Asian Power

ISSUE 55 | DISPLAY TO 28 February 2013 | www.asian-power.com | A Charlton Media Group publication

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India’s 100gw CAPACITY target is the vision even feasible until 2017?

MICA(P) 248/07/2011

OpINION Caution on China’s hydropower dams

FEATURE Making energy sustainable in Asia

opinion Indonesia’s upcoming geothermal projects

FEATURE Asia’s growth potential in power

PAge 10

PAge 14

PAGE 16

PAge 18

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Answers for industry.

FIRST

News from asian-power.com

Trincomalee Power Company Limited.

The Government of India’s line of credit for the project totals US$ 200 million.

MOST READ More Japanese reactors to come online in 2013

Japan’s Nuclear Regulation Authority says that the start-up of more idled nuclear reactors will not come until next year.

The NRA, the new nuclear energy regulator, said it will compile a blueprint of new standards to govern restarts by next March and subject this to public discussion.

Suzlon defaults on US$209 million debt

Terra Firma invests heavily in China’s renewable energy

A major British private equity firm is continuing its diversification into renewable energy by setting up a US$5 billion investment fund in China.

Terra Firma Capital Partners Ltd is planning a fund of up to US$5 billion with China Development Bank for investments in renewable energy in China.

The partners are expected to start raising between US$3 and US$5 billion in the next few months.

Indonesian gas service provider expands into electricity business Publicly listed oil and gas services provider PT Radiant Utama Interinsco plans to build hydropower plants in West Sumatra to diversify its business.

Radiant’s subsidiary PT Supraco Mitra Energie will build three minihydropower plants in Solok, West Sumatra--the PLTMH Gumanti 1, 2 and 3. The three plants have a $40 million price tag and

Japanese reactors to open

a combined capacity of 15 MW.

Vietnam scraps six hydroelectric projects

Six hydropower projects of Vietnam’s Thua Thien Hue Province that have low economic values which were forecasted to cause severe flooding were cancelled.

This was announced

by Provincial People’s Committee Vice Chairman Le Truong Luu. The projects were six of the 21 hydropower projects approved in the plan until 2020.

Four turbines of Malaysia’s Bakun hydel dam to be commissioned

Sarawak Hidro will commission the remaining four of the eight turbines at Bakun hydroelectric dam by stages in the second half.

The installation of the fifth to eighth turbines from Argentina was in progress and those would be commissioned in stages, said Managing Director Zulkifle Othman.

“Testing of the fifth turbine is expected to be carried out in March next year,” he noted.

Indonesian firms to help build power plant for Malaysia

Two Indonesian companies and a Malaysian company will develop a coal-fired power plant that would deliver electricity to Malaysia.

Indonesia’s Perusahaan Listrik Negara and coal miner Tambang Batubara Bukit Asam and Malaysian electricity utility firm Tenaga Nasional inked an MoU for the project in the Indragiri Hulu district, Riau.

The MoU includes

the construction of an undersea cable connecting Indonesia and Malaysia.

Vietnam notes renewable energy sites

Vietnam has identified locations suitable for green and renewable energy projects that foreign firms can invest in.

A report by the Ministry of Industry and Trade said Vietnam’s energy use relative to GDP growth is double that of developed countries, indicating vast efficiency improvements in energy use are needed.

India to lend $200m for Sri Lanka’s 500MW coal power plant India will extend financial support to Sri Lanka to set up a 500MW coal based power project in the Trincomalee region of Sri Lanka through

Publisher & EDITOR-IN-CHIEF

MICA(P) 248/07/2011 Asian Power is a bi-monthly news magazine published by Charlton Media Group Pte Ltd registered in Singapore.

Its circulation is to leaders in the Asian power industry and is available on a controlled circulation and paid basis.

CONTACT THE PUBLISHER Charlton Media Group, #06-09 E, Maxwell House 20 Maxwell Road Singapore 069113 www.charltonmedia.com, +65 3158 1238

Art Director media assistant ADVERTISING CONTACTS

Suzlon Energy has been hit with India’s largest convertible bond default to the tune of US$209 million. Suzlon defaulted late last week after bondholders rejected its request for a four-month extension. The company has started talks with senior-secured lenders and bondholders on options.

Suzlon requested the extension on the bonds’ maturity to Feb. 11, 2013 saying it needed time to raise funds from fresh debt and the sale of noncritical assets, among others.

Solar energy dominates Japanese clean energy projects

Solar energy projects constitute 83% of clean energy projects recently approved by the Japanese government.

The Ministry of Economy, Trade and Industry approved clean energy projects totaling 1,780 megawatts of capacity. Of this total, solar projects accounted for 1,480 megawatts or 83%, followed by 292 megawatts in wind projects.

Since April, Japan has added 912 megawatts of clean energy capacity with solar projects comprising 885 megawatts of the total.

Tim Charlton Jonnel Martin Herman Daniela Gujilde Tim Charlton tim@charltonmediamail.com Laarni Salazar-Navida lanie@charltonmediamail.com

All editorial is copyright and may not be reproduced without consent.

Contributions are invited but Asian Power can accept no responsibility for loss.

ASIAN POWER 3

FIRST Here’s how much LNG Singapore will consume by 2015 A Bloomberg report said, “Singapore will consume as much as 3 million metric tons of liquefied natural gas by 2015, Steve Hill, BG Group Plc’s vice president of global LNG and oil marketing, said at a conference in the Asian city-state.”

South Vietnam to get $225b power project investments Vietnam’s Southern Electricity Corporation will invest nearly US$225 billion for power projects this year. The projects include a sea cable system from Ha Tien to Phu Quoc island, and power transmission networks in rural areas.

World’s largest wind farm to rise in Japan To be built off the coast of Fukushima. Japan plans to build the world’s largest offshore wind farm 10 miles off the coast of Fukushima, site of the ill-fated Daiichi nuclear power plant that caused Japan’s worst nuclear accident in March 2011.

Korean nuclear plant shut down The Uljin-1 reactor at the Uljin Nuclear Power Plant located 330 kilometers southeast of Seoul was shut down late last week due to a problem with the reactor’s energy system, said the Korea Hydro & Nuclear Power Company.

New coal-fired plant for the Philippines Palm Concepcion Power’s 270MW is located in the Visayas region.

Palm Concepcion Power Corporation’s coal-fired power plant in Iloilo will supply electricity to the province of Iloilo and the entire Western Visayas region. Built at a cost of some US$332.3 million, the power plant is a joint project of Philippine companies AC Energy, A. Brown Company and Jin Navitas Resources.

China posts new record in cleantech investments But world investment in clean energy drop 11% in 2012. A recent study by Bloomberg New Energy Finance shows that world investments in alternative energy projects came to US$269 billion, making it the clean energy sector’s second most successful year.

4 ASIAN POWER

Check out how our global energy system has evolved

BY Adriaan Kamp

O

ur world is under rapid construction and development, with new wealth and wealth distribution being created, every day, and in an unprecedented speed. Over the coming two to three decades some 3 billion people in Asia, Middle-East & Africa, Latin-America will join the new global middle-class and are prognosed to enjoy the same consumption patterns in their homes, in their offices and in their transportation now so much taken for granted in the OECD and upper middle class families in the emerging and developing nations. By the mid of the century, we expect we will be living with 9 billion people - sharing one planet. Energy is vital and essential to modern day life. In fact, the wealthier you get, the more energy you are likely to use. I guess that feels logical.

