Commentary

China Power Capacity Additions Expenditure to Total $1.2 Trillion between 2012 and 2021

Ten years ago, California’s power crisis finally ended. Shortly after, Enron would file for the largest bankruptcy up to that point in US history. With myriad consultants alternately proclaiming either that “it wasn’t our fault”, “it could happen to you” or “we know what really happened”, restructuring initiatives were scaled back or stopped in China, Indonesia, Korea, Macau, Malaysia, Thailand, Taiwan and Hong Kong.

The future of nuclear power generation is in Asia.

In devising policies, and pursuing its nuclear energy industry, China will strive for all of: 1) National independence for nuclear power technology; 2) Control and independent management of the fuel cycle; 3) Fuel diversity in the electrical power generation industry; 4) Significant source for electric power; 5) Reduction in emissions of air pollutants and CO2; and, 5) Commercialization of an indigenous reactor design, including high temperature gas cooled reactors – pebble bed module (HTR-PM) reactor technology. The current efforts to arrive at up to 40 GWe of nuclear generation capacity by 2020 will only have a limited impact on the current shape of China’s electricity industry.

Energy is an integral part of economic activity. An adequate energy supply is essential to support industrial activities, fuel the mobility needs for both freight and passengers, and ensure convenience and comfort in life. To facilitate such economic activities, large-scale investment in energy supply infrastructure is necessary, including the upstream oil, gas, and coal; midstream transformation facilities for electric power generation, oil refinery, and gas processing; and distribution networks that can deliver energy to customers. To meet the rapid energy demand growth of 2.4% per year until 2030, the Asian Development Bank estimates that Asia and the Pacific will require a cumulative investment of between $7.0 trillion and $9.7 trillion in the energy sector. Most of the total investment in the energy sector will be concentrated in China, India and Japan and dedicated to electricity generation, transmission and distribution.

India has made impressive progress in the field of electricity generation since Independence in 1947. In terms of generation, while new capacity has been added, the gap between demand and supply has, by and large, increased.

The Smart Grid Utility space is quickly evolving and is a market that will start to accelerate.

The growth in the use of private finance to fund major public infrastructure projects throughout Asia continues unabated. Yet the Asian power sector faces the hurdle of trying to balance industrial and consumer demand with a sound environmental sustainability strategy.

What is Geothermal Energy? As the world takes measures to move towards lower carbon energy production, many forms of renewable energy technology have been developed. Geothermal energy is heat (thermal energy) that is generated and stored within the core of planet Earth. It is generated from the difference in temperature between the inner core and the surface of the Earth. When compared to other formed of renewable energy production geothermal is considered one of the most promising forms of production. To harness geothermal power involves drilling up to five kilometres below the Earth’s surface and pumping water into the Earth’s core where it is naturally heated before returning to the surface where the heat energy can be used through transfer to generate electricity and/or heat. Mitigating Geothermal Development Risks Whilst the concept is simple, construction of the required infrastructure requires significant development cost both in terms of drilling works and uncertainty over the volume of water that can be efficiently pumped and what temperature increase it will achieve. This often constitutes a major barrier to investment for the sector. For a project to have good chances of success a thorough sub-ground analysis is required, which can cost up to several million dollars. Only once this analysis is completed can actual success of a project be estimated. Should the sub-ground analysis work only identify a thermal capacity which is not sufficient to allow economic operation of a geothermal power plant, all investment made in the analysis work will be lost. Historically there has been no ability to insure risks inherent wit development of geothermal power; however Marsh in Germany has now developed a service that can assess project specific risks before the commencement of any drilling works and significant capital expenditure being incurred. The team is working to expand availability of the geothermal power risk assessment so the service can be made available for all Geothermal Power plants globally.  

A number of countries in Southeast Asia such as Thailand, Malaysia, the Philippines and Indonesia have begun to pursue wide-scale investment in solar power.

Currently in Australia like much of Asia, the debate about a carbon tax and what form it should take is holding centre stage in both the political arena and public debate through the media. Looking at the major industrial countries, India has already legislated a carbon tax whilst China is looking at implementing a tax in either 2012 or 2013. South Korea has discussed a number of initiatives, but is still to formally legislate any compulsory taxation measures.

