HomeWorld RegionsAsiaREPORT: US GAS AND STEAM TURBINE MARKETà‚– Filling up the order books

REPORT: US GAS AND STEAM TURBINE MARKETà‚– Filling up the order books

Figure 1. Aeroderivatives such as the LM6000 are well suited to peaking applications
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It started in 1998: an unprecedented surge in demand for power generating equipment in the USA overwhelmed most manufacturers and surprised analysts. The orders are continuing to roll in, but it appears that demand growth has peaked. By 2007, the market could be back to normal.

As demand rose in 1998 and early 1999, equipment manufacturers’ order books quickly filled up, and most gas turbine manufacturers were unable to take on new orders unless they were for delivery beyond

2003 or 2004. The situation eased slightly as the OEMs increased their manufacturing capacities through acquisitions and agreements with new suppliers, but the backlog of orders still remains a barrier to the installation of new capacity in the USA.

The sudden rise in demand for power plant equipment in the USA has been driven by a variety of factors, not least a gradual rise in electricity demand over the past ten years coupled with a reluctance by utilities to invest in new, but much-needed, capacity. Technology has also played a large role, with the emergence of the gas turbine and combined cycle power plant on the market, as has an increased awareness of the impact of power generation on the environment.

All these factors have colluded to produce a boom in the market; to what extent the market is cyclic, and whether it will enter a ‘bust’ phase, remains to be seen. What may save the day for equipment manufacturers, and justify their investment in increased manufacturing capacity, is the return of the Asian market.

According to international consultants Frost & Sullivan, the market for gas and steam turbines in North America grew an unprecedented 338.9 per cent in 1999, generating revenues of $8.22 billion. In a new report on this market, the company has predicted continued strong sales through to 2006.

Driving a boom

Undoubtedly the largest contributing factor to the surge in demand was deregulation of the electricity suppply industry. While some US states embraced deregulation, such as California and in the northeast, others have made only tentative moves and some have held back altogether. This approach to deregulation meant that most utilities held back on investing in new capacity additions from the early 1990s onwards; they felt that their future was too uncertain to be making commitments to new plant that they might ultimately have to divest or would be unable to recover capital costs from.

The reluctance to replace old plant and add new capacity, coupled with a continued rise in electricity demand growth rates fuelled by a strong economy, particularly in the western USA, resulted in the highly publicised and crippling summer power shortages in the Midwest in 1998 and 1999, and in California in 2000.

New capacity additions, including peaking and baseload plants, have already come on-line in parts of the US, and as a result, reserve margins are slowly rising. It is estimated that there is currently over 175 000 MW of new capacity under development in the US. Much of this is being added by independent developers active in deregulated states.

A further driver in this market, according to Frost & Sullivan, has been gas turbine technology, and the flexibility and efficiencies reached by using them in combined cycle configuration. Gas turbine-based power plants have low installation costs and short lead times, important factors in competitive markets. In addition, combined cycle plants can reach efficiencies close to 58 per cent and have low emissions compared with coal fired power plants.

Increasing the efficiency of combined cycle power plants is currently an area of focus for many of the equipment manufacturers. Technologies developed under the US Department of Energy’s Advanced Turbine System Programme are already beginning to hit the commercial market after several years of development and testing, and will further increase this technology’s popularity.

Figure 2. US electricity net generation
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The abundance of natural gas in the USA has also driven the strong uptake of gas turbine technology. According to Frost & Sullivan, as environmental restrictions become more punitive for generators emitting pollutants, the use of coal will decrease. Surveys indicate that natural gas use will continue to rise and will account for nearly half of power generation in the US within 20 years. Such forecasts suggest that gas turbine sales should remain strong for at least the next ten years.

Of course this does raise some security of supply questions for the USA, particularly in the light of recent concerns over natural gas supplies in the country. The US Energy Information Administration states that average spot prices for natural gas averaged about $4.96/1000 cu ft ($175/1000m3) in September 2000, nearly double the price from one year ago. Although rising crude oil prices have encouraged natural gas prices to advance, the primary cause of these elevated gas prices has been a strained supply situation. US working gas in storage is estimated to be nine per cent below normal.

Further pushing the trend towards turbine technology is the retirement of ageing coal and nuclear plants in the US and North America, says Frost & Sullivan. Although coal-fired generating plants are expected to remain the main source of power generation until 2020, their capital costs and environmental impact have reduced their development potential compared to gas turbine-based plants.

In addition, there are no new nuclear power plants slated for development in the USA, and many are reaching their retirement age. While some specialist nuclear plant operators have emerged from the deregulated US market, such as Entergy, and will seek to extend licenses on some nuclear plants and operate them competitively, a significant amount of nuclear capacity will require replacement in the coming decades.

There has therefore been a strong surge in orders for small, medium and large gas turbines as well as for steam turbines in the US for applications ranging from baseload to peaking and distributed generation. Most of the manufacturers have a backlog of orders until 2004 and orders are still coming in.

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However, there are still a number of factors restricting the market for gas turbines, and thus delaying the installation of much-needed capacity on the ground. These include difficulties in obtaining permits for new power plants and a lack of standardization concerning regulations for the siting and operation of power plants, and long project lead times due to the high backlog of orders on manufacturers’ books.

