'Second-Tier' EMs Primed For Gas Power Growth

BMI View:  Ongoing consolidation in the power turbine manufacturing industry will leave the companies that emerge better placed to capitalise on growth in gas-fired capacity in middle- to low-income power markets. While growth in gas-fired capacity in many developed markets is likely to remain tepid, there are vast opportunities in markets such as Saudi Arabia, Mexico and Nigeria. 

Middle- to low-income countries hold significant opportunities for manufacturing companies in the power sector and will drive global demand for gas turbines. Our view is predicated on the untapped demand for electricity in emerging markets and the potential for the expansion of thermal power capacity, as demographic and economic fundamentals drive electricity demand higher. While China and India will undoubtedly be the biggest sources of new demand - many 'second-tier' markets will also need new turbines in order to utilise their gas (and coal) resources.

Amongst these second tier markets the potential for growth in gas-fired generation is significant, albeit not on the same scale as in China or India.

Gas To Grow Globally
Global Growth In Gas Generation - By Region (TWh)

BMI View:  Ongoing consolidation in the power turbine manufacturing industry will leave the companies that emerge better placed to capitalise on growth in gas-fired capacity in middle- to low-income power markets. While growth in gas-fired capacity in many developed markets is likely to remain tepid, there are vast opportunities in markets such as Saudi Arabia, Mexico and Nigeria. 

Middle- to low-income countries hold significant opportunities for manufacturing companies in the power sector and will drive global demand for gas turbines. Our view is predicated on the untapped demand for electricity in emerging markets and the potential for the expansion of thermal power capacity, as demographic and economic fundamentals drive electricity demand higher. While China and India will undoubtedly be the biggest sources of new demand - many 'second-tier' markets will also need new turbines in order to utilise their gas (and coal) resources.

Gas To Grow Globally
Global Growth In Gas Generation - By Region (TWh)

Amongst these second tier markets the potential for growth in gas-fired generation is significant, albeit not on the same scale as in China or India.

Consolidation: Laying The Foundations For Global Expansion

We also emphasise that weakness in demand for gas-fired capacity in developed markets has triggered a wave of consolidation in the turbine manufacturing sector. As such, we believe many of the manufacturers that have emerged from the consolidation process will increasingly focus on emerging markets in order to offset weak demand for gas turbines in regions like Europe - at least until the policy environment and the project economics are more favourable to gas-fired capacity.

General Electric (GE)'s purchase of France's Alstom is a good example, enabling the US company to expand its global footprint ( see 'GE's Alstom Acquisition: Steaming Ahead With Growth In Gas', June 24 2014). We have also seen a host of other companies make similar strategic acquisitions in recent months (see table below).

Consolidation In The Turbine Sector
Buyer Business Unit Purchased/Partnered Date Price Paid Competitive Advantage
General Electric Alstom Jun-14 USD10bn Expands GE's global footprint, gives it large installed global capacity base
Siemens Rolls Royce Jun-14 GBP785mn Smaller gas turbines for O&G industry and DES
Mitsubishi Heavy Industries Hitachi Formed a 63/35 JV. Started Operating Feb 2014 na Targeting gas and coal-fired generation equipment market
Shanghai Electric Ansaldo Energia Announced in May 2014 USD400mn for 40% Establishing JV operations in China to target the Asian market
Mitsubishi Heavy Industries Pratt & Whitney Power Systems Bought from United Technologies in May 2013 na MHI can offer small and medium-size aero-derivative engines
Source: BMI Research

Manufacturers:  Putting Energy Into Emerging Markets

As many of these newly-formed manufacturers seek out opportunities in second tier markets, we highlight that the long-term outlook for global investment in traditional capacity is bright. Global gas-fired electricity generation will grow at an annual average of 3.8% between 2014 and 2023 (including growth in China and India). The region that will register the biggest average annual growth in gas-fired capacity will be Sub Saharan Africa (SSA), registering growth of 11.4% between the same time period (albeit from a low based).

Using our forecasts, we have used the size of the increase in gas-fired generation (in TWh), the 10-year average annual growth rates and gas' contribution to the energy mix to select the most attractive markets for gas turbine and equipment manufacturers in four key regions.

SSA: Nigeria is likely to register the biggest expansion in gas generation in SSA - underpinned by the government's power sector reform drive and huge untapped demand for electricity ( see 'Opportunities For Resolute Power Sector Investors', June 23 2014). Cote d'Ivoire is forecast to be Africa's second largest gas-fired electricity generator as it attempts to add 150MW of new power capacity each year. Ghana is also looking to boost gas-fired capacity in an effort to curb economically damaging electricity shortages and monetise gas from its offshore Jubilee field, although setbacks during the development of gas facilities makes the timeline for expansions uncertain ( see 'Ghana 1,000: Energizing Gas Supply Diversity', May 12 2014). 

