The Future Of Electricity-Center Of Gravity Shifting To Asia

The global electric power landscape is changing fast, and increasingly, the action in it has been shifting to Asia. On average, in each of the last three years, China alone has added as much new generating capacity as all of existing capacity in Texas. The shift to Asia will continue.

CERA's Dawn of a New Age scenarios project that Asia will account for well over half of the increase in worldwide power generation capacity over the next 25 years. By comparison, North America will claim only a little more than 10 percent.

This move toward Asia has big implications for everyone connected to the power industry-plant developers, fuel suppliers, equipment vendors, engineering and construction companies, service providers and, of course, investors.

The biggest factor in this change is China, which is industrializing on the strength of its vast coal reserves. Over the past three years, China added 200 gigawatts of coal-fired power-generating capacity.

This is equivalent to two-thirds of total U.S. coal-fired capacity, which, by comparison, was installed over the course of half a century. The Chinese government has ambitious plans to build more hydro, nuclear, renewable and gas-fired power plants to diversify its electricity sources.

But coal-indigenous, cheap and abundant-is set to dominate new power capacity in China for years to come.

China's current path is much like the one taken by the United States several decades ago. Rising Chinese power demand comes from both strong economic growth and increasing electricity intensity-that is, the amount of electricity consumed per unit of economic activity. In the 1990's, one percent real growth in Chinese gross domestic product (GDP) corresponded to 0.7 percent growth in electricity consumption.

But today, one percent GDP growth corresponds to 1.4 percent growth in electricity usage. China's recent record of 10 percent annual growth in real GDP thus translates to double digit annual growth in electricity consumption.

Many forces contribute to increasing electricity intensity: infrastructure development to sustain high economic growth; China's move up the value-added chain into energy-intensive manufacturing; and rising middle-class incomes, which now support larger dwellings, with a full complement of air conditioners and modern appliances.

If we look at in those terms, this pattern starts to look familiar. And it should. The United States experienced something like it half a century ago. In the 1960's, coal-indigenous and abundant- was the leading option for expansion of U.S. power generation capacity. Real GDP grew 4.2 percent annually during that decade, while electricity consumption grew 7.3 percent, driven by industrial expansion, and by widespread adoption of air conditioning and electric heating.

Electricity consumption continued to grow faster than real GDP during the first half of the 1970's. But this changed quickly after the first oil shock of the mid-1970's. High oil prices led to improvements in end-use efficiency, and the recession of 1980-82 shook up the manufacturing sectors and led to the closing down of less competitive factories. These forces pushed growth in electricity demand below the rate of real GDP growth, where it remains today.

But China is still at the stage the U.S. was in the 1960's and early 1970's and so is likely to move along its current path of rapidly growing power demand for the coming decade, and perhaps longer.

What does the shift to Asia mean to those in the power business? Sustained economic growth in Asia has strengthened Asian power developers and produced financial institutions capable of handling the expansion of the Asian power system. Homegrown Asian firms are increasingly winning businesses away from their Western competitors.

In addition, heightened concerns for energy security have reinforced the government's role in the power sector and an emphasis on using power generation equipment and design, engineering and construction services provided by Asian companies or by Western companies that work closely with Asian partners.

For example, China's objective of self reliance means that all the resources needed for coal-fired power plants-such as plant design, boilers and turbines, and construction-are coming from Chinese companies.

Nuclear power development is proceeding along two tracks: indigenous reactor designs and resources on one, and imports of Western technologies with heavy technology transfer requirements on the other.

Sustained growth of the Chinese power sector, combined with the government objective of self reliance and technology transfer, will likely lead over the coming decade to the growth of strong local companies in equipment manufacturing, design and engineering, construction, services and project development.

These companies will compete not only in the domestic Chinese markets, but also in the regional Asian market. The rise of strong Asian competitors in the power sector will intensify competition for Western firms. Some Western firms have sought business opportunities in Asia through partnerships, but many have found it difficult to get a foot in the door, and as they share technology, they fear that they also risk strengthening their competitors.

Eventually, Western firms will face the prospect of competing with Asian players in Western markets. How will Western power companies respond?

Western utilities focusing on domestic markets will source components and services worldwide. Western firms that provide equipment and services will strive to maintain their competitive advantage by staying on the innovation frontier. Even with their much faster GDP growth, China and India will still have lower per capita income than North America and most of Western Europe for the next two decades.

Higher incomes in the West will support research, development and the use of advanced technologies, giving Western firms opportunities to stay at the technology frontier.

We can think of North American companies that are doing well amid fierce competition from Asia. These companies flourish not because they can pare costs to the bone, surviving on high volumes and thin margins, but because they remain at the frontier of technology and product design.

If Western firms in the electric power business can follow this strategy, they will find it a very competitive approach in a world of intensified competition.

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