Generation trends

In this booming market, new baseload power plants are being announced at record levels, and combined cycle is the technology of choice. According to Frost & Sullivan’s analysis, which covers North America, revenues in the 60 MW and above gas turbine and steam turbine market in 1999 was $6345 million, accounting for around 77 per cent of revenues. Many of the new plants are merchant plants, selling power into spot markets or to customers on short-term contracts, and are in excess of 1000 MW in capacity.

Factors that Frost & Sullivan believes are driving the market for gas and steam turbines in this market sector include:

  • The efficiency of combined cycle plants surpass competing technologies
  • The retirement of fossil fuelled steam plants
  • The environmental benefits of the combined cycle configuration.

The combined cycle configuration can also give operational flexibility. With a two-on-one configuration, one gas turbine can be shut off, allowing the operator to optimize operation during periods of maintenance, or during low demand periods.

Another increase in gas turbine demand occurred in the region with independent developers entering the power generation market to capitalize on periods of peak demand when wholesale prices are highest. These peaking applications, which typically involve gas turbines in the output range of 25 to 50 MW, have been increasing where electricity prices are high enough in peak periods to entice merchant generators to construct new plants and sell the electricity on the spot market.

According to Frost & Sullivan, total revenues in the 15 to 60 MW gas turbine market in 1999 were $1737 million, reflecting a strong growth in peaking applications. Peaking applications are dominated by aeroderivative gas turbines which are highly fuel efficient, can be started rapidly, and are quick to install.

This growth in peaking applications has been driven mainly by deregulation and the new market model this has brought. In a deregulated market where spot markets and real time bidding exist, a power plant developer can assess the risks associated with fluctuating, but high returns, and supplement its operating portfolio with peaking units that can come on and off-line quickly.

Total revenues from the 2 to 15 MW gas turbine sector in 1999 were $135 million, according to Frost & Sullivan. This represents the emerging distributed generation market where small generating units are connected directly to the grid to provide a reliable source of power for baseload or peaking applications.

While an increasing demand from the industrial sector for distributed generation and small combined heat and power applications is helping to drive the 2-15 MW sector, some important factors are restricting the uptake of this technology.

The distributed generation market itself is restricted by a lack of progress on policy and regulatory issues. These issues include ownership of and access to transmission lines, interconnection and siting. In addition, gas turbines experience intense competition from other technologies in this sector, particularly from reciprocating engines running on either diesel or natural gas fuel. Other, more advanced technologies are also making their way into this market, including fuel cells and hybrid power plants.

Competitive challenges

Figure 4. Small gas turbines, suited to distributed generation applications, are facing tough competition from other technologies
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According to Frost & Sullivan, one of the largest challenges that suppliers face in this boom market is the ability to deliver equipment to the customer on time. The backlog of orders has adversely affected manufacturers, who are striving to improve manufacturing techniques to maintain quality and increase deliverability in the face of high demand. Both GE and Siemens-Westinghouse have taken large single orders for power generation equipment for the USA. In February 2000, Duke Energy North America placed agreements with GE for 84 gas turbines and 17 steam turbines for 23 merchant plants.

One manufacturer was reported to have stopped taking orders after their backlog grew, according to Frost & Sullivan, and the largest restraint on being able to increase sales and deliveries has been a lack of production capacity. Frost & Sullivan notes that the manufacturers with the greatest capacity have been the ones to make the greatest number of sales.

Deliverability issues have been a source of frustration for project developers who are anxious to get their plants up and running, and this has also affected the confidence of potential project financiers.

GE Power Systems has notably increased its manufacturing capabilities through the acquisition of the heavy duty gas turbine business from Alstom during the merger of ABB and Alstom Power in 1999. This gave it manufacturing facilities which it has been able to use to manage the surge in demand. Other gas turbine manufacturers have been able to increase capacity by asking their own suppliers to expand.

Quality problems have also emerged, caused by both the high demand and by bringing new technology to market. Some manufacturers have had to make payments to developers associated with revenue losses from delays to projects and failure of advanced combined cycle technologies. Some combined cycle plants have also been forced to shut down due to the failure of some turbine blades from overheating.

In August 2000, Alstom Power reported technical difficulties with the introduction of the latest version of its advanced heavy duty gas turbine, the GT24/26 ‘B’. It said that the problems were not unusual in the commissioning of complex, advanced technology of this type, and that it would have to pay penalties for projects that had been delayed by the problem.

Market share

Nevertheless, the surge in demand for power plant equipment has enabled Alstom to gain a firm foothold in the US market, one of its main aims at the time of the merger with ABB and subsequent buy-out of ABB from that partnership. The company is currently developing nearly 9000 MW of capacity in the USA.

Frost & Sullivan predicts strong sales in gas and steam turbines until 2006, although forecasts that sales will decline slightly through this period, with revenues standing at $7089 million in 2006. As the market falls off, suppliers will be looking to use their additional production capacity elsewhereà‚– possibly in Asia and Latin Americaà‚– and there may also be new demand in their home markets as deregulation continues in the USA.