Robust outlook for Southeast Asia’s power equipment market-

The power sector of the Southeast Asian region is expected to grow at a brisk pace in the coming years, driven by high demand stemming from rising economic growth and lack of access in several areas. According to estimates of the Asia Pacific Energy Research Center (APERC), the combined electricity output of Indonesia, Malaysia, Philippines, Singapore, Thailand, and Vietnam (hereafter referred to as “the six countries”) is expected to grow from 624 TWh to 957 TWh between 2010 and 2020 (see Fig. 1), which translates into a compound annual growth rate (CAGR) of 4.37 per cent.

Naturally, the extent of the expansion will vary by country size and state of development. In particular, larger and more underdeveloped countries are expected to undertake a greater share of power sector investments compared to the smaller and more developed nations. Furthermore, given the regional variations in resource availability, the fuel mix adopted by these countries will also differ.

As the expected capacity expansion of the Southeast Asian power sector across the six countries is quite substantial, there are immense business opportunities for power equipment manufacturers. The investment plans of these countries and the fuel mix adopted by them will determine the dynamics of the region’s equipment market in the coming years.

Southeast Asia Infrastructure takes a look at some of these future trends.

Skewed towards thermal power equipment

Not surprisingly, the dollar value of investments in generation is expected to be significantly higher than that in transmission and distribution (T&D). APERC’s forecasts reveal that the average annual investment in power generation for the six countries (taken together) will range from approximately $21 to $26 billion (2005 value). In contrast, the investment ranges for T&D will be $2.8–11.4 billion and $1.24–1.64 billion, respectively. The country-wise breakdown of these projected investments is shown in Fig. 2.

In power generation, thermal power has thus far received the greatest emphasis in the region. As a consequence, investments have been skewed towards this segment – a trend that is expected to continue. It is revealing to examine the expected capacity additions differentiated by type of fuel (see Fig. 3).

 

As is apparent from Fig. 3, the domination of fossil fuels will not abate any time soon. In particular, coal- and gas-based generation is expected to grow significantly. The addition to coal-based capacity is likely to be the greatest in Indonesia and the Philippines, which should not come as a surprise. Both countries produce sufficient quantities of coal to be exporters of the fuel; in fact, Indonesia is the world’s second largest exporter of thermal coal.

Natural gas that already dominates the fuel mix of Singapore, Thailand, and Malaysia will continue to be augmented by large capacity additions in these countries. Vietnam, the Philippines, and Indonesia are also expected to invest substantially in gas-based generation. On the contrary, the decline of oil-based power generation is expected to continue, as oil is by far the most expensive fuel for power generation in the region. The highest demand for hydropower equipment is likely to come from Vietnam, followed by Indonesia, Malaysia, and the Philippines.

The large investments in thermal generation in the coming years will create significant opportunities for equipment vendors to win contracts in the region. Southeast Asia Infrastructure Research estimates that investments in coal- and gas-based generation will be $89.6 billion (2008 prices) during 2010–15 and $75.6 billion during 2015–20. Country-wise investments for these periods are shown in Fig. 4.

The total investments in coal-based generation equipment for the six countries are expected to be around $67.5 billion in 2010–15 and $53.7 billion in 2015–20. Furthermore, the total investments in gas-based generation are likely to be about $22.2 billion and $21.9 billion for the same periods.

Expansion of T&D equipment market

T&D infrastructure is expected to attract considerable investments as well. A major factor influencing investments in transmission infrastructure is the future additions in generation capacity. The power grid needs to be extended to the site in order to meet new power plants’ evacuation requirements. Since the majority of the generation facilities in Southeast Asia are centralised, inadequate transmission infrastructure can increase T&D losses and increase the unreliability of the grid.

The changing perception about the transmission segment as a stand-alone business and not just support infrastructure is likely to have a positive impact on investments in the power grid. The unbundling of generation, transmission, and distribution services in several countries in the region has generated tremendous interest from the private sector.

To meet the requirements for the evacuation of power from new power plants, as well as improve the efficiency and reliability of grid infrastructure, countries are stepping up their investments in this segment. The expected levels of network addition in power transmission between 2011 and 2015 are shown in Fig. 5.

As can be seen from Fig. 5, the biggest chunk of these investments is expected in Indonesia and Vietnam, based on two reasons: one, these countries will be investing the greatest sum of money in power generation; and two, the existing grid infrastructure of these two countries is far from adequate in meeting their needs.

Since transmission equipment must be in place before a new power plant can be operationalised, power grid investments tend to track investments in power generation. However, transmission companies also would not invest in the infrastructure until construction is well under way and the date of commencement of operations is in sight (at least a tentative date). Such a strategy reduces the interest payments of the transmission companies, as new investments are often financed with debt. Therefore, the timings of the network additions (Fig. 5) will likely approximate the date of commencement of the new power plants in the region.

Thanks to technological advances in computing and communication, a large share of the grid expansion is likely to deploy smart grid technology that increases grid reliability, helps manage demand more efficiently, and reduces overall system losses. Smart meters are an essential component of smart grid infrastructure. Pike Research, a market research company, predicts that Southeast Asia will have 226 million smart meters, which represents a market penetration of 25 per cent, in operation by 2020. The projected penetration rates by country are shown in Fig. 6.

Indonesia – Dictating market outlook

Southeast Asia’s power equipment market outlook is heavily influenced by the largest country in the region – Indonesia. Thus, it merits special mention. As of December 2010, Indonesia had a total installed capacity of about 33 GW. Between 2012 and 2022, electricity demand is expected to grow at an average rate of 9.3 per cent per year, with the highest growth in demand in the eastern region of the country at 10.6 per cent.

To meet the growth in power demand, the government plans to spend about $97.1 billion on the sector over the 2010–19 period. It aims to add 5,000 MW of capacity every year during this period.

According to Indonesia’s latest 10-year power development plan prepared by the Ministry of Energy and Mineral Resources, the country has plans to add more than 27,000 MW and 24,258 MW of capacity over the 2011–15 and 2016–19 periods, respectively.

In January 2010, the government launched Phase II of the Fast Track Program to add 10 GW of capacity by 2015. Under Phase II, 40 per cent of the capacity will be geothermal, 36 per cent coal, 15 per cent combined, and the remaining will be hydro. The ministry expects half of the Phase II capacity to come from independent power producers and the other half to be developed by PT PLN.

Indonesia plans to add about 43,500 km of transmission lines and 116,722 MVA of transformer capacity during the 2010–19 period at voltage levels of 70 kV to 500 kV. During the period 2011–15, about 34,674 km of lines at these voltage levels would be added to the grid. Given that the country has the largest share of the region’s current capacity and will be the fastest growing market in the coming years, a large number of power equipment players will be taking a cue from the developments in Indonesia’s power market for the formulation of their capital investment plans.

Conclusion

Power sector investments undertaken by Southeast Asian countries will produce significant business opportunities for power equipment manufacturers, thus triggering fierce competition for market share. While factors such as research and development activity and efficiency through economies of scale are likely to matter the most, factors extraneous to the manufacturers, such as financing offered by the export-import banks and exchange rates, are also liable to have a bearing on their success.