Now, if all people on this planet were to consume fossil (oil, gas, coal) fuel energy in the same way as people do in the West, we would be in trouble, as we would need Five planets to fuel these resources. The present trend is exactly that. So how are we going to do this: having only one planet to share and ideally staying out of trouble? Well, and to start - the countries presently, and very simplified, divide themselves in resource1 rich (exporting) countries or in energy

With the present rate of energy demand growth and the present pattern of energy use2, we are presently heading to double our world energy consumption over the coming 12-15 years.

(poor, importing) countries. So, this creates a world picture in Five (Energy) Clusters: 1. OECD, or the West- The high consumers of the past, present and perhaps the future 2. China, and BRICS- The new party in town 3. Saudi and OPEC/ Russia and GaspecThe oil and Gas “cursed” nations 4. India and leading emerging nationsReady to join 5. The Very poor- How can we join?

These clusters have all their own pattern of energy behavior and politics. Their own needs. With the present rate of energy demand growth and the present pattern of energy use2, we are presently heading to double our world energy consumption over the coming 12-15 years. To say it differently: We are going to expand our world energy system by a factor two over the coming 12-15 years. A system which has been evolved and built over the last 150 years!

That’s quite an acceleration.

So with this expectation, we may soon see the world energy system run against triple-A limits (affordability, availability, acceptability) or may become unstable That doesn’t feel good. Does it?

GDF SUEZ ENERGY ASIA HAS WON

THE 2012 ASIAN POWER AWARD for “Independent Power Producer (IPP)” of the year.

GDF SUEZ Energy Asia will have added 2,8GW gross capacity to its portfolio by the end of 2012, so passing the 10GW capacity, consolidating its presence in several major Asian countries, and ensuring emerging markets have the energy they need to go on growing.

IT’S OUR GOAL FOR TOMORROW.

ASIAN POWER 5

COUNTRY REPORT: INDIA POWER INDUSTRY

Will India meet surplus electric power production in 2013?

The country’s aim to add over 100 GW capacity until 2017 faces enormous challenges.

G

overnment reports show that India’s peak and energy demand have grown at annual average rates of 5% and 6%, respectively over the last decade. Corresponding peak and energy deficits meanwhile have been in the range of 12-14% and 9-10% respectively.

The need to bridge this gap motivated reforms to attract private sector investments through competitive bidding, market development through open access and power trading, and introduction of point of connection tariff regime in transmission. The private sector exceeded its investment target of 15 GW capacity addition with an actual of 23 GW in the 11th five year plan from 2007-2012.

The overall conventional capacity addition of 50 GW took place against a target of 62 GW in this plan period.

The peak and energy deficits are down to 10.6% and 8.5%, respectively.

The country aims to add over 100 GW in the 12th five-year plan 2012-17, half of which is expected to come from private sector.

6 ASIAN POWER

S.L. Rao, first chairman, Central Electricity Regulatory Commission (CERC) boasts that the policy framework has evolved well with respect to power market development over the past twothree years. Power exchanges, he said, are now operational and power trading is taking place. “The concept that small and local surpluses could be used to meet similar shortages elsewhere in the country has proved beneficial.”

Is the vision feasible?

Rao added that energy account settlements have taken place without major hitches.

Spot (day-ahead) trading has been growing and market tariffs have come down since the inception of power exchanges. The introduction of traceable renewable energy certificates will add a new dimension to the market. Rao told Asian Power that the unscheduled interchange (UI) surcharge under the availability-based tariff (ABT), which was for a while touted as a price for power instead of (as it was designed) being a penalty for destabilizing the frequency of

As a power economy, India is one of the least resilient countries in electricity markets.

the regional grid, is functioning well and has significantly improved grid frequencies.

“Some states use UI to overdraw power in case of unavailability and pay the UI penalty and others plan for using it to improve revenues. This is a misuse of the UI system. The UI mechanism was not meant to be a last resort for acquiring power by distribution companies or to make extra profits.” Pooja Malhotra, manager for market analysis and carbon finance at SN Power says that if India succeeds in adding the target 100 GW in the 12th five-year plan, it is possible that deficits will be wiped out in current plan period.

However, she cautions that the present deficits are still quite high and the reason is the significant demand from a large economy. “The effect of urbanization on energy consumption is evident from the growthof13.4%fromcommercialand8.2% from domestic categories over the last five years. A strong electricity demand growth despite decline in economic growth may be a result of significant unmet demand as well as substitution effect.”

Despite encouraging growth in the Indian power sector during the last fiveyear plan, Malhotra said that there are many challenges that have surfaced. Some of the key issues that may slow down the anticipated growth, she said, include the financial viability of the retail energy segment. “Most of the 876 TWh of energy generated in India is supplied to retail consumers through state-run distribution

COUNTRY REPORT: INDIA POWER INDUSTRY utilities that are getting snapped on account of surmounting financial losses estimated at around USD 13 billion as of 31 March 2011. The average technical and commercial transmission losses have come down from 35% in 2004-05 to 26% in 201011 but are still high.” Malhotra argues that the sector is socio-politically driven and the autonomy of States sometimes serves as an impediment to optimize resources across the country.

There are efforts at various levels to resolve these issues and partial success has been achieved with some states undertaking revision in retail tariff that was overdue, she adds. Malhotra also notes that most of the power projects are facing fuel supply issues. “With the increase in installed thermal capacity from 86 GW in 2006-07 to 131 GW in 2011-12, the growth in fuel production has not kept pace. Growth in coal production has fallen from 8% in 2009-10 to just 1.3% in 2011-12.

Gas production from the huge KG-6 gas field has been reduced from its anticipated volume and there isn’t much willingness to pay for power produced from more expensive imported gas. The shortage of fuel availability is evident from falling thermal PLFs from 78.6% in 2007-08 to 73.3% in 2011-12.”

Struggling developers Further due to high imported coal prices and foreign exchange rates, Malhotra cautions that the private developers, who bid low power tariffs under the competitive bidding regime, are facing huge challenges.

“These developers are now struggling to make the projects viable by urging for revision in Power Purchase Agreement tariffs. Most private developers are debtladen and under financial pressure due to high interest rates, higher cost on account of fuel and project delays accompanied by lower merchant power prices.”

Adrian John, head of energy research and advisory services at John Loffman Research also shared a negative outlook on India’s power sector. John argues that not only does India continue to miss targets in annual capacity additions, but electricity production, transmission and distribution are also failing to witness meaningful improvements. Naturally adding capacity would be expected to at least begin to address demand deficits, but John believes that the major issues of insufficient fuel supplies, particularly gas and domestic coal, and huge transmission & distribution (T&D) losses among others, means that additional capacity is not having the desired effect.

This situation, he said, is further compounded by the poor financial health of the state electricity boards (SEBs).

“With the SEBs subsidising electricity for poorer consumer categories, they

have accumulated substantial losses that have impacted their ability to invest in T&D infrastructure and also put them in situations where they are either unable to pay power generators on time or are forced to reduce the amount of supplies that they purchase – further contributing to the lack of power supply for consumers.”

