ARC Advisory Group
The electric power market is an exceedingly dynamic one, with many opposing underlying factors at work concurrently. Electric power companies spend an enormous amount of money on capital projects every year to ensure a steady stream of revenue for the future. For 2002 and beyond, many firms are focusing on their financial performance through continued prudence in spending and more attention to ROI in new projects. Overall industry revenues exhibited only a modest growth over the last two years, and worldwide spending on CapEx budgets was somewhat dampened in 2002.
Expansion will be quite uneven among geographic regions, with the U.S. and Europe spending less over the short term. However, the electric power industry is poised to expand in order to meet the underlying demand for additional electric power in both the developing and developed regions of the world. There are a number of factors contributing to growth of spending for the power industry. These include the entrance into the electric power market of new players, the convergent energy companies, and the large industrial consumers now erecting their own generating facilities. Also, there is a pent-up demand for improvement and expansions in transmission facilities. Additionally there is the impact of the replacement of older, dirtier, less efficient generating facilities with more efficient designs, and the switch from high polluting fossil fuels plants to cleaner, more environmentally friendly generating methods or to the use of clean coal technology. Other factors are the possible synergy of combining electrical delivery with IT/broadband delivery, which will possibly increase the demand for both services. Finally there is the need to integrate operational-based systems with business process, and the upgrading as necessary of systems to allow this to happen
What drives the market
A key factor in understanding the electric power market is recognizing that the basic market is driven by a variety of factors: the health of the world economies, the current and future electric power rates, and political actions within key producer countries. Recently, the electric power industry entered a trough in the price cycle, and revenues have flattened. But recovery is both tied to the general recovery of industry and its power consumption, as well as the pent up demand for growth in the developing regions (China in particular), and their need to use technology to integrate the industry’s functional segments of generation, transmission, and distribution during and after deregulation. There will be a further shaking out of participating companies, and opportunities will go those that are most opportunistic, and those that can use technology to the fullest-to those that can operate with the highest levels of efficiency, not to those that have just become the largest or have added the most capacity.
Mergers and partnerships among the major oil and gas companies and utility-based power producers, well as in joint ventures, have created more efficient international energy companies that are entering a new age of energy business. These companies have achieved new efficiencies and are embarking on ambitious growth plans.
Natural gas usage is increasing rapidly in electric power generation. Deregulation in the natural gas industry occurred ahead of electric power. Many natural gas companies are incorporating power generation and becoming energy companies.
Natural gas generation will continue to increase for both new large electric power generating plants and smaller distributed-generation plants. The Energy Policy Act (EPACT) affects virtually all sectors of the energy industry with a range of federal mandates and regulatory changes.
The greatest growth in demand will be in the developing counties, and significant new capacity will be added. While investments are generally governed by demand, recent industry surveys indicate that most electric power firms consider new technology a key to their growth. Continued investment to adopt new technology is, therefore, expected throughout the industry. The industry will be undertaking another expansion cycle driven by technology and, as always, geopolitics.
Web-based commerce will have a major impact in the electric power industries. One result will be the ability for electric power firms to rapidly pass along price increases to customers. A precursor is to fully integrate generation and distribution operations and their associated SCADA systems with the enterprise business systems to reflect a truly integrated model of the entire business entity. There are other examples of the electric power industry participating in Web-based initiatives to optimize their operations. The importance of IT is growing in electric power companies, and SCADA systems will become part of the renewed attention.
Asia accounted for the majority of expenditures for the electric power industry in 2002. North America accounted for over 30 percent of total industry expenditures worldwide in 2002. Europe, the Middle East, and Africa, (EMEA) was over 27 percent. Asia and Latin America will experience the highest growth through 2007.
Capital spending versus operations expenditures
At $190 billion, operations services expenditures are slightly less than capital spending for the electric power industry. Also operations services will grow at a smaller rate than capital spending through 2007 as the industry continues to place more focus on operational efficiency.
