international energy markets: AES’ Paul Hanrahan on how his company finds opportunity overseas

If the news doesn’t include the word “worldwide” it won’t make headlines anymore, at least that’s how it seems. Consider this quick sample of recent deals:

When GE Energy launched its new corporate initiative “ecomagination” in December 2005, it began in the U.S. then outlined the Europe-specific aspects of the initiative in Germany. Next stop, China in May of 2006. In Africa, GE Energy will supply equipment and services for five power plants in Nigeria that will add more than 2,000 MW to the country’s electric grid.

Plug Power and IST Holdings were awarded a $3 million grant by the International Finance Corporation for the purchase and distribution of fuel cell systems throughout South Africa.

Japanese conglomerates Mitsubishi Heavy Industries and Toshiba competed with GE and the Shaw Group for Westinghouse, which is owned by the British Government through British Nuclear Fuels. Toshiba won.

Electricité de France SA, Europe’s largest utility, is the largest power distributor in Britain, owns 45 percent of Energie Baden-Wuerttemberg AG in Germany, and agreed to buy an Italian utility in partnership with a Milan utility.

Scotttish Power is selling its U.S. utility, PacifiCorp, to Iowa-based MidAmerican while considering a merger with German energy giant E.On.


AES President and CEO, Paul Hanrahan, in Africa with colleagues at the Limbe power plant in Cameroon Click here to enlarge image

The Russian power sector is once again expected to open soon to foreign companies, although the country’s disruption of natural gas supplies to the Ukraine in early January could spiral into a wider energy crisis and sour relations with Russia once again.

According to a Dec. 13, 2005, article in the International Herald Tribune, energy industry bankers and analysts say that with the stepped-up battle for the world’s energy resources, deals made in 2005 may pale in comparison with 2006.

While these market opportunities are irresistible, they are also complex and, well, dangerous. How can U.S. energy companies benefit and manage risk, or should they even play in this game at all? To get a glimpse at international opportunities for U.S. energy companies, we spoke with the president and CEO of one of the world’s leading power companies, with three top analysts in the energy sector, and with a consultant who worked in one of the ex-Soviet bloc countries. And finally, from regular contributor Bob Fesmire, a little history of England’s energy markets.

AES, with headquarters in Arlington, Va., operates in 26 countries on five continents-at last count-with capacity to serve 100 million people. The company is only 25 years old but it’s already gone through its growth spurt and turnaround program.

Paul Hanrahan became president and CEO of AES in 2002 to lead the company in its turnaround period. Prior to that, he served as chief operating officer responsible for business development and the operation of electric utilities and generation facilities in Europe, Asia and Latin America. He spoke with us about his company’s plans and capabilities and why AES is successful.

Paul Hanrahan, president and CEO, AES Corporation, on how his company finds opportunities overseas

EL&P: According to your website, AES is one of the world’s leading power companies today. Is that measured in megawatts produced or by financial metrics?

Hanrahan: We look at it as a combination of the number of megawatts produced through our generation businesses and the number of customers and people served by our distribution companies. Through our generation facilities and utilities, we have the capacity to serve roughly 100 million people worldwide, which makes us one of the largest in the world. Platts does an analysis that looks at many different metrics and they ranked us as No. 4 globally among independent power producers. So whether we’re No. 1, 2, 3 or 4, we’re at the top.

EL&P: You took over after AES ran into trouble a while back. What makes your turn at the helm different?

Hanrahan: In the past, AES was really a victim of its own success. We had a lot of wins, we had a lot of new businesses added, but what we didn’t have in place was a deep enough bench, with the numbers of people needed to manage all those businesses well. So our focus, more than anything else, has been on putting the right people in the right places, developing them and adding more people with the right management skills. We really do now have a cadre of what I call experienced and capable “global utility executives.” They’re able to go into places all over the world and be effective. The real focus for us now is developing our talent, hiring new talent and making sure that we have a deep enough bench.

EL&P: The company is organized into four regions, North America, Latin America, Asia and Europe, Middle East and Africa, each headed by a regional president. Is this a new way for AES to run its business?

Hanrahan: The exact organization is different for us, but we have generally been organized on a geographic basis.


Morning in Almaty, Kazakhstan. Click here to enlarge image

What we did after I took over, was to go into a mode where we were organized along business lines. We had one generation group and one distribution group. We did that to focus on improving and upgrading the performance of our businesses. After following that model for a couple of years, we have now shifted to our current regional organization, which better positions us for growth in addition to improving the overall performance of the businesses.

What that really does for us is it allows our people to focus on expanding their existing businesses and to take advantage of existing platforms that we have out there for growth.

On top of that, we’re better able to leverage our knowledge of the regions. It’s the understanding of the risks in those regions and how to mitigate them. It’s an organizational structure that’s designed to allow us to grow but to do it in a way that we really do acknowledge and handle risk better.

