Not so long ago, no power industry conference was considered complete without some investment analyst or other giving us the benefit of his wisdom, very often pointing to Enron as the model of how to do business in the liberalised electricity markets or projecting immediate massive growth in microturbines as the next big thing. Recent experience has taught us to treat these self-proclaimed gurus with a good deal of healthy scepticism.
“If we’d listened to the analysts we’d now be an IT company”, Klaus Voges, head of Siemens Power Generation told his guests during a dinner held for customers in the course of PowerGen Europe in Milan. Ignoring the analysts’ advice to jettison the mundane business of making power stations and to focus on what used to be seen as the more high-margin and glamorous areas of telecomms and IT has turned out to be a very good strategy. For the past couple of years power generation has proved to be one of the most profitable parts of Siemens, helping to offset the huge losses on the IT and telecomms side.
At a press conference during the same PowerGen show, Michael Dietrich, executive director, Siemens Power Generation, Europe, Middle East, Africa, India, commented that last year, Siemens Power Generation “produced some of the best results in all of Siemens AG” and in the first half of this fiscal year “we were again at the head of all operating groups of Siemens AG in terms of results and business volume trends”, with earnings 220 per cent higher than the first half of last year. Margins (in terms of profits (before interest, tax, amortisation) as a percentage of sales) are also looking healthy, projected to be getting on for 16 per cent for the first half of 2002.
This is an extraordinary turnaround and these are remarkable numbers for a business which has up until relatively recently been notoriously difficult to get decent returns from, with the notable exception of GE, which last year recorded a margin of some 24 per cent.
Undoubtedly a contributor to this upturn in power profitability has been the US gas turbine boom, which took everyone, including, of course, the marketeers and analysts, completely by surprise. With the bursting of that particular bubble – and the recent cancellation of the Heritage H system project perhaps a sign of the times (see news) – it will be difficult to maintain these levels of earnings in the future, even with the expected recovery in the Asian markets.
Nevertheless, being in the conventional power plant business does not look as financially foolhardy and unrewarding as it used to be. And it could be that ABB, which did appear to follow the analysts recommendations and did indeed transform itself from a heavy-engineering company and into an IT provider, may occasionally look back nostalgically to its days as a supplier of big power plants.
A couple of years ago ABB took a high profile step into what it called “alternative energy”. The company says the strategy is intact, but the business seems to taking a good deal longer to materialise than expected. What was anticipated to be a cornerstone technology, Windformer, has been “put into hibernation” because current blade materials have turned out to be inadequate at the kind of turbine sizes originally envisaged. Another key element of the strategy was microturbines. But market projections for these have proved wildly overoptimistic, with one indicator being that the share price of Capstone, a major player in this sector, and once an analysts’ favourite, is now down to around the $1.50 mark (compared with $100 less than two years ago).
Rather unpredictable boom and bust cycles for individual generation technologies and for various regions of the world seem to be an inescapable feature of the power sector. But what we can say with certainty – and without any prompting from analysts – is that over the long term the power plant business must inevitably continue to grow simply as a function of the inexorably rising demand for electricity worldwide.
Nuclear: Finnish but not finished
What sensible people the Finnish parliamentarians are, or at least the 107 who voted in favour of ratifying the “decision in principle” which paves the way for building a fifth reactor in Finland (see this month’s news).
The vote, coming at the same time as TVA’s decision to recommission Browns Ferry 1 after 17 years in mothballs, is being hailed as a turning point for the world’s nuclear industry, which has not seen anything like this in years.
But it remains to be seen how the arguments that have won the day in Finland play elsewhere. Within the Finnish context, with the country’s very energy intensive industrial base and high dependence on imported energy – much of it from Russia – nuclear power makes very good sense, particularly as the Finns also take their Kyoto commitments very seriously.
Finnish experience with nuclear power to date has generally been extremely positive. It already accounts for about 30 per cent of the country’s electricity and the country’s four existing reactors have consistently been among the best performing in the world (as, for example, recorded in the load factor statistics collected over the years by our sister magazine Nuclear Engineering International). Finland is also, as yet, the only country in the world to have firm plans in place for dealing with high level nuclear waste, which must considerably help the nuclear cause.
There is of course a long way to go before Finland’s fifth reactor goes into operation, which will not be before 2010. There are some difficult choices ahead, eg on site, reactor type and size, and vendor, as well as some ambitious financial engineering to be done.
However if the fifth reactor, which could be as big as 1600 MWe, does get built it will demonstrate that in a well balanced diversified national energy mix there is still a role for large centralised clean power plants, alongside small distributed systems, kitchen-scale CHP and the renewables.
