Prospects for IPPs remain bright
To better understand the future dynamics of the Asian IPP market, Datamonitor recently conducted an end-user survey with all the major IPPs in Asia – with some interesting results.
London, United Kingdom
Almost all countries across the world have started the process of electricity privatization over recent years, significantly altering the structure and size of the global electricity market. As a consequence, Independent Power Producers (IPPs) have become almost as important as utilities in some emerging and mature markets.
Both the EU and the USA are actively promoting generation competition and electricity spot markets in order to help lower electricity prices. In emerging markets such as Asia, the IPP fills a more fundamental role – as the escape route for utilities that cannot bear the full weight of electricity demand growth from domestic and, in particular, industrial customers.
The Asian IPP market developed during the mid nineties, when escalating power demand in Asia left many countries with no option but to induce foreign investment in independent power plants. Given that the projected investment requirements were vast, and could not possibly be covered by Asian governments or by multilateral institutions such as the World Bank, capital had to be raised through the private sector and this could only be achieved by offering attractive incentives to foreign investors.
Furthermore, the public sector could not cope with all the decisions or managerial responsibilities in the complicated business of infrastructure development. Private sector investments are in general better suited to set market prices and have an incentive to be more efficient in investment and operation. In addition the various Asian governments also had other pressing issues for which resources were needed, such as health, education and reducing poverty. These limitations offered opportunities for private investment, and growing power demand offered little choice in any case.
Although the immediate need for new IPP power plants in Asia has decreased as a result of the impact of the economic crisis in the region, these fundamental factors behind the emergence of the IPP market have not altered. After a few years of economic slowdown in many countries, IPP activity in the region is expected to increase once again.
With a total order volume of 36 279 MW between 1994 and 1998, Asia is one of the largest IPP markets in the world. Total IPP order volumes showed particularly healthy growth rates in 1995 and 1997. However, 1998 saw a sharp decrease in orders from 11 738 MW in 1997 to 3200 MW in 1998. This was mainly due to the delayed effects of the economic crisis hitting most countries in the region in late 1997, causing many power plant projects to be cancelled or postponed indefinitely, as well as preventing new contracts from being signed.
This was reflected in the composition of order volumes in 1998, where the majority of orders were from China, India, Thailand and Vietnam. Apart from Thailand, all are countries that up until now have not been seriously hit by the crisis. Thailand`s position as the third largest market was a result of substantial orders placed up until the end of 1997.
China, one of the countries least affected by the crisis, has been the largest market over the last five years, with orders totalling some 8854 MW or close to 25 per cent of the total. In 1998, orders totalling 1075 MW were placed in China, when most other countries saw order volumes plummeting. China was followed by Thailand with a total order volume of 7301 MW. The majority of power plant orders in Thailand were placed between 1994 and 1997, before the effects of the crisis were felt in earnest. Other major markets were India, Indonesia, Malaysia and South Korea.
Key to the market
To better understand the future dynamics of the Asian IPP market, Datamonitor recently conducted an end-user survey with all the major IPPs in Asia in order to establish which factors they consider important when investing in the region. IPPs were also asked to rank the top three countries for each of the most important variables.
Datamonitor Industrial asked the IPPs to rank the following eight variables:
Regulations and energy policies;
Planning approval process;
Possibility/price of PPA;
Existence of spot market;
Number of IPP licences awarded in the past and expected number for the future;
Investment risk profile.
When analysing the results of the survey, points were awarded according to the ranking and then the results of each response were aggregated to produce an overall picture. The survey revealed that overall, the most important variable for the IPPs when considering investing in Asia is the “possibility/price of the power purchase agreement”. The second and third most important variables were “electricity price” and “regulations”, respectively.
An interesting result from the survey is that the “investment risk profile” variable was only ranked fourth – considering recent events in the region it could be expected to be seen as far more important. This is a very good sign which suggests that IPPs actually do want to invest in the region, but are just hampered by a lack of available projects.
For each of the variables, respondents were also asked to identify the top three countries in the Asian region that best satisfied the criteria. Points were awarded for first, second and third, and the data aggregated. The overall results are shown in Figure 3.