John adds that the knock on effect of the SEB’s purchasing less power supplies combined with existing tariff policy, rising fuel prices, and domestic fuel shortages is that power producers have not been in the financial position to make timely investment decisions and project finance has been increasingly difficult to obtain from traditional lending sources.

Investments on a freefall Consequently, according to studies by John Loffman Research, annual levels of investment and capacity additions are set to continue falling between 2013 and 2015 from the peak levels witnessed in 2012, as recent delays or postponements of final investment decisions begin to have a significant impact. “So, in the nearterm, there seems to be no end in sight to these and the many other problems faced throughout India’s entire power market supply chain. Tariff policy reform remains essential, but will not be sufficient in the short-term to overcome the historic and sustained under-investment in capacity and T&D infrastructure. So 2013 is set to be another difficult year for the Indian power sector, with demand deficits likely to persist and the occurrence of rolling blackouts and more severe unscheduled outages for consumers a very real possibility.”

Anand Pattani, associate vice-president of Black & Veatch’s energy division notes that several large thermal power projects have been under development in the past few years in various parts of the country, and some have been commissioned recently.

However, a number of projects continue to face delays due to coal and gas fuel shortages resulting from infrastructure bottlenecks and economic issues. Operating power plants have had to reduce generation due to fuel shortages and this trend, he said, is expected to continue in 2013, although additional projects will be commissioned.

Pattani reckons that some states, notably Gujarat in the western region, are in a position of power surplus; and some northern states have the potential to achieve base-load power surplus positions if large plants are commissioned in 2013.

“Overall however - across the country power generation is expected to lag behind demand in 2013, especially for peak loads.

Despite the near-term power generation outlook, India’s market fundamentals remain strong given a rapidly growing population and the need for new infrastructure to meet demand.”

The average technical and commercial transmission losses have come down from 35% in 200405 to 26% in 2010-11 but are still high.

What must be done?

SN Power’ s Malhotra believes that the key to India achieving surplus power production will be the growth of these private developers and their continued interest in the sector. This, she said, would require strengthened reform process accompanied by supporting fiscal and monetary policy environment. “A significant capacity is expected to come on line in the next few years. At the same time, energy demand is growing consistently and is likely to maintain this growth rate. The government concern on improving the sector is evident from various regulatory and structural reforms initiated in the past couple of years.

It is expected that these reforms will be implemented, perhaps at a slower pace due to hurdles along the way. But addressing the key issues of fuel supply; financial viability of distribution segment and strengthening of regulatory machinery, it will be possible to meet the growing electricity demand of an advancing Indian economy.”

CERC’s Rao meanwhile notes that the key issues for power sector development go beyond trading. Regulators and state governments, he said, must not hinder the setting of tariffs that are adequate to meet the costs and provide a decent return for the enterprise. “So-called ‘regulatory assets’, an Indian regulatory creation to hold back

Electrical energy consumption growth per sector

Source: Central Electricity Authority; SN Power Markets

Trend in thermal PLFs (%)

Source: Central Electricity Authority; SN Power Markets

ASIAN POWER 7

COUNTRY REPORT: INDIA POWER INDUSTRY legitimate tariff increases, have strained the cash flows of distribution companies.

State government subsidies to some customer groups, without identification or limits, have led to huge and mounting losses to distribution enterprises of these governments. Their inability and unwillingness to check power theft in transmission and distribution further add to these losses.” Rao mentions that the state utilities recorded losses of Rs 700 billion last year and the state government budgets are running into the red because of the electricity sector.

In contrast, Delhi, he notes, has a surplus budget because it has not had for many years now to incur costs on supporting its electricity sector. “Until politicians and bureaucrats decide that power costs must be recovered in prices, this gap will continue to exist. No electricity company wants to buy expensive power, because this would add to their losses. They would rather resort to load shedding unless they get it cheap.

If tariffs are not allowed to be raised and merchant capacity keeps coming up, the market for merchant sales would decline, stranding good part of these capacities.

Therefore, the decision on tariffs that cover costs and give a return is of fundamental importance.”

Power prices According to Rao, prices on the power exchanges have declined as more generating companies have offered their surpluses for sale on the exchanges and state distribution enterprises have tried to avoid load shedding and consumer dissatisfaction. However, excess demand and shortages, he said, do cause sharp price rises.

“For example, during the election months to May 2011 in Tamil Nadu and Kerala, the state governments wooed voters by ensuring full availability and South prices went into double digits while the rest of the country was around Rs 4/ per unit.” Rao says that it must be expected that prices will show a declining trend as more merchant power plants start generating and other projects set aside a portion of their generation for trading, except in the case of severe shortage periods.

However, he cautions that the exchange prices will on an average still be higher than those under long-term power purchase agreements. In the coming years, Rao notes that India can expect more privatization of distribution. “Distribution enterprises might begin to leave an unfilled gap in their demand forecasts to be met by market purchases. However, spot markets are good for small purchases to plug unanticipated demand-supply gaps. But where there is an anticipation of a future shortfall, buyers should be able to enter into futures contracts. These contracts must also be 8 ASIAN POWER

capable of being traded when the extra demand does not materialize.”

Rao also mentions that futures trading would be another way to balance supply and demand. However, any speculation in futures contracts where some players corner future supplies to sell them at windfall profits can be regulated through the appropriate regulator and rules, he said.

“Systematic regulations to avoid gaming and speculating in the futures market will attain significance. A major factor for introducing futures contracts is the decision on who will regulate the futures market – the Forwards Market Commission or the CERC. This issue is currently sub-judice at the Supreme Court and will be resolved soon.”

In any case, Rao believes that the regulator must keep a close watch on the power exchanges like the Securities and Exchange Board of India does on the stock exchanges. Information systems, he said, should be closely tracked to ensure that data is not tampered with.

More developments Rao believes that the future outlook for the Indian power market in the next 5-10 years is that of increasing power trading, tariff-based bidding for new generation capacities, spot and futures trading, trading in transmission capacities as well as contracted-for capacities becoming temporarily surplus to requirements and being traded.

India can expect more privatization of distribution.

Another future development, Rao thinks will facilitate trading is of regulators separating distribution wires from supplies - that is metering, billing and collection.

“Once this is done, we can expect a large number of suppliers (procuring electricity from competing sources) using the natural monopoly of the distribution wires at tariffs that may be well below those fixed by the regulator.

The ability to choose among suppliers will vastly improve customer service and lead to price competition. This will benefit consumers.” However, for this to be effective, Rao said that supply should not lag as much behind demand as it does today. Further, the issue of cross-subsidies and free power to some customers, he added, must be resolved so that the supplier is not left to bear the burden of shortfalls because of them.

“For instance, in the case of Mumbai where the regulator has given the choice to the consumer, the original supplier makes a killing by supplying large customers at good prices while others who cater to small households and the very poor, and used to cross-subsidize the unprofitable small consumers have now lost this ability and bear the losses of supplying these small consumers without any way to make up the losses from larger customers.

These other suppliers face huge financial burdens in servicing these consumers at subsidized rates without any matching compensation.

ASIAN POWER 9

OPINION

John Goss

john.goss@ceejay.com.hk

Caution urged on large hydropower dam projects in China

W

hen completed in 2015, the Xiangjiaba hydropower plant in China’s Sichuan Province will be the third largest hydropower plant in China, third only to the Three Gorges hydropower plant in Chongqing and the Xiluodu hydropower plant in Sichuan, which is also under construction. Reports say that around 640,000 hydro projects had been completed in Sichuan Province by the end of last year.