Top Gas Power Growth Markets
Gas Generation By Country (TWh)

Asia: We forecast that thermal generation will dominate the energy mix in Malaysia to the end of our forecasts period in 2023 - underscored by plans to develop two gas-fired plants with capacities of between 1,000-1,400MW by 2018 and 2020 ( see 'Thermal Energy To Remain Dominant', July 24 2014). Meanwhile, Thailand will register growth in gas-fired generation even as its attempts to diversify its energy mix because of concerns about its dwindling domestic gas reserves ( see 'Power: Gas Down, Coal And Imports Up', November 11 2013).  

Latin America: Growth in gas-fired capacity will be driven by Mexico, with energy sector reform and efforts to establish the midstream infrastructure needed to utilise US shale gas supporting our forecasts for 6.6% average annual growth in gas-fired generation. Elsewhere, the proposed addition of over 20,000MW of new gas-powered capacity ahead of September's A-5 electricity auction demonstrates Brazil's efforts to cut its reliance on hydropower and wind - for capacity, not for generation ( see 'Natural Gas To Play A Larger Role', July 24 2014).

MENA: The expansion of gas-fired capacity in Saudi Arabia will be critical to efforts to preserve lucrative oil for export. Expansion will be backed by government infrastructure spending, although the issue of subsidy reform will likely have to be addressed to make the exploitation of domestic reserves commercially viable ( see 'GCC: Expansion, Diversification, Efficiency', April 17 2014). Meanwhile, although recent political upheaval has deterred investors and disrupted upstream activity in Egypt, gradual subsidy reform could incentivise investment in gas-fired capacity ( see 'Energy Subsidy Reform: Piecemeal But Proceeding', April 14 2014). Iran could also register huge growth in gas-fired generation, with opportunities emerging should rapprochement with the West prove successful.

The opportunities on offer in these sectors are vast. We highlight, however, that there are three main factors that turbine manufacturers will have to consider if they are to successfully enter and expand - not just in emerging markets, but also in developed markets. 

  • Manufacturers will need to provide middle- to low-income markets that utilise both coal and gas with steam turbines. While this analysis has focused on gas-fired capacity, many of the markets included in our coverage will also rely heavily on coal over our forecast period. This will be particularly prevalent in Asia, where countries like Vietnam, Thailand, Bangladesh and Indonesia will utilise coal until they can monetise their own domestic gas reserves or install necessary liquefied natural gas (LNG) import infrastructure to bolster growth in gas power.  

  • Distributed Energy Solutions (DES) will play a bigger role and boost demand for highly efficient, small-scale gas turbines. DES present a major threat to the traditional utility model in many developed markets ( see 'Distributed Energy Solutions: Gaining Traction In Mature Markets', May 13 2014). Utilities have historically generated revenue by investing in large-scale generation capacity to meet growth in electricity consumption. Small-scale, on- or off-grid solutions, such as rooftop solar, undermine this business model. In this context, we expect demand for large gas-fired capacity in developed markets to remain tepid but opportunities will emerge in the DES segment. Growth in small gas turbines that can be deployed close to the point of use is already occurring in Germany, and it is notable that Siemens has purchased a Rolls Royce unit that can meet that demand.

Low Electrification Rates To DES Turbine Offering
Electrification Rates In Selected African Markets (%)

Similarly, we expect demand for DES to grow in emerging markets where there is insufficient grid infrastructure (see chart above). GE's decision to establish a Distributed Energy unit that will focus on the under-electrified African market underscores this potential ( see 'SSA And General Electric: Primed For Growth In DES', June 17 2014).

  • Turbines will need to be very flexible in order to complement intermittent renewables capacity. Our forecasts for rapid growth in global renewables capacity  entail that highly flexible gas-fired capacity, which can be ramped up to full capacity very quickly, will be necessary to overcome problems associated with intermittent wind and solar. GE, for example, announced that its 9HA gas turbine could reach full power in 30 minutes and could be 'turned down' to run at 40% of maximum capacity. The company is likely to compete fiercely with MHI and Siemens in this segment. The US market will likely be the focus of much competition due to low gas prices.

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This article is tagged to:
Sector: Oil & Gas, Power
Geography: Global, Mexico, Nigeria, Saudi Arabia
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