Electric power remains a large consumer of equipment-intensive capital projects. Plant-level capital expenditures will increase to approximately $250 billion over the next five years. While growth in operational spending far outstrips that of capital spending in other industries such as refining, the electric power industry will continue to spend a large amount of capital for new generation infrastructure in developing regions. In developed regions, the emphasis over the next several years will be on efficient additions to existing systems and the re-integration of the fragmented industry segments caused by deregulation.
No matter which vertical industry is examined (processing, manufacturing or utilities), end-users are demanding complete solutions from suppliers. The industrial end users are experiencing continuous reductions in resources and personnel. Automation departments and their internal capabilities and execution capabilities continue to shrink. The skilled senior employee that worked for 25 years in the plant, and knew everything there was to know about a certain process unit has taken early retirement. Similarly, the large automation and systems integration departments that used to exist at many of the major engineering and construction firms have also been reduced or eliminated.
Consequently, electric power companies increasingly need to outsource many of the project services, which were previously handled in-house. Automation suppliers are filling the gaps created by depleted automation departments, sometimes with the same people that previously worked at the manufacturing and EC companies. Even if these business units do not provide all the products and services themselves, they act as a single point of responsibility for coordination and fulfillment of these projects. Automation suppliers have taken many steps to develop solution-oriented business units that provide customers with the total spectrum of automation projects and services. ARC expects service expenditures to continue to grow faster than hardware and software expenditures through the year 2007.
Combined hardware and software expenditures accounted for close to 67 percent of total electric power industry expenditures in 2002, and will grow at a below average annual rate of over 4 percent through 2007. Service expenditures accounted for over 32 percent of total industry expenditures in 2002, and will increase at the above average annual rate of over 6 percent through 2007.
Hardware & software
Capital spending forecasts may be segmented by type of hardware or software. Examples of categories include electrical, mechanical, automation, and IT.
“-Electrical: Electrical equipment expenditures include all low, medium, and high voltage equipment used in the generation, power transmission, and distribution of electrical power. Equipment included in this category starts with the generating stations, and includes both transmission and distribution substations, transmission facilities, and switchgear for the plant incoming lines. In industrial plants, it would include the numerous types of switches, breakers, transformers, and low voltage monitor control centers used for supplying AC power to process equipment. HVAC is included in this category but any power distribution equipment used for building services, such as lighting, is excluded. Electrical spending leads the way in hardware and software capital expenditures, accounting for close to $55 billion in 2002. Electrical equipment spending will experience slightly above average growth through 2007, when it will account for 68 percent of total capital expenditures.
“-Mechanical: Mechanical equipment expenditures include any mechanical equipment used in making up the process facility and the piping used to interconnect the equipment to make a complete process. Examples of mechanical equipment include turbines, prime movers and drivers, boiler systems, and solids handling equipment or conveyors. Piping includes those components used for passing gaseous and fluid process material to mechanical equipment. Electrical conduit, trays, and cables are excluded from this category. Mechanical equipment expenditures will grow at a below average rate for the five year timeframe.
“-IT & business: Plant IT equipment includes such equipment as personal computers (PC) and work-station hardware including PC hardware used in conjunction with standard Enterprise Resource Planning (ERP) software. Expenditures related to plant IT equipment include the cost for PCs, workstations, servers, uninterruptible power supplies (UPS), and additional storage systems. Plant IT equipment expenditures also include the cost of all communication equipment outside of the specific bus systems, such as device network and fieldbus equipment, used for intercon-necting plant electri-cal and automation devices for power or communica-tions. The high-est growth seg-ment for capital expenditures will be IT & busi-ness expendi-tures, which will increase at the average annual rate of justunder 5 percent through 2007.
