Growth slows in independent power market

March 1, 1999
The international market for independent power projects has grown during the past 12 months, although less so than it would have if not for the Asian financial crisis. This is the conclusion of Hagler Bailly Consulting, Arlington, Va., based on the results of its most recent semiannual survey of the international independent power (IIP) market. The growth of independent power projects is significant for the oil and gas industry, because so much of the projected additional power capacity they

The international market for independent power projects has grown during the past 12 months, although less so than it would have if not for the Asian financial crisis.

This is the conclusion of Hagler Bailly Consulting, Arlington, Va., based on the results of its most recent semiannual survey of the international independent power (IIP) market.

The growth of independent power projects is significant for the oil and gas industry, because so much of the projected additional power capacity they represent will be fired by natural gas and, to a lesser extent, oil products.

The survey focuses on non-utility generation capacity outside the U.S. and Canada. The reported data include projects larger than 10 MW and generally exclude captive generation capacity within industrial facilities, such as processing plants.

Growth in independent power activity has declined in 1997 and 1998. The number of grassroots IIP projects being brought on line has fallen considerably, and privatization of generation capacity also has slowed.

Despite these growth rate declines, there remains a sizable and relatively stable backlog of projects, says Hagler Bailly. In the past year, said the firm, the number of grassroots independent power projects under development has grown 7%. In terms of generation capacity, however, this represents a capacity increase of less than 3%.

Slower growth

Hagler Bailly divides IIP capacity into two categories: greenfield, which means purpose-built; and privatized, which includes assets formerly owned by, in most cases, state monopolies. For purposes of the survey, the company defines overall IIP activity as the sum of: operating IIP capacity (greenfield and privatized), greenfield IIP capacity under development, and planned generation-capacity privatizations.

The most recent survey found that overall IIP activity increased by 9% in October 1998 from a year earlier.

"Most of the overall growth in IIP activity can be attributed to a strong rise in generation privatizations," said Hagler Bailly.

The rate of growth in IIP capacity slowed during 1996-98. As of last October, grassroots additions to IIP generation capacity for the year totaled 7 gigawatts (GW), compared with 14 GW in 1997 and 22 GW in 1996.

Privatization of IIP assets also has slowed, reaching an equivalent capacity of only 10 GW through October 1998 vs. 24 GW in 1997 and 28 GW in 1996.

As a result of these declines, says Hagler Bailly, the total volume of "generation-related closings" has decreased more than 20% ($10 billion through October 1998 vs. $30 billion in 1997 and $46 billion in 1996).

"Interestingly," said the firm, "private-sector activity in the distribution sector has remained more stable, with about $27 billion in transactions in both 1997 and 1998, which is an increase over the levels seen in 1995 and 1996."

Hagler Bailly does not believe that the declines in capacity additions and privatizations indicate some sort of serious downturn: "Although the rate at which projects are being brought on line has slowed recently, the continued growth in the backlog should provide the basis for recovery as global financial conditions improve."

Total operating greenfield IIP capacity is 90 GW, says Hagler Bailly, and another 836 GW of greenfield capacity is under development. Operating privatized IIP capacity totals 91 GW vs. 101 GW under bidding or recently awarded.

Regional highlights

Asia still leads the international IIP market, with 61% of total activity, 40% of operating projects (greenfield and privatized), and 69% of greenfield capacity under development. There are 1,356 greenfield projects under development in the region, involving a total of 578 GW.

"The economic slowdown in this region has resulted in only a 6% increase in total IIP activity over the last year," said Hagler Bailly.

Europe is responsible for 15% of total IIP activity. It has 61 GW of operating capacity, 89 GW of greenfield projects under development, and 20 GW of pending privatizations.

Europe saw an increase of more than 35% in total IIP activity during the 12 months ended in October 1998. This was mostly the result of a substantial increase in privatization activity.

Latin America also accounts for 15% of total IIP activity. It has 43 GW of operating capacity, 78 GW of greenfield projects under development, and 42 GW of pending privatizations.

Latin America's total IIP activity grew by 12% during the 12 months ended in October 1998, says Hagler Bailly. "However, since most generation assets have been privatized or are now pending sale, future growth will slow."

The Africa/Middle East region represents only 9% of total world IIP activity. It has 4 GW of operating capacity, 91 GW of greenfield projects under development, and 10 GW of pending privatizations.

Other trends

Fossil fuels continue to dominate IIP projects. They account for 77% of the capacity under development Table, 1 [96,089 bytes].

Gas and oil-fired projects lead, in terms of the number of projects under development, but coal-fired projects account for a slightly greater share of the capacity.

Other key findings of the Hagler Bailly survey include:

  • The privatization market, including operating capacity and pending deals, increased to 190 GW from 145 GW during the 12 months ended in October 1998.
  • Latin America leads privatizations, with 47 projects slated for privatization in the near term (most in Brazil and Argentina). Asia and Europe have experienced significant increases in pending privatizations-19 GW and 15 GW, respectively.
  • Only 38% of all greenfield projects under development have an announced start-up date. This proportion has not changed significantly.

Need for new capacity

The demand for IIP generation capacity is growing at a reduced rate, compared with previous years.

Hagler Bailly defined IIP demand as greenfield capacity under development plus planned privatizations.

"On the demand front, there are over 600 open greenfield solicitations and over 170 privatization requests in 87 countries," said the company. "However, the pace of new demand has slowed overall.

"Since the all-time high of 95 GW of new solicited demand in 1996, new solicitation announcements slowed to 72 GW in 1997, and their pace slowed further in the first 9 months of 1998 to only 26 GW."

Only 25 countries are responsible 89% of total IIP demand. Open greenfield solicitations fell 8% in those countries during the 12 months ended last October, while privatization demand increased 37% Table, 2 [133,326 bytes].

Taiwan, South Korea, and Romania experienced the most dramatic increases in total demand activity, says Hagler Bailly, resulting from plans to privatize, respectively, Taipower, portions of Korea Electric Power Co., and Renel.

Thailand suffered the largest decline in demand activity because of a decrease in greenfield solicitations and the closure of Electricity Generating Authority of Thailand's private offering. The next largest reduction was in Colombia and was attributable to the completion of several transactions and a decrease in outstanding activity.

According to the survey results, the top five greenfield solicitation markets are, in descending order, China, India, Turkey, Myanmar, and Brazil. These countries represent more than 70% of total announced greenfield demand.

Brazil leads among privatization demand markets, with 28 transactions and 38 GW of capacity at stake, says Hagler Bailly. The next largest markets are Ukraine, Taiwan, Australia, and Romania.

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