the role of private participation in this concept. Therefore we work with various stakeholders, facilitators and competence centres for the betterment of the societies and business communities we are actively participating in. We encourage the exchange of ideas between businesses and academic institutions in order to facilitate a secure, economically viable and ecologically sound energy sector development. We find the exchange of ideas and perspectives between business leaders and academic excellence groups can be very fertile for both sides.
PEi: Amongst its activities the IPPF supports and drives the development of industry guidelines and appropriate policy research. Can you give me some examples of when the IPPF has been involved in these two specific activities?
NK: As an example, the IPPF is advising the Asian Development Bank on its energy finance policy development, as a member of its stakeholder group. We consider the development of appropriate finance concepts key to sustainable energy sector formation. The financial sector relies on first hand information about the current developments and challenges faced by the energy industries in order to design its mechanisms appropriately and effectively. The IPPF constantly gathers and processes expertize not only from its members, but also from stakeholders of various energy-related industries and businesses on a global scale, and therefore is a valuable knowledge resource for public and private interest groups and decision-making bodies. We share this asset with the public, with industry and with policy makers at our gatherings, at conferences and in the media. As a matter of fact the IPPF enjoys fairly good exposure, which enables us to deliver and receive the relevant messages.
PEi: Does the IPPF have a role in promoting environmentally friendly technologies or encouraging energy efficiency?
NK: The challenges imposed by global climate change and environmental degradation affect all people and all business entities.
The energy sector plays a key role in building a sustainable future for mankind, economically, environmentally and therefore socially, too. And we are convinced that the inter-relations between these aspects are best characterized as being inter-dependent, rather than contradictory. The energy industries benefit from groundbreaking technical improvements and continuous expansion of technology choices.
This enables power projects to operate more efficiently and environmentally friendly, and to utilize natural resources efficiently. We are actively promoting clean coal technologies and the establishment of a mix of various energy sources, both renewable and conventional energy. Improving energy efficiency has a vast potential in Asia, and policy makers and business leaders recognize the benefits of this opportunity. By optimizing the energy efficiency of power plants, transmission and distribution systems, we can achieve a much better utilization of primary energy sources, reducing both fuel costs and emissions.
The IPPF is closely co-operating with the Hong Kong Association of Energy Service Companies (HAESCO) and other stakeholders to actively promote energy efficiency across the region.
To improve the energy efficiency of rapidly growing economies can contribute more to combating climate change and sustainable resource development than any other single measure. Along with the promotion of renewable energy we have a powerful tool on hand which we must utilize.
PEi: What countries in Asia have seen the greatest IPP development, and why?
NK: China certainly has been at the very forefront of the market for private power in Asia, simply because it has grown to be the second largest power market in the world after the USA.
Southeast Asian countries have also seen a significant boom in private power investment and we believe that they will see more to come because they are improving their regulations and rule of law, and thereby facilitating new investments to serve their urgent requirement for power.
The Ratchaburi combined-cycle power plant, which is Thailand’s largest power station, is an example of the new breed of independent power projects public-private partnerships
PEi: Focusing specifically on China, how does the IPPF view the opportunities for developing private power projects there currently?
NK: China holds a great potential for independent power projects, albeit China’s state-owned enterprises (SOEs) have developed the capabilities to grow the Chinese power sector by and large on the basis of domestic resources.
Still, there is sufficient room for international investment and co-operation. Both IPPs and SOEs share the challenges imposed by the rising coal prices and the volatility of the prices for gas. These price developments are not fully reflected by the electricity prices.
This greatly affects the stability of their revenue streams and therefore the prospects for direct foreign investment in China’s power sector. But the rapid demand growth and the challenges it creates for the security of energy supply, for the environment and the living conditions of the Chinese people provide sufficient incentives and opportunities for international co-operation.
PEi: What types of power generation do independent power producers traditionally invest in here, and is the IPPF detecting a shift towards other less conventional forms, such as renewables?
NK: Renewable energy in its various forms has a great potential in Asia and it has grown solidly over recent years. IPPs are investing in renewable energy projects all over Asia. The attractiveness of these projects depends to a high degree on the natural, market and regulative environment. Wherever regulators set up appropriate frameworks to encourage private investment in renewable power projects, the IPPs will follow. The high fuel prices are also a very encouraging factor for such types of technologies.
In addition to the various sources of renewable energy, coal may play a revolutionary role in the future fuel mix, as technologies for coal gasification and liquefying advance. This conventional energy source may provide the basis for generating substitutes for natural gas and oil. Given the technical and economic viability, these concepts have the potential to take a lot of pressure from the oil- and gas markets, given the vast world coal reserves. IPPs are now getting involved in the coal processing sector as part of their business development strategy and could be a driver for this development. Coal bed methane projects also have significant potentials in Asia, especially in China and India.
PEi: What impact does the IPPF think the continuing global downturn may have on private investment in Asia’s power sector?
NK: The current turmoil in the US financial sector is not likely to largely affect the growth of the global energy demand. The Asian financial crisis provides historical evidence. But the current developments in the financial markets may affect private investments in serving the rising energy demand, which creates a difficult situation for both governments and the private energy businesses.
However, in times of crisis there have always been companies that took the opportunity to grow into new markets and thereby outperform their competitors later on. A crisis is as much an opportunity as it is a challenge.
PEi: Looking to the near future, which Asian country is likely to greatly expand its IPP sector, and in Asia as a whole, how does the IPPF see the IPP sector developing over the next 10-15 years?
NK: Some of the markets which have been either closed to foreign investment or which have been particularly challenging are now becoming more attractive. We see growing interest in power projects in Vietnam, Laos, Cambodia and Indonesia. Thailand and Malaysia are also attractive markets for future power projects.
All of these countries have urgent power needs and are encouraging international private participation in building their energy future. And then of course there is the soaring power demand of India, which offers vast opportunities for IPPs.
PEi: I see that the IPPF is associated with power industry events as far away as the Middle East. What plans do you have to expand the geographical reach of the organization?
NK: India has been a blank spot on our map, as the past IPP developments have been proven particularly challenging for both the Indian government and for foreign investors. However, India is an attractive and fast growing power market and private power investors are very active there. There is no reason why India should not see a major IPP development as it sees massive foreign direct investment in literally all sectors that are open for private participation.
I am personally very committed to assist in this development and to facilitate the presence of the IPPF in India, as I believe it is becoming a very attractive market for international private power investors. This is due to its soaring needs for power and its incentives to broaden the basis of investment, as well as its drive for new efficient and clean technologies in power generation. India will find its place in the world markets, and IPPs can play a significant role in fueling this development.
For information on IPPF and its activities, contact the IPPF Secretariat via www.ippfpowerasia.com