With the aim of supplying water to all of the water deficient areas within Sichuan province there will be 13 large and around 60 medium-sized hydro projects commencing over the next five years. It is thought that the province has an abundance of water resources; however many of Sichuan’s cities and regions suffer from relentless seasonal water shortages and pollution.

Many of Sichuan’s cities are located on the Tuojiang River which runs directly through many of these cities who obtain all of their water supplies from this river. However, in the dry season many of these cities will obtain their water supplies from water that has been stored in reservoirs. These crucial water storage projects use the water from the river which results in the volumes of water remaining in the river can be at times negligible and problematic.

A few years ago the Tuojiang River was severely contaminated following a major accident at a chemical plant upstream in Chengdu. The contamination left millions of residents in cities downstream without any safe river and tap water for almost three weeks.

There are so many cities and chemical plants along the river that pose potential safety hazards to the millions of people also living along the river that alternative supplies of clean water need to be found and delivered.

The constant growth and urbanization and industrialization of the cities cannot be prevented with many cities planning to expand their populations by at least one million.

However, these population increase plans are being hampered by a severe shortage of suitable clean water at many times in the year.

A planned irrigation project which involves the Xiangjiaba hydro electric power plant is currently waiting for approval from China’s central government. It has been estimated that some five million people in the provinces of Sichuan and Yunnan will benefit if the hydro project is given the ‘goahead’ signal.

Caution urged on further large dams Whilst supporters of large hydroelectric power plants in China promote these massive dams as effective solutions to the country’s power shortages, water irrigation and water levels, their critics are increasingly advising caution.

Concerns have been voiced which are aimed at the current hydropower dam construction activity on the upper reaches of China’s Yangtze River. Lessons of past large hydropower dam construction in China’s south-western provinces must be learnt in the face of mounting environmental concerns 10 ASIAN POWER

and resettlement controversies.

There are environmental and geological hazards to be considered plus there are the simmering tensions over the relocation of local populations and disputes among the people evicted to make way for the large hydro dams and reservoirs.

It is generally felt by officials in China’s Environmental Ministry who have commented in the Chinese media that they have been watching this large hydropower dam project and they are attaching much attention to the opinions of the Chinese media and various social interest groups.

Concern has been expressed over the construction of the Xiaonanhai hydro dam which is a controversial dam project.

The Environmental Ministry is urging local authorities concerned with this project to make careful decisions after thoroughly reviewing the various impacts of this divisive project.

Concerns about the Three Gorges dam The massive Three Gorges hydropower dam is also causing concerns in that since water levels in the Yangtze River dam and hydropower plant rose to its maximum level during 2010, the occurrence of landslides and other associated disasters have increased by around 70%, according to China’s Ministry of Land Resources.

Around 1.4 million local people have already been relocated from areas surrounding the reservoir to make way for this enormous dam and hydropower plant project on the powerful Yangtze River.

The ministry says that 5,386 danger sites linked to the project are now being monitored on a continual basis and remedial work is taking place on rock falls and landslides at some 335 locations around the lake.

However, some geologists have commented that damming up too much water in the reservoir carries a heightened risk of earthquakes and long-term damage to the Yangtze River’s ecology.

It has been estimated that some five million people in the provinces of Sichuan and Yunnan will benefit if the hydroproject is given the ‘go-ahead’ signal.

ABB Pte Ltd Business Unit Power Generation Tel: +65 6776 5711 Fax: +65 6778 5695

ASIAN POWER 11

FEATURE: JAPAN ENERGY

Nuclear power gets a second chance in Japan

Political sensitivity is at play at the moment but it will just be a matter of time before reactors will be back up-and-running, said experts.

D

ebates over as to what extent can Japan reduce its dependence on nuclear power were revived following the return to office of the conservative Liberal Democratic party (LDP) under Shinzo Abe. The new administration, to a certain degree has effectively killed off the idea of a non-nuclear Japan when it announced a review of the nuclear phase out policy of the previous administration.

While some may argue that a review of the nuclear phase-out is not necessarily tantamount to an effective termination of a non-nuclear Japan pathway, experts interviewed by Asian Power shared various reasons why a reverse commitment to nuclear energy is more likely to happen in the longer term. They are also in consensus that while nuclear energy may never regain its key role it once had, it will continue to account a significant share of Japan’s electricity for years to come.

What is the possibility of a nuclear phaseout in Japan?

To put it another way, what are the chances 12 ASIAN POWER

that Japan’s government can effect a quick restart of mothballed reactors?

Martin Adams, energy editor at The Economist Intelligence Unit (EIU) believes that Japan now looks less likely to abandon nuclear as Mr Abe’s immediate priority will be to get reactors back up-and-running.

“Mr Abe and his party are undoubtedly pro-nuclear.

He will want to restart reactors as soon as is feasible and will find ample reasons to do so. Mr Abe has already said that he wants to review the DPJ’s—itself somewhat wishywashy— long-term rejection of nuclear. He has even gone so far as to talk about building new reactors.”

Adams adds LDP’s ‘cozy’ relationship with big business will also give a big push.

If Mr Abe is going to revive corporate Japan, he notes that reliable and relatively cheap energy are going to be crucial. He also needs to convince foreign investors that Japan offers stable energy supplies, he said.

“Power utilities are suffering financially as reactors sit idle. Corporations are keen to see Japan’s nuclear reactors back in action

Nuclear power’s share of total electricity are expected to be around 2025% in 2030

as soon as possible. On top of this, fossil fuel imports are escalating Japan’s import bill and undermining its energy security.”

Platts report that one think tank, the Japan Research Institute, estimated last March that renewables could provide 28% of the country’s electricity in 2030, double the contribution from nuclear at that time.

But the same institute is now predicting that nuclear power could contribute at least 20% of the total electricity at that date.

“Analysts think that because Japan has succeeded in reducing energy demand since the 1980s, but especially since the Fukushima accident, demand will continue to decline steadily in a “natural” trend.

Cutting consumption is seen as the best long-term strategy and there are calls for increasing the target to a 40% reduction of demand by the 2030 horizon,” wrote Platt’s Tokyo correspondent Shota Ushio.

Nuclear Capacity Nuclear power’s share of total electricity is expected to be around 20-25% in 2030, versus 28.6% in the fiscal year ended March 2011, 10.7% in the year through March 2012, and a target of 50% before the accident. Abe has said he will allow completion of two nuclear power units under construction and construction of eight new units now on the drawing board. Some analysts believe that this could lead to a nuclear power share as high as 30%.

Aside from appeasing Japan’s top nuclear companies like Hitachi, Toshiba and

FEATURE: JAPAN ENERGY Mitsubishi, SAP Asia Pacific Japan director for utilities industry Phillip Vaughan believes that the government would also like to serve the interests of local power industry. “Japan has also been having territorial disputes with its neighbors recently, which would incline its interests towards industrial strengthening. In the end, however, based on current decisions, it appears the government believes concerns over nuclear power are more ideological than pragmatic.”

And what are the prospects for renewed reactor-building?