“-Automation: Despite the disappointments and uncertainty of deregulation with regard to projected rates and the expected ROI of projects, the automation of utility facilities is still viewed as a key element to improving productivity and lowering cost of production in the electric power industry. Re-integration of the separated functions of the deregulated power industry and reducing costs through automation equipment with consideration of life cycle approaches are becoming even more important than having a lean operations strategy. Many energy companies have spent millions of dollars on enterprise, business process, and trading systems to manage their business operations. Automation systems continue to be heavily utilized in generation facilities, and increasingly the field sites of transmission and distribution are being further automated and integrated with the business or enterprise systems. Automation will remain a relatively small portion of total capital expenditures through 2007. Automation expenditures will increase at a slightly below average annual rate of close to 4 percent over the next five years.
“-Other: The other equipment category includes all plant equipment expenditures not included in the previous four categories. Specifically, this category covers all buildings and structures used to support or enclose the process or electrical equipment. The other equipment category includes foundations, structural steel, transmission towers, steel fabricated buildings, concrete and brick structures, and equipment used to service any buildings such as building lighting and building power distribution. Such structures play a significant part in electric power production and transmission. The “other” equipment category including the civil and building components and will grow at an average rate for the five year timeframe.
Automation hardware & software
There are a number of segmentations within the capital spending for automation products. Three of the most significant are DCS, SCADA, and “software.”
“-DCS: Distributed control systems: DCS saccount for the majority of spending in automation hardware and software capital expenditures in the electric power industry for 2002, accounting for close to 27 percent of total automation spending.
“-SCADA: SCADA systems are an important tool for the control and monitoring of geographically remote sites. A number of different applications of SCADA systems have developed within the electric power industry. SCADA systems accounted for close to 20 percent of total electric power .automation hardware and capital expenditures in 2002. SCADA growth is being driven primarily as a means to obtain and distribute the additional information now available from intelligent field devices such as IEDs. Within SCADA, services will lead the growth followed by the software segment of the SCADA market. Both are areas where suppliers will need to focus their future efforts. The hardware portion of SCADA sales continue to be under commodity pricing pressure, and will essentially be flat. This has led to market consolidation with mergers and acquisitions becoming increasingly common.
“-Software: The software category includes a wide range of software that is sold both bundled and unbundled with control systems. This software can include everything from HMI to plant information management to configuration and engineering and advanced control and simulation. Plant asset management systems (PAMS) are included. The highest growth will occur in the software segment of the business. Specific growth areas within software include advanced control and optimization, simulation, and collaborative production management (CPM).
Open control, HMI, programming, and supervisory software are all included in this category. HMI software typically resides in the PAS workstation or PC. Programming software accounts for a small part of the total automation software business and is used to program and configure the various functions of the control system at startup. Supervisory software performs supervisory and advanced control functions and typically resides in an application processor or supervisory computer.
Capital expenditures for services
Services capital expenditures include all service expenditures related to the creation of a facility or asset: the construction, commissioning, and decommissioning of an electric power facility. Services such as project management, feasibility studies, execution planning, engineering, process simulation, construction, commissioning, and the implementation of plant equipment are included in this category. Plant-level services capital expenditures by electric power companies worldwide will increase from close to $65 billion in 2002 to close to $88 billion in 2007.
Operating budgets are the key driver for products and services involved in the operation and maintenance of facilities throughout the productive stages of their lifecycle. Operating budgets many times are the majority of spending by the process industries and are often larger than capital budgets. The power industry, however, tends to be skewed towards the large capital investments required for the creation and upgrading of the electrical power infrastructure throughout the world. As the installed base of generation, transmission, and distribution grows, however, so will the associated total operating costs.
Historically, operating budgets have been spent internally on captive activities such as project management, equipment operation, and maintenance where the utility or manufacturer has preferred to use internal resources. However, like most industries today, the energy industries are clearly becoming more mindful of customer needs, and this is forcing companies to develop new and creative ways to reduce costs, improve quality, and ensure the best possible customer service. Deregulation and Web-enabled systems are further encouraging this shift to a customer-centric model and accelerating the need for action. Information has also become critical to competing in this environment, and having effective information systems throughout the enterprise is fast becoming a key strategic goal for many utilities and manufacturers.
Novak is the director of consulting with ARC Advisory Group. More information on ARC can be found at www.ARCweb.com.