Several Asian countries are planning to increase the share of renewable energy sources into their generation mix. China added 18.9 GW of new wind power capacity in 2010 to a total of 44.7 GW of total installed wind power capacity, overtaking the U.S. as the country with the most installed wind energy capacity (40.2 GW in the U.S.). In April 2011, the Malaysian parliament approved a sophisticated system of feed-in tariffs aiming for 2,080 MW in renewable energy (RE) capacity by 2020, joining Thailand, Taiwan and the Philippines in their quest for cleaner energy and lesser dependence on fossil fuels. A large proportion of renewable energy in the system, particularly wind power, will result in a relative loss in base load capacity, traditionally relying mainly on fossil fuels. More crucially, this would lead to bigger problem for grid operators, as wind energy cannot be delivered constantly or adequately to meet fluctuating demand. Although the wind speeds forecasting technology is improving, in the absence of storage capabilities, wind plants are required to shut down to compensate for the load course and relieve the grids especially when less electricity is needed and there is a lot of wind (usually at night). The development of photovoltaics has similar challenges to wind power. Electricity generation depends on solar radiation, which can vary considerably depending on the season and other short term factors such as weather changes and passing clouds. Hence, new and large electrical storage possibilities are needed to compensate for fluctuating grid requirements.. A proven and economically feasible technology to manage the variable and non-dispatchable generation such as wind and solar generation is pumped storage hydro plants. Pumped storage plants are uniquely suited to help integrate intermittent renewable sources because these plants can store electricity to balance load, and can react quickly to changing grid conditions. Interests in pumped storage projects have surged in the U.S. and Europe in recent years, due mainly to the large influx of renewable energy sources, especially wind power. As the portfolio of these intermittent renewable electricity sources increase, grid operators become increasingly concern over grid reliability. In Europe, the share of energy consumption from renewable sources is expected to increase to 20% by 2020 from the current 11.6%. This is expected to lead to an addition of about 27 GW of pumped storage capacity to balance these variable sources of energy. The construction of pumped storage facilities has seen long periods of ups and downs. In the 20 years up to 2010, Europe built only 15 plants with a total capacity of 5.6 GW, while 30 years passed in the U.S. without any new pumped storage projects. As of early 2011, Europe has almost 45 GW of pumped storage capacity in operation; the U.S. has about 22 GW, while Asia has about double that of the U.S. with Japan installing half the share. Historically, the development of pumped storage facilities has a lot to do with the size of the energy industry and the generation mix. A large energy industry has a bigger need for capacity to store electricity. A higher share of more operationally flexible power plants such as gas-fired power plants (compared to conventional thermal plants) in the generation mix requires less storage capacities. Now, the appeal of pumped storage is connected to the potential it offers to help integrate intermittent renewable energy resources into the grid reliably. Capital costs for pumped storage plants vary widely according to local conditions (the existence of a lake or existing hydro facility can significantly reduce costs) and economies of scale, however they are typically significantly more expensive than traditional hydropower or thermal plants. In face of such costs, the challenge for any storage facility is the financing. The uncertainty over the value of pumped storage is typically the lack of adequate methods for the valuation of storage. This is generally the case in many emerging economies with newly deregulating power markets. Traditionally, the economics of pumped storage is driven by the peak to off-peak spread – the cost incurred for pumping during low off-peak prices against the revenues gained when generating during peak hours. While arbitraging the difference between peak and off-peak prices was an effective way of benefitting from inflexible thermal generation, pumped storage projects built to complement intermittent renewable resources would likely rely on less predictable price and generation fluctuations. The irony in adding significant storage could shrink those price differentials by relieving downwards pressure on off-peak prices, making it difficult to recapture construction costs. Ancillary Services can be another significant revenue source for pumped storage facilities. Due to operational flexibility, pumped storage facilities are very capable of providing a wide range of ancillary services. As each System Operator sets their own standards for ancillary Services, product definition and market-price formation, Ancillary Services in less organized markets may not be properly valued, and can therefore make it difficult for investors to justify the high investment costs of a pumped storage facility. Increasing the percentage of generation from renewable sources will create the need for more storage facilities, increase the requirement for ancillary services, as well as compel large investments in the strengthening of transmission grids. A national commitment to a high renewable portfolio in developing markets in Asia, requires a commitment to either 1) A deregulated power market with competitive spot market operations together with a customized co-optimized market for ancillary services, or 2) An Energy Ministry with a long term vision for a healthy and functioning power sector, and the financial backing and muscle to invest in long term solutions that include pumped storage facilities.

A scenario: • You identify an attractive investment opportunity that requires its assets to perform safely and reliably . • You will be the subject of severe reputation and financial penalties should the plant fail to perform as contracted. • Your main contractor is fine on deliver but is stating they have some 400 global suppliers to whom they will subcontract equipment orders. • Safe and reliable delivery of the equipment is essential .Failure would have unacceptable negative impact on your brand and financial return. • You have substantial uncertainty ,substantial risk and hard questioning from your stakeholders How do you mitigate the uncertainty and lower the risk to retain the investments attractiveness to you and your stakeholder ? “Have we thoroughly evaluated all of our exposure to risk ?

The over-bearing dependence on regulation.

Today, we are witnessing a potent combination of factors, which together are driving organizations across the process industries to optimize their energy consumption. In the oil refining, petrochemical and gas processing businesses, in particular, energy is one of the largest components of operating expense. Limits on nitrogen oxide and sulphur oxide, regulations to control ‘flaring’, and restrictions on greenhouse gas emissions are combining to push the issue up the business agenda.

Chinese wind turbine manufacturers have experienced explosive growth in recent years. Sinovel, which installed its first wind turbine in 2006, was ranked as the world’s second largest wind turbine manufacturer in 2010 – ahead of companies like GE, Gamesa, and Siemens. In 2010, four of the top ten original equipment manufacturers (OEMs) were Chinese.