In the longer term, EIU’s Adams believes that the new administration will want Japan to build new reactors but plans may be slowed by a number of “anti-nuclear” hurdles. He says that for now, Mr Abe will be preoccupied with trying to win the upper house elections, which must be held by July. He may not wish to risk antagonising public opinion yet by pushing too hard on the nuclear issue.

Practicality-wise, the expert also notes that building a reactor takes half a decade or more. Work cannot even begin yet, Adams adds, as the government has not drafted its comprehensive energy strategy. “This may become clearer if the LDP wins the coming upper house elections. But the project to build more reactors could be vulnerable to the vagaries of Japanese politics and shortlived premierships.”

Frenk Withoos, ABB vice-president for power product and power system division, shared the same view adding that while the politicians are still sensitive now towards the public opinion, who overwhelming support the nuclear free direction, it is just a matter of time before the next nuclear station will be again allowed to be put online.

The newly established Nuclear Regulation Authority has submitted it first draft of new mandatory safety requirements and these should be finalized by mid2013. Withoos said that the expectation is that nuclear stations that do not fulfill new standards could potentially still be allowed to be started, as long as a plan is submitted and approved that details the actions that will be taken to comply with them.

Sea and the Sea of Japan between Japan, Korea, and China.”

Cahill notes that Japan was the third largest producer of nuclear power in the world before March, 2011. It also is the world’s largest importer of liquefied natural gas, second largest importer of coal, and third largest importer of oil.

SAP’s Vaughan, said that any measure to reduce or remove reliance on nuclear power would have the opposite effect and hurt Japan’s economy. Following the Fukushima tragedy, many countries had started to reconsider their use of nuclear power as a source of energy. Countries like Germany, for example, decided to off-line their nuclear power production.

Vaughan however notes that unlike Germany, Japan cannot obtain power from other sources or other markets as easily, much more in finding alternative sources. Vaughan said that perhaps, in the short term, gas fired peaking generation could help in combination with demand response programs. But the government, doesn’t seem convinced that this is a viable long-term option, he added.

Could Japan replace nuclear power with renewable sources?

EIU’s Adams believes that renewable energy’s share of the energy mix will grow only slightly this decade. Renewables, he said, will continue to be held back by several barriers most especially, a shortage of available land. The government’s ability to commit enough funds to drive rapid roll-out of renewables is also questionable, he adds.

“We forecast that renewables—including hydro, wind, solar and so forth—will remain a small part of Japan’s overall power supply in 2020.”

The Japanese government has set a gen-

Japan was the third largest producer of nuclear power in the world before March, 2011.

It also is the world’s largest importer of liquefied

erous feed-in tariff (FIT) that pays 42 yen per kWh ($0.47/kWh) for solar power; this has resulted in 1.4 GW of solar installations between April 2012 and November 2012, according to figures released by the Japanese Ministry of Economy, Trade and Industry.

METI has recently recommended that the country reduce the FIT to maintain 6% internal rate of return for solar projects it used to calculate the FIT in July, 2012.

Despite the potential for slight FIT cuts, Lux Research expects new solar installations to continue growing in Japan. But while it believes this will help the country reduce reliance on nuclear power, the research firm says it will not be able to replace nuclear for multiple reasons.

First, Lux Research’s Cahill notes that nuclear is a baseload while solar is peaking, which means that for solar to truly replace nuclear, the country would need significant energy storage capacity, which he says is still far from being ‘economically viable’ without an incentive of its own.

Japan’s Electricity Generation by type

Source: EIA International Energy Statistics

Economically, does it make sense for Japan to phase out nuclear energy by 2040?

“Certainly not,” says Edward Cahill, a Research Associate for the solar intelligence service at Lux Research while arguing that phasing out nuclear would require importing even more power and energy resources.

“This move would result in – and since nuclear plants have been put on hold, has already resulted in – significant electricity price increases, which is detrimental to domestic industries. Japan’s urgent need for energy has already coincided with disputes over resource-rich islands in the East China ASIAN POWER 13

FEATURE: SUSTAINABLE ENERGY

The hurdles of making energy sustainable in Asia

Developing Asian countries are geared up to provide sustainable energy to the remaining 19% of the total population living without electricity.

E

nergy consumption in Asia has been reported to have increased more than three times over the last decade and is expected to double over the next 20 years to match unprecedented economic growth and accelerated urbanization.

On the contrary World Energy notes that approximately 19% of the Asian population, or one in five people in the region, still live without electricity.

Population without electricity mainly represents the rural areas of the countries - there is only 73% rural electrification in comparison to 94% in urban areas. PricewaterhouseCoopers (PwC) senior manager Suman Ghorai said that almost all governments in developing Asian countries are geared up to provide electricity and clean cooking fuels through several Centre and State funding projects which are essential to curb poverty and achieving sustainable development but these are without challenge.

The era of green society Fossil fuels continue to dominate Asia’s to14 ASIAN POWER

tal fuel consumption accounting for more than 92% as of 2011 but experts believe that the era of green society has already come. Ghorai reckons that fossil fuels will continue to contribute in the same range during the next few years with China and India showing significant changes in energy mix and offsetting a sharp rise in other countries. “There is a declined trend in primary fuel consumption where fossil fuel consumption has decreased from 94% in 2001 to 92% in 2011 in China and 93% to 91% in India in the same period.”

Investments in sustainable energy Though there is a substantial opportunity for the investment in sustainable energy, challenges remain as to the details of policies, programs, guidelines and support currently under development in many countries, said Ghorai.

“Investors may have to face complex administrative procedures in most of the Asian countries. These procedures vary according to the country as well as according to technology, which implies a lot

Fossil fuels continue to dominate Asia’s total fuel consumption accounting for more than 92% as of 2011

of research on information for investors.

Moreover, delays for obtaining authorisations are not the same throughout the Asia, some countries offering much quicker procedures than others, for example, the Indian government has streamlined the process for certifying and rating solar technology manufacturers and has created a clearance mechanism whereby all business permits can be obtained simultaneously.”

Trade finance analyst Eugene Chen meanwhile notes that the trouble is most of the important players in the region are affected by financial crisis but he is glad to see that countries like China, India, and Japan have declared more green energy activities than before to promote clean power - especially Japan which was relying very much on nuclear power is now trying to switch to more green energies. In general, he sees that reluctance to promote green energy is mostly due to political reasons.

China on the lead for sustainable energy Data from Bloomberg New Energy Finance show that China is leading Asia in sustainable energy with total investments in the country amounting to $52 billion in 2011, which is marginally higher than the US with $51 billion. Ghorai however notes that the growth rate for Chinese investment is lower at 17% in comparison to USA’s 57%.

India enjoyed the sharpest growth in total investment, at 62% to $12 billion. Ghorai said that the Indian advance reflected

FEATURE: SUSTAINABLE ENERGY a sharp increase in the financing of solar projects under the country’s National Solar Mission, and rises in wind capacity addition and venture capital and private equity investment in renewable energy companies. Indonesia attracted the largest total investment at $1 billion, a fivefold increase over 2010. Indonesia was followed by Singapore with $767 million of investment, up seven times, and Thailand at $578 million, down 38%.

There were some surprisingly low figures, below the $100 million level in countries like Malaysia, which for several years was a significant player in biofuel, and Pakistan, which has seen increased interest in its wind sector but had fewer deals reaching financial close in 2011 than in 2010, said Ghorai.

