By Sunil Krishna
Impact of the recession on utilities and the steam turbine market
A shortage of capital in the present climate is a major problem area for utilities across the world, including Europe. There is some doubt on whether investment will come forward in a timely manner to keep pace with the future power demand. Debt and capital commitments play a prominent role in funding the operations and growth of utility companies. Although the debt markets remain open to most major utilities, they are available at a higher cost. In raising funds through the equity market, there are higher revised estimates for the equity market risk premium. The slump in industrial output has also dampened energy demand, implying lower sales revenues for the utilities. Several utilities across Europe are reevaluating their investment programs. Spanish utilities have announced investment cuts totaling about €30 billion, or 44% of their planned spending. E.On has announced a downward revision of their investment plan by about €6 billion or just fewer than 17%, while ENEL and Vattenfall have announced investment cuts of 27% and 5% respectively. Under the given scenario, new power plant orders in Europe are likely to fall in 2009, although construction works on projects underway are expected to continue. This implies a downward revision for new sales of steam turbines for in 2009.
Steam turbine market overview
The steam turbine market has undergone a period of strong expansion in recent years on the back on a strong expansion in combined cycle gas turbine plants and a renewed interest in coal-fired generation. The market is entering a period of correction as previous levels are not sustainable in a climate of economic contraction and growing problems with obtaining finance for large projects. The steam turbine market in Western Europe has undergone a period of very healthy growth in the past few years. Utilities and IPPs alike invested heavily in combined-cycle power stations and, increasingly, in coal-fired generation which was experiencing a resurgence in Western Europe. Frost & Sullivan expects order levels in the near turn to be reduced significantly due to the economic downturn as many utilities, whilst not actually halting investments, pursue a strategy of delaying some investments, partly for financing reasons and partly also in expectation of somewhat more competitive price levels in the future. The Central and Eastern European region with its growing power demand and under capacity, present significant opportunities for new investment in power. Central and Eastern Europe has considerable coal resources and coal fired power generation is expected to account for a majority of the new build projects in the medium to long term. The region would need to replace a huge amount of ageing capacity of coal fired plants in order to comply with the Large Combustion Plant Directive. A number of Western European utilities have also expressed interest in constructing new coal fired plants in the region. Large scale investment may however be hampered by slow progress in the privatisation process. There is also risk of a general deterioration in the investment climate and concerns on availability of new credit, brought about by the economic downturn. However, the economic uncertainty is not the only problem and the steam turbine market faces other challenges. Frost & Sullivan takes a closer look at the steam turbines market in Europe in this time of uncertainty.