Considering the current state of its economy and the cancellation of a number of its planned IPP projects in the last few years, it is perhaps surprising that Thailand emerges as the top country overall. However, this can be seen as an indication that the IPPs believe Thailand is in the process of recovering from the crisis, and that once this has happened will return to being one of the countries with the best opportunities for new investments. The major reason for this confidence is that Thailand had a very well organized IPP programme before the crisis hit, and IPPs believe it will not be difficult to get this programme going again.
India and China are two other countries in which IPPs have great confidence, being ranked in third and fourth position, respectively. Both countries have large and rapidly growing demand for electricity, and neither has been hit to a large extent by the economic crisis. As national utilities in these countries are unable to finance the construction of enough power plants to meet electricity demand, the level of IPP business in these countries will increase substantially in the coming years.
Indonesia, the fourth largest market between 1994 to 1998, has lost almost all backing from IPPs, being placed in the third last position out of the 16 mentioned countries. Even small markets such as Bangladesh are ranked more highly than Indonesia. South Korea, the sixth largest market between 1994 to 1998, has also dropped way down the ranking to second-bottom position.
The future looks bright
Nevertheless, all participants in the end-user survey believed that the IPP market in Asia has a bright future ahead of it. The continuing privatization of the region`s electricity industry will once again provide healthy conditions for new IPP investments. In addition, IPPs believe that continuous growth in electricity demand will mean that utilities in more countries will no longer be capable of generating the necessary electricity.
According to Datamonitor`s forecasts, significant growth in IPP order volumes, particularly after 2005, means IPPs will continue to grow in importance as a customer group for equipment suppliers. It is expected that IPPs will be placing more than 50 per cent of total orders not too long into the next century.
In the past five years combined cycle technology has been the largest segment in the Asian region. However, the conventional thermal segment was not far behind in terms of total volume size, a trend forecast to continue until the year 2020. Due to environmental issues, the increasing availability of natural gas as well as the expected returns on this type of investment, combined cycle technology will be the first choice for IPPs in many countries.
However, in certain countries, such as China and India, the supply of natural gas is not yet well developed and it is therefore expected that conventional thermal technology will continue to be very important. As China and India are expected to be very large IPP markets in the next 20 years, orders for this type of equipment will still form a significant part of total order volumes in 2020.
In terms of market value, the combined cycle segment will again grow at the fastest rate, reaching $4575 million in 2020. Over the same period, the conventional thermal segment will increase from $1803 million to $4229 million, thereby decreasing in relative importance. Total investment made by IPPs in Asia is expected to reach approximately $10 billion in 2020.
As Asian economies begin to recover from the worst of the economic problems, growth in electricity demand will return. However, as governments have large spending requirements in areas such as infrastructure, health and the environment, they are unlikely to be in a position to build enough power plants to meet rising demand, offering significant opportunities for IPPs.
The way IPPs operate in Asia is fundamentally different than in more mature markets, such as Europe and the US. In Asia, IPP projects are not seen as a vehicle towards liberalization of electricity markets, but rather as a way of getting much needed investment into the country. Because of this, there is less pressure on IPPs to provide electricity at competitive prices – but on the other hand, they must undertake greater risk by investing in Asia. However, as can be seen from the results of Datamonitor`s end-user survey, the investment risk factor is not a major concern.
One issue likely to affect projects in Asia is that in order for an IPP to obtain a license in Asia, a certain number of local suppliers must be involved in the project. As the involvement of local companies becomes more difficult as turnkey contracts increase in popularity, IPPs increasingly pass this risk down the chain to the equipment supplier.
As conditions for new IPP projects have been tough over the last couple of years, equipment suppliers have been willing to accept projects under these circumstances. Whether this situation will continue in the long term is unclear.
As the Asian region recovers from the worst effects of the economic crisis, the number of IPP projects will increase substantially, and as a result equipment suppliers will once again be in a stronger bargaining position.
Figure 1. Asian IPP order volume by country, 1994-98. Source: Datamonitor
Figure 2. Weighting of IPP investment factors for Asia. Source: Datamonitor
Figure 3. Weighting of top three IPP countries for Asia. Source: Datamonitor