Expansion plans for renewable energy The five countries of Indonesia, Vietnam, Thailand, Malaysia and the Philippines have targeted to install a total of 32GW of renewable power in the period 201125, with Indonesia the most aggressive at 12GW, and Thailand and Malaysia offering the most generous subsidies.

Investment in Thailand in sustainable energy has gone down by 30% in 2011 than the previous year. Countries like Afghanistan, Korea and Nepal are lagging far behind the other Asian countries in developing sustainable energy.

Trade specialist Chen notes that Australia should be a perfect country to introduce green energy including solar power and wind farm as it has a desert and large rural area which needs a separate power system to provide smart city services.

“So, if New Zealand can support its small neighboring countries with green energy why can’t Australia which is the strongest economy of the region.”

Chen adds that other tropical countries such as those sub-Sahara countries are good places for promoting green energy using regional development banks or world banks as coordinating centers but advises that it would be better to work together with the Chinese government which has a strong commitment in the economic development of the third world countries and whose solar power industry is suffering from a redundant capacity for export.

“A win-win possibility is on the hands of those officers who have planning capacity.”

quickly that while renewable sources are available and can contribute to this effort, they have yet to be crafted at the proper scale to meet the urgent need for electric power throughout Asia.

The case of Europe and North America Wersch notes that in Europe and North America the needs are very different. First, demand for electric power is growing slowly, if at all, and second there already is a large existing base of generation sources. “Therefore, these regions are able to integrate new sources of renewable energy incrementally, and as a replacement for existing fossil fuel capacity. As part of that effort, the governments in Europe and North America have established multiple mechanisms to encourage renewable power development, such as tax incentives, feed-in tariffs and renewable portfolio thresholds.”

Wersch expects a scaling-up of capabilities for renewable energy throughout Asia but for now, he notes that because of the urgent need for power, Asia also must pursue other forms of generation, mostly those using fossil fuel such as coal and natural gas.

According to PWC’s Ghorai, recent energy sector developments in India, Indonesia, Sri Lanka, Vietnam and China bring opportunities for improved livelihood through access of electricity and clean energy at urban as well as rural areas.

“The International Energy Agency (IEA) report states that with policy reforms that create incentives, adaptation of emerging

Indonesia, Vietnam, Thailand, Malaysia and the Philippines have targeted to install a total of 32GW of renewable power in the period 2011-25

technologies and innovative financing, renewable energy can be scaled up.

In the developed and developing energy markets, improvements in energy efficiency through investment in new technology can contribute annual energy saving of as high as $325 billion. Again, untapped hydro, wind, solar and geothermal resources offer vast opportunities for private investment to develop new projects to cater the future energy needs.”

Scalability, cost and government support There are many things that must occur to boost sustainable energy throughout Asia but the most important areas would have to do with scalability, cost and government support, said Alstom. First, renewable energy technologies need to increase their size and availability.

For example, the largest geothermal plants today only can generate up 330 MW, while a new coal or gas-fired plant typically is rated at 800 to 1,000 MW. Second, the cost of renewable energy is high, and other than hydropower can be two or three times higher than existing sources using fossil fuels.

Third, developers need to have the proper incentives from the government to reduce the inherent risk in many of these projects. “While costs for renewable power are expected to come down in the future, the pace of those reductions needs to accelerate if renewable energy is to make a larger, immediate contribution.”

Challenges Based on the observation of turbine supplier to the region, Alstom, development of sustainable energy in Asia differs significantly from that occurring in other regions such as Europe and North America.

Alstom’s SVP sales and marketing for APAC Wouter Van Wersch notes that there is a pressing need in Asia to build large amounts of generating capacity very ASIAN POWER 15

OPINION

Edward McCartin Indonesia to finally see more successful geothermal projects

I

nterest in the Asian power game has shifted to Southeast Asia for thermal and renewable power. These nations are mostly emerging markets with a mix of fuel options and underserved markets.

With 250 million citizens, a growing economy and natural resources in abundance, Indonesia presents untold opportunity, but the power sector has trailed the needs of the economy.

There are an estimated 28,000 megawatts of power potential in Indonesia, but the quantum that has been developed is a fraction of that.

There are an estimated 28,000 megawatts of power potential in Indonesia

Indonesia’s slow geothermal power growth The resource is domestic, it runs 95% of the time and it has no external fuel costs? Basically, geothermal is different to develop than thermal power. The skill required to find fuel is not typically in the toolkit of the traditional power companies, requiring drilling and an appetite/appreciation for the risks of drilling, and funding that can bear the significant costs of that work.

Work must be done on equity until fuel is proven to convince lenders to make loans. And development follows a series of phases to assure that expensive activities (drilling) are not undertaken unless likely success is demonstrated, and so a project may take many years to develop, which requires certainty of regulation, an attractive tariff for the successful developer and the capital to make it happen.

The lack of consistent regulatory regime Indonesia has lacked a consistent regulatory regime to attract investors. The geothermal structure in the 1990s attracted investment; developers served as contractors to the state oil company to develop steam to generate power sold to PT PLN, the state power utility.

Several projects closed financing and began construction (and some operation), but development was cut short by the 1998 Financial Crisis.

Thereafter, the government sought to vest regulatory control for the steam-fields in local governments. These attempts were unsuccessful in attracting investment as the only legal purchaser was PLN, which was unwilling to pay prices higher than for coal-fired power, despite strong government support for geothermal.

The Energy Ministry has since provided guidance to give geothermal developers confidence that PLN would purchase their power at tendered prices.

PLN has executed three PPAs, with more in negotiation. One project has drilled its first well, with more in process. Things seem to be moving as projects develop drilling plans and undertake the significant drilling and civil works that are needed for these projects.

Multilateral lenders have indicated that they support geothermal development, some being willing to make early stage capital available to developers, and banks are 16 ASIAN POWER

showing interest in providing financing.

Adopting feed-in-tariff Recently, the Energy Ministry adopted a feed-in tariff (FIT) from 10-17 US Cents/kWh depending on where the development is to take place, with the lowest tariff for Sumatra and the largest in Papua and Maluku.

Regulatory pronouncements have decreed for new tenders the FIT will set the price and bids will be evaluated only on technical and financial factors.

Views on the FIT have been mixed with some wondering if removing the objective test for the tender (power price) in favor of more subjective tests is prudent. Others question whether the FIT will benefit from the escalation provisions that PLN had been discussing with developers as under a 30-year PPA inflation can easily erode the economic viability of a project.

There are questions, but there is also momentum to move geothermal projects off the drawing board and into the reality so as to provide affordable base-load power from indigenous resources with limited fuel price volatility.

There is no substitute for success, and as these early projects achieve drilling success and commercial operation we should new players and financing coming to the market.

ASIAN POWER 17

FEATURE: ASIAN ELECTRICITY with other Asian firms,” says Graziano.

Tapping Asia’s exceptional growth potential in power See how power company Alstom is benefitting from Asia’s sustained growth in electricity demand.

W

ith Asia’s GDP growth driving the increased demand for energy, the need for efficient energy production and distribution is prominent now more than ever. Among ASEAN countries, Vietnam, Thailand and Indonesia are experiencing higher growth levels than their peers. With such a market as this, a sustained growth in electricity demand can not be disregarded. With this, it means that there is high demand to build large amounts of generating capacity with the ability to get to those who need it very quickly.