EL&P: AES operates in 26 countries today. Which markets do you think will be the strongest in the next five years?

Hanrahan: There are really four areas that we have looked at where we think there’s a lot of potential.

North America would be one. There’s a need for more greenfield capacity, particularly solid fuel-fired. It could be coal-fired or other solid fuels. That’s an area in which we have a lot of experience and a real competitive advantage here in the United States. In addition, we have a number of plants with different technologies, which gives us flexibility and another competitive advantage.

The next would be central Europe. In central Europe you’re seeing continued privatization of generating plants and distribution companies, in addition to the need for more greenfield capacity, particularly solid fuel-fired, like our project in Bulgaria that we just secured financing for in December.

Finally I’d say the Middle East is an area where we’ve seen some growth, maybe not as big as the other markets, but I’d mention countries like Oman, Qatar and Bahrain, which could use plants that combine power and water production. They need desalination facilities. When you combine the two it’s a very efficient process.

EL&P: For desalination, are you talking about nuclear plants or large gas-fired?

Hanrahan: Generally, we’re talking about large gas-fired because gas is relatively cheap in those regions. You are essentially using a waste heat from the condenser to convert sea water into steam. Essentially it’s boiled then condensed, and you produce fresh water. It’s all gas, sized at about 400 to 700 MW.

EL&P: What makes the Corporate Development Group so effective at identifying new properties for AES?

Hanrahan: The regional organizations are focused on the existing businesses, expanding them in their regions, while the corporate development group is focused on new strategic initiatives-areas we want to develop for the future. A good example would be when we entered the wind generation business: that’s the group that did it.

The benefit of having a group like this is that we can give heightened attention to identifying trends and new opportunities and doing what it takes to capitalize on them. I think we can do this more effectively through this type of structure than when development is part of a bigger focus, such as operations. It complements our regional structure very well.

EL&P: Is the investment community showing a stronger interest in overseas expansion, or are they pulling back?

Hanrahan: I’d say right now it’s a stronger interest, but the investment community tends to go in ebbs and flows. They’ll get stronger then they might fall off a bit, but generally there is recognition by investors that the high growth markets in our industry are overseas.

The economies there will be growing faster. There is a need for companies like us to provide power, and there are not many companies out there like AES that can provide this kind of service and have this capability. We have strong management-the global utility executives I talked about-and match that with our risk management capabilities in terms of understanding risk and finding ways to mitigate it.

By having a disciplined approach toward growth we can pick the places to invest or not invest. I think the investment community recognizes that. And they also recognize AES as a company that has a lot of potential value going forward because there is great demand for more electricity on a global basis-it’s a high growth market-and we have the talent to go fill it. At the same time, there isn’t a lot of competition that’s developed so we sort of have that space to ourselves to some extent.

EL&P: Some U.S. politicians are distressed by foreign control of what they term “essential industries.” When AES does business in foreign countries, do their leaders express such concerns?

Hanrahan: It’s interesting. It’s changed a lot in other countries. It used to be that people looked at the electricity industry as a critical or strategic industry for a country, but most overseas countries have figured out that it’s an industry that uses and needs a lot of capital. Most of these countries would rather deploy that capital for other government uses outside the electric industry.

They have figured out that the utilities can be run more efficiently if they’re not state-controlled. Most of the governments we deal with have recognized that this is something that should be in the private sector, that it results in more competitive markets and frees up a lot of capital for the state to deploy in other areas.

And in distribution, while some consider it be strategic and better run by the state government, others consider it something to be privatized. There is a clear trend around the world of moving away from having the electricity sector invested by the state toward having that sector privately run, with the right regulatory scheme in place. That’s really what’s creating for us a wealth of opportunities for us to do what we do best.

EL&P: You have had experience in China’s energy markets. What does AES think about the opportunity there today? Is the market as explosive as everyone seems to think?

Hanrahan: I was the first AES person to go to China. I moved there in 1993 and I lived there for four years. The growth there is just astounding in terms of what that economy is doing and the need for new capacity. We’re there with seven power plants already; we have a lot of good relationships and we’re looking to expand in that country. I see a lot of potential and a lot of room for growth and we’re in a good position to expand our presence in China. So for us, it’s an area of long-term strategic interests.

The other thing that struck me during my last trip to China in December was the level of sophistication that’s now involved in the Chinese power sector in terms of how the government thinks about regulating that sector and how they think about running those markets. They really have come a long way. You’re seeing a sector that is attracting more investment, and it is bringing the generating capacity into balance with the needs of the country. We are strongly in favor of doing more business in China.

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The Clarion Energy Content Team is made up of editors from various publications, including POWERGRID International, Power Engineering, Renewable Energy World, Hydro Review, Smart Energy International, and Power Engineering International. Contact the content lead for this publication at Jennifer.Runyon@ClarionEvents.com.

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