Decentralised power generation growth in emerging markets is likely to exceed that of the industrialised world over the next decade. This is one of the main findings of a series of reports covering five major countries.

Jon Slowe, Delta Energy & Environment, UK

Decentralised power generation (DPG) is an increasingly diverse sector in the power market. It can include on-site power-only systems, combined heat and power (CHP) and peaking plant, and features a growing range of technologies, both mature and emerging. Every major international manufacturer of power generation systems is now a player in this sector, and for some it is a core part of their business.

The growth of DPG markets in the industrialised world promises to be significant over the next decade, with prospects, opportunities and technological breakthroughs being increasingly well documented. The opportunity in larger emerging markets (sometimes known as BRIC countries – Brazil, China, India, Mexico and Russia) and the implications for investors in the energy sectors of such countries is less well understood.

In short, absolute power demand growth in emerging markets is already higher than in OECD markets, and is projected to get further ahead over the next 25 years. This has direct implications for requirements for new capacity.

A further macro issue is the trend in natural gas use for power generation. A growing share of the DPG market is based on natural gas, indeed its availability is a significantly greater requirement for DPG than for conventional central plants. The availability and use of gas in the power sector is therefore a second powerful indicator of the opportunity for DPG. Overall, the gas share in generation is increasing worldwide; in developing countries the trend is dramatic.

These two broad indicators suggest a clear potential, but no more than that. To explore this, the five analyses include a market outlook rating that consists of the selection of a range of key indicators and drivers that determine current market conditions and evolving market prospects; and the allocation of a weighting to each indicator according to its influence. Separate scoring is also carried out for the various market segments.

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The overall ratings for the five countries studied in 2005 are summarised in Table 1.

Market triggers

Before looking at the implications of these ratings, consider these examples of how they are developed. The principal step is to identify the key indicators, or ‘triggers’, of DPG market development. One of the most important of these, and one therefore with a high overall weighting, is the level of the spark spread, the difference between the electricity price and the fuel price. On the basis of this trigger, none of the five countries scored higher than three (out of five) for any of the DPG sectors, and is thus a clear first clue that there are important challenges facing the development of these markets, at least in the short-term.

Another of the triggers is the level of grid stability and supply quality. If these are poor, many energy users will look to DPG as a means of reducing dependence on the grid. This has a more moderate rating than some of the other triggers, but all countries scored well.

The assessment strongly indicates that industrial scale DPG systems, often in the form of CHP, present the best overall conditions for project development and DPG equipment sales. There are several reasons for this. The first is that industrial CHP is usually the most cost-effective form of DPG. Plant sizes are larger and unit costs smaller; load factors are often higher than for other forms of DPG. Without a healthy industrial market, therefore, the emergence of the other DPG markets is less likely. The ratings here for India and Mexico were particularly high, a reflection of poor quality of public supply, the need for new capacity and the experience that already exists there with such projects. The 2003 Electricity Act in India is also proving a strong driver.

Applications

Buildings-based CHP systems, suited for example to application in hotels, hospitals, residential apartment blocks and shopping centres, are little known in the five countries and are likely to face tough conditions for the short-term at least, in part because of the limited space heating requirements in Brazil, Mexico, India and parts of China.

District energy systems that involve the distribution of heat in towns and cities are only currently viable in Russia and China, where there is already a strong tradition in their application. The other three countries have little or no experience largely for climatic reasons.

As for micro-generation, there are few surprises here. This market is only now beginning to emerge in a small number of OECD countries and its development in any of the emerging markets will only happen once full commercialization has taken place in one or more of these markets.

The market outlook ratings provide a basis for the development of a series of ‘top-down’ market projections. The uncertain and evolving policy framework for DPG in these emerging markets means that forecasting the amount of new investment is subject to some uncertainty, but our research projects a base-case of 129 GW of new decentralised plant up to 2015 in these five markets alone. Low case forecasts give 64 GW of capacity, with high case forecasts giving 193 GW up to 2015. These projections compare to current total worldwide installed capacity of DPG plant at around 260 GW.


Figure 1. India projections by technology type
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The analyses not only contain a series of projections for overall DPG markets, but also for a range of project sizes and for a range of DPG technologies – see Figures 1 and 2.


Figure 2. Brazil projections by project size
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Russia and China are likely to be the two leading markets among the BRIC countries for DPG project development over the next ten years, with India in a strong third place.

Scale and opportunity

China is a potential DPG giant, but to a great extent this is down to the sheer scale of capacity requirement rather than strongly positive market triggers. While the base case scenario puts China behind Russia, the high case scenario shows that market growth can exceed that of Russia, with around 77 GW of new decentralised CHP capacity by 2015.

Power demand in China has been growing at double-digit rates since 1990 and grew at around 15 per cent in 2004. The country faces a chronic shortage of capacity in many areas. In addition, power prices have been edging upwards since 2004 and natural gas supply is extending to some of the main cities and industrial areas. While gas-fired DPG in industry and buildings is not yet able to compete with conventional coal generation, the gap is narrowing with sharp increases in coal prices. Power market restructuring and emerging policy incentives for on-site systems will be critical to the evolution of the market. Until these are fully implemented, the market for DPG systems will be confined to certain niche applications. However, because of the immense scale of demand growth, we expect opportunities in China to exceed all other world markets in the longer-term.

The inroads into the steam turbine market made by gas-fired DPG technologies (CCGT, gas turbines and gas engines) are expected to be particularly dramatic. At the moment, virtually all DPG projects are steam turbine based in China. This share is projected to fall to around 65 per cent in 2015.

In Russia, demand for power is expected to grow by at least 30 per cent over the next 15 years. Couple this with the expected retirement of three quarters of existing capacity and the scale of potential investment in the power generation sector, around $160 billion, becomes clear. The significant penetration of district heating, which serves over 70 per cent of the heating market, together with the experience of CHP in the industrial sector and the widespread availability of natural gas provides a solid base for decentralised CHP to capture a significant share of new power generation capacity.

Uncertainties affecting the amount of new capacity include the nature of restructuring of the electricity market and how on-site generation will be treated compared to conventional generation. The availability of natural gas in Russia means that gas turbines are expected to be the leading DPG technology, closely followed by steam turbines and CCGT plants. Approximately 40 per cent of decentralised CHP is expected to be developed in each of the 50 MW plus and 15 MW to 49 MW size ranges. Gas engine sales will also benefit from the expansion of DPG in Russia.

Diverse strategies

Overall, the opportunities in major emerging markets are likely to be significant. Nonetheless, the immediate market outlook for DPG in these countries is uncertain and a range of challenges face both project developers and equipment suppliers that are working to exploit the potential.

Diverse market entry strategies will be required for each of the countries assessed, and there is already clear evidence that some companies have not found the route to market to be smooth. More often there have been switchbacks and potholes, and there will continue to be so. However, most of our sector-specific indicators that have been used to measure the potential in the markets point to a clear conclusion – these countries can not be ignored.