Asia’s growth potential According to Marco Graziano, Alstom’s senior vice president for the Asia Pacific Region, Asia represents the strongest growth market for energy in the world. Because of that rapid growth, the region is in need of the best technological solutions, especially to conserve limited natural resources. Alstom has managed to maximize Asia’s growth potential over the years. And although individual ASEAN countries contribute smaller percentages, as a whole, the order intake for these countries make up close to 20% of the company’s power and 18 ASIAN POWER

grid market.

Graziano claims that Alstom technology is among the most advanced and efficient in the world, and can provide Asian customers with innovative ways to meet their every demand, having had a long established presence in Asia. For instance, Alstom has been in India and Japan for almost 100 years and in Singapore for almost 50 years. The company has also participated in several key projects in power and grid including Three Gorges in China, Manjung #4 in Malaysia, and the 800kV UHVDC project in India.

Asia’s strategic location and favourable business conditions indeed prove attractive to companies like Alstom. In fact, the company has long established a power manufacturing centre in Surabaya in Indonesia, Tianjin in China and Vadadora in India.

Alstom also built a grid manufacturing facility in Kobe, Japan and engaged in a joint venture with PT PLN to manufacture transformers in Indonesia.

“Our customers in Asia continuously challenge us to develop even better, more efficient technologies to meet their needs.

This has lead us to invest in new facilities, increase employment and develop tie ups

Asia represents the strongest growth market for energy in the world.

The future of power The sound, strong growth in Asia is expected to continue in the coming years, predicts Graziano. Since there is increasing focus on environmentally friendly products and energy sources, there will be constant demand for the most efficient power and grid related equipment. He notes that the transmission grids are evolving into “Smart Grids” which are more efficient, self healing, highly automated, and investment optimizing – with the underlying driver being minimal impact on the environment. Grid interconnections between countries are also on the rise. According to Graziano, Asian countries have non-homogenous levels of development but there is significant growth in some new markets such as Myanmar. “We need to continue to place our energy in these growing markets, and areas of business with increasing demand to defend or increase our market share in this region.

To be cost competitive we will pursue our platform approach and develop whenever possible our local supply chain,” he adds.

And as Alstom continues set to leverage Asia’s exceptional growth potential, flagship projects are to rise in the region.

One such project is the KTX in Korea, the country’s first high-speed rail. “In Korea we have installed over 20 gas turbines as well as installed 50% of existing boilers and hydro turbines. Apart from that countries like Singapore prove to be a key reference for the neighboring countries. Alstom is currently constructing 4 gas plants in Singapore and we have a strong grid and transport footprint there too,” reveals Graziano.

Investing in the future workforce is also important for Alstom. In Thailand, the company is working with Kasetsart University in developing and growing the key talent in Asia. In Malaysia, Alstom signed a memorandum of understanding with MIGHT-METEOR for Malaysia’s LEADER Series Programme focusing on human capital development in the country. “We are always looking for ways to engage the young talents of the future,” says Graziano.

Investment in key talent pays off whenever Alstom has major projects. “Large Hydro projects such as Son La in Vietnam (2400 MW) make us particularly proud.

This plant was on budget and delivered ahead of schedule and constitutes one of our best references in the region. We are also very excited with the recently won Lai Chau project, the 3rd largest hydro power plant in Vietnam,” he adds. The ASEAN market has the benefit of proven technology from the more developed markets, and as companies move their manufacturing to Asia, they also have the benefit of cost optimization. “So overall, these markets are growing and very dynamic,” concludes Graziano.

CO-PUBLISHED CORPORATE PROFILE

OWL Group swoops across the Asian Region Managing Director, Tony Segadelli, shares OWL’s strategic plans to take South East Asia under its wings. bination that will provide winning results.

Tony Segadelli - Chief Engineer / Managing Director

T

he OWL Group is a new company in the power industry. However, in its three years of existence, it has rapidly grown to become one of the largest high-end engineering consultancies in SE Asia.

Your competitors named their companies after their founders; why did you choose to name yours after a bird?

Owl is the bird of wisdom, and, likewise, our business is knowledge-based. Selecting a bird, rather than my name, emphasizes our focus on delivering services, working with clients and working within the community. As the founder, I provide the leadership and direction, however, it is our employees that are the most critical in delivering the results.

What are the key differentiators between OWL and your global competitors?

Like our competitors we perform projects throughout the project cycle from development, through construction to operations, plus special assignments for both renewable and fossil fuel projects.

Where we differentiate ourselves is that we feel that we understand the market better than anyone else. Southeast Asia is where OWL started, and we have employees from around the region. This means we are able to provide solutions that fit the local environment rather than solutions that only work in the West.

Another key differentiator is our flexibility and focus on clients. This can take many forms from going the extra mile for the client to breaking the mold in

terms of structuring contracts (e.g. risk sharing) and even developing projects as equity investors.

Why did you choose the Philippines as your latest area of expansion?

The Philippines is very much a growing market, but as we have observed, there are power shortages in many parts of the country. The main fuel in the Philippines is coal and OWL’s engineers have significant experience with this fuel, including being Owner’s Engineer for the Philippines largest coal-fired power plant in the 1990’s.

The Philippines is looking to become an LNG importer. In Thailand 75% of the fuel mix is natural gas and so OWL has significant experience with CCGT plants.

Also, our regional experience with renewable energy sources including biomass, biogas, solar and wind is readily transferable to the Philippines because we understand the issues related to developing these types of projects in the rural environments of rapidly developing countries.

We believe that a good knowledge of the technologies widely used in the Philippines combined with a strong understanding of the culture is a com-

“Where we differentiate ourselves from the global companies is that we understand the market better than anybody else.”

ASEAN is currently following a European Union type integration which is called the AEC (Asian Economic Community). How do you expect this to affect business in the region?

Although it has similarities with the EU, the regional banks learned difficult lessons from the 1997 economic crisis, which has resulted in over $90 billion in liquidity in the Philippines and Thailand alone. As long as a project has strong fundamentals, financing is typically available. OWL is able to provide assistance on ensuring the technical viability of a project either as Owner’s or Lender’s Engineer.

The AEC will lead to a better flow of people and skills, which is part of OWL’s growth strategy because we believe in growing ASEAN as a whole, rather than cherry-picking countries. The region has been integrating the power industry for more than a decade, and our engineers have been involved in some of the key projects that are enabling this including working on Cambodia’s first transmission line, which was supplied from Thailand, plus crossborder hydropower deals. Another regional change is the emergence of Myanmar from decades of isolation.

How is OWL positioning itself for this change?

We have been in discussions with potential clients in Myanmar for quite some time and have recently won a project there and are expecting a lot more work to follow. The government is very keen on bringing in foreign direct investment, and we are able to provide expertise in terms of planning and implementing projects. The projects we are in discussions about include coal, wind, solar and transmission opportunities.

OWL currently has companies in Thailand, the Philippines and Hong Kong. What are your plans to penetrate other parts of the region?

Our long-term aim is to be the HSBC of the power engineering consulting sector (i.e. to be the region’s local energy solution provider). As part of this we are looking to set up an office in either Jakarta, Singapore or Kuala Lumpur in the next 3 years, however, the exact location will depend on client and project opportunities.

CONTACT Tel: (66) 8 4637 2672 Email: tony.seg@owlenergy.biz http://www.owlenergy.biz ASIAN POWER 3119 ASIAN POWER

OPINION

Phillip Vaughan A fearless forecast on what to expect of Asia’s power

M

Currently, the Asian power industry is caught up in a headlong rush to expand supply and meet power demands.

arket change has been a force for evolution in Asian power companies in this new millennium. Reviewing how these forces are playing out leads to some interesting conclusions about where companies and the industry as whole is heading.

Utilities are often struck along jurisdictional lines. For example, a municipal water business operates in a municipality.

However, this jurisdictional scale is not necessarily an efficient business scale. In fact, large scale appears to be the key to competitive advantage.

In the United States, since deregulation began in the 1990’s, the utilities industry has shrunk from 100 publicly traded companies, down to 50. As energy demand slumps due to efficiency measures, a new round of consolidation may see the number being halved to 25 in a few years from now.

Higher Investments Earlier this year, Tim Winters, a Wall Street analyst had this to say: “The utility industry is going to continue to consolidate. One of the bigger drivers is that investment hurdles are higher. Duke and Progress merged in June 2012 to improve their earnings. Smaller utilities are going to continue to be consolidated into larger ones for economies of scale.”

We don’t know yet what is the natural business scale for power companies. Perhaps there will be organizations of more than a million employees.

Currently, the Asian power industry is caught up in a headlong rush to expand supply and meet power demands. Even mature markets have seen plenty of activity as the industry looks for more sustainable power solutions.

However, just like the seasons change, inevitably this phase will end and power companies will need to demonstrate operational efficiencies. In Australia there are already reports of a cooling demand for power generation as home generation and energy efficiency start to take effect.

It is likely that privatization will continue in Asia, because it is attractive to governments. It provides money to state coffers and it allows government to slip into the role of regulator and not operator, which is the natural role of government, i.e., to govern.

Some Utility companies are good at running their electricity retail businesses or their power generation businesses, or whatever the case may be. Privatization provides the lease both to buy, and be bought by, other players.

Successful performers attract investors and the capital value of the enterprise rises. The opposite is also true and weak performers will lose value. This effect of money following value is what makes markets efficient distributors of capital. Strong players will buy weaker ones.

20 ASIAN POWER

However, to truly extract value the companies must be synergized and harmonized. This means that those operations cannot easily be de-merged. Consolidation is a one-way operation.

Once decisions are taken to privatize a business or to liberalize an industry sector, then natural forces inexorably lead to certain outcomes. These include consolidation, business efficiency and brand building.

Few players The inevitable outcome is an industry with a few very large players. Today there are around 4,000 medium to large utilities. In the next couple of decades this could come way down perhaps to less than a hundred. There are only around 40 car makers in the world. There are only 9 tobacco companies. There are only two PC chip suppliers.

The long term strategy lesson here is not to think about where is the next power project, but rather what does the player landscape look like? Who are the natural winners and losers?

What is the opportunity for partnerships and alliances? A small investment in this direction can have long term benefit.

ASIAN POWER 21

OPINION

Peter J. Rae Secrets to success in hydropower development

D

evelopment of hydropower projects in Asia, especially small and medium scale, has received significant interest over the past decade as important advantages for power system generation expansion are being recognized.

Importantly, hydropower provides predictable long term energy cost, after the initial capital investment during construction is completed.

Secondary and dynamic benefits should provide incentive to encourage further development although many power systems have not yet allowed for monetization of the value by private power companies.

Individual investors could, however, capture part of the benefits by development of complementary projects such as wind, solar, or pumped storage hydropower.

One of the keys to success for hydro development is to obtain a clear understanding of how the project benefits can be maximized and then to capture as much of the value as possible for the investor.

The obvious first step is to select the optimum installed capacity and project layout that will give the best returns for the investment. However, the developer should also consider conjunctive operation with other projects and the potential secondary benefits, both of which can add value.

Conjunctive operation can include the shared use of reservoir or head pond storage among several projects to allow greater peak period generation. Sharing of operation and maintenance facilities will also allow for cost savings. Operation of other renewables can be improved if some storage can be developed, again to transfer off peak energy to on-peak periods.

The final project turn-out cost, comprising development and construction, will largely determine whether the project can be financially successful. An important part of this cost is the time required for construction, especially if delays are incurred because of the effect on direct construction cost, interest costs, and loss of generation revenue.

The cost structure for the hydropower project is very different from a typical gas turbine or steam turbine thermal plant. Hydropower costs have a large component affected by site conditions and involve a major civil works contract.

The value of the electrical and mechanical equipment package is normally well under half of the project cost.

This is unlike most thermal power projects where the majority of the cost can be fixed through contracts for equipment supply, EPC construction, and long term fuel purchase.

Construction period uncertainty can arise from design, geological conditions affecting the civil works, and the performance of the construction contractor.

Of these, design and geological uncertainty is best mitigated by wise investment during the development 22 ASIAN POWER

period when site investigations are performed and the preliminary design of the project is developed.

A key for successful development is to undertake appropriate studies and investigations early in the project development. Well-conceived investments prior to start of construction will provide for lower construction costs, less potential for delays and cost overruns, and significantly lower risk of construction claims that would increase cost through disputes.

Contractor performance can be a significant cause of delay and cost overrun during construction. Many causes can be identified for poor performance of contractors, including difficulties with weather, coordination of the work, labour disruption, and material shortages.

The occurrence of any difficulties by the contractor will normally result in construction claims to the owner as the contractor attempts to preserve their financial position and divert risks.

A key for success is to ensure that the correct contractor is selected with a well-qualified and appropriate management team. The low-bid tender may not provide for the lowest cost project when the effect of construction delays and cost claims arise.

It is better for the owner to select a contractor that can provide a strong management team that has relevant experience in similar conditions. Any increase in cost at the tender evaluation stage will likely be more than offset by savings in additional costs and delays during construction.

Another key for success is to ensure that the contract packages prepared for the project are well defined, precise, and realistic. It is important that the owner enter into the contracts with a view to avoid construction claims by ensuring that both parties to the contracts clearly understand their responsibilities and roles as well as the conditions of the site.

One of the keys to success for hydro development is to obtain a clear understanding of how the project benefits can be maximized.

ASIAN POWER 23

The key to cost-effective, reliable and safe power supply ENEAS solutions for distribution automation www.siemens.com/eneas

As technology leader in the field of energy automation, Siemens provides solutions for current and future distribution grid challenges. Whether to cost-effectively automate and operate primary equipment or to increase supply reliability and power quality in order to quickly adjust changes in the distribution grid: ENEAS solutions for distribution automation have proven effective in numerous applications worldwide. They are installed where it counts – with automation equipment directly in the field.

In addition, new superordinated applications such as automatic self-healing, voltage compensation and quality measurement make energy systems safer and more reliable.

As a result, all fault detection, localization and correction functions are covered. Also, bidirectional load flow operation and active control are supported – allowing for the integration of distributed generators and electric vehicles.

All in all, ENEAS solutions in distribution grids ensure energy supply with maximum reliability.

Answers for infrastructure and cities.