Issue 144 - 1 August 2008

Boom time for ‘interim solutions’ providers

Southern Africa’s power crisis and chronic capacity shortages throughout the continent have consolidated the boom for short-term providers of generation in a host of sub-Saharan economies. With big profits to be made, the ‘interim solutions’ marketplace is getting fuller and more varied, writes François Misser.

With new players entering the scene, such as Empower, the new creation of official British emerging markets investor Actis and its Globeleq subsidiary, and established giants such as Aggreko and Cummins Power Generation reporting ever fuller order books, providers of ‘emergency’, ‘interim’, ‘temporary’ and/or ‘standby’ power solutions are enjoying a boom. Thus the last year has been “an exceptional experience” in countries such as Ghana, and Tanzania, according to Caterpillar’s Swiss-based director of electric power projects for Africa and the Middle East, Robert Rankin.

Ghana was confronted with two major challenges: hosting the African Cup of Nations football tournament, and drought, which required some 100MW of generation capacity quickly. For Rankin, “this is the kind of situation where we intervene.” And Ghana is not an exception. The Swiss-based Caterpillar operation has exported probably around 1,000 units to Nigeria since June 2007, totalling 250MW, but its sister company in the UK did even better, selling 4,000 units to Nigeria. Overall Caterpillar sales to Africa may have doubled in the past year.

Hydroelectric dams and gas turbines take time to build, but governments in much of Africa need a quick fix. Post-conflict and oil-rich Angola is emerging as quite a large market for Caterpillar, but the best performer of all has been South Africa, where sales increased by 1,000% in the past year, Rankin told African Energy. This is not surprising: South African dairy producers say they have been forced to spend up to $30.8m on generators to combat the electricity supply crisis. Industry needs power to keep going. As the University of Cape Town Graduate School of Business’ Professor Anton Eberhard puts it, load-shedding – Eskom’s instrument of emergency demand management during this year’s crisis – “is the least economically efficient of all solutions.”

Cummins global rentals business director Charles Roper told the early July Africa Energy Forum (AEF) that Africa, with its 922m population, was a “growing” market (already worth some $900m) for gensets of up to 2MW, while Europe (728m population and $2.2bn market size) was “mature” and the Middle East (197m/$1.4bn) was “booming”.

The case for ‘standby power’

Too often associated with natural disasters or self-inflicted crises, it’s not all sticking plaster solutions, as Cummins has tried to show since breaking up its emergency gensets used in Senegal to provide a basis for isolated rural generation. Caterpillar Geneva territory manager Bruno Chappuis reports a strong increase in sales to West Africa, citing Côte d’Ivoire, Senegal and Mali. One reason for this is mobile telecoms companies’ demand for small 10-15kVa generators for their GSM antennae.

Cummins Diesel South Africa’s Vinesh Surajali told the AEF – EnergyNet’s annual event, this year held in Nice, where it was more strongly supported than ever by shorter term generation providers – that one lesson of the southern African crisis was that “in the long term there will always be a need for diesel and gas power generating sets to reach remote sites.

Moreover, standby power will always be a requirement, irrespective of the availability of grid power, for critical installations such as hospitals, banks, the mining sector or any other production plant that cannot afford to be without power or face a financial loss.” Cummins reminded AEF participants that it came to the rescue of Zambia’s Indeni Oil Refinery, providing the support of its rental power units when the refinery could not rely on the grid.

Oil producers have emerged as big buyers, using the proceeds of spiralling export revenues to reduce short-term tensions by buying in emergency generation equipment. The cost of diesel is high, but governments have built up financial reserves, and in Nigeria and other economies fuel is subsidised. This may not make developmental sense, but it helps politicians paper over cracks in the economic fabric.

Given the booming market context it was no coincidence that so many providers of ‘interim solutions’ attended the AEF. These included Alstom Power Rentals, offering the immediate deployment of 40MW diesel power equipment and 22 Cummins KTA power modules.

Aggreko, champion of ‘temporary power’

The largest supplier of ‘temporary power’, London Stock Exchange FTSE 250-listed Aggreko, says its worldwide trading profit increased by 121% to $99m last year, when 27 new contracts were signed and many customers extended existing projects. This trend has continued into 2008: H1 interim results to be announced on 26 August are expected to show revenue growth of about 25%, with pre-tax profit about 40% higher.

According to Aggreko, “in International Power Projects, continued investment has enabled us to grow the rental fleet by about 40% year-on-year, utilisation has been running at high levels, and profits will be well ahead.” All this will help to keep Aggreko’s share price buoyant, as it was in H1 08, despite the pressures on generally depressed LSE market indices. Visit http://ir.aggreko.com/agk_ir/shinfo/sschart for Aggreko’s share price movements over the past year.

Aggreko last October said that it had won a significant rental contract with Angola’s Empresa Nacional de Electricidade (ENE) to supply Luanda with 90MW of temporary power worth $45m just for 2008, in addition to the 60MW already installed in the capital and in Cabinda. Aggreko now supplies electricity to 18 other African countries; it is likely to see its 40MW contract with Tanzania Electricity Supply Company (Tanesco) extended to 2009, according to a report published by the Tanzanian parastatal in June.

The end of lease date for Alstom’s rental units in Tanzania (40MW) could be also delayed from 2008 to 2009, Tanesco said.

Newcomers of all sizes

AEF participants included newcomers who had not so far been present in Africa, such as Belgium’s Power Solutions NV, which had felt a “tremendous rise” in demand, according to account manager Jean-Christophe Buisseret. He told African Energy that “the demand is such that world leaders such as Aggreko are coming to us to rent multi-megawatt generators to meet the needs of their customers.” The Belgian company now feels the need to have direct contact with African clients.

Empower will provide merchant, HFO option

Most remarkable though was the public unveiling of Empower, the British company created last autumn as a subsidiary of Actis and CDC, which is proposing a heavy fuel oil-fired technical solution for the short and medium term. The Empower concept was born within Actis-owned generation company Globeleq – from which company officials including chief executive Luka Buljan have come – and gained sufficient momentum to warrant an autonomous corporate structure. The Empower idea is that short-term solutions that are meant as bridging solutions, to give hydropower or gas-fired plants time to come on stream, very often tend to last. And in such circumstances, there is a need to offer a technical and economic solution that minimizes the cost. Buljan says Empower will have 72MW available in H1 09, as a step towards achieving this.

Empower intends to install, own and operate modular generation plants. It proposes the services of a “unique fleet of transportable containerised generators” which can be running a few months after the signing of a power purchase agreement. Empower’s machines run on heavy fuel oil, which can generate power at a much lower cost than diesel or light fuel oil generators – some 40% less, it argues. Coming out of the Actis/CDC/Globeleq stable, Buljan said “Empower already has experience in HFO generation and Africa.” He told African Energy there was already substantial interest from several governments.

Under Empower’s merchant power system, the rental is higher but the operating cost is much lower, argues business development director Dan Croft, who describes the typical client as one who needs continuous supply for between 20 months and five years, with no access to grid or gas supply. It could be a mining or other industrial company, as well as a utility. Mines and industrials have taken to the idea as Empower has done its early market testing in South Africa. The model has other innovations, such as taking EPC costs onto its balance sheet.

Croft is also confident that Empower will start earning soon, with the first demonstration test of its technology scheduled to take place in October in the UK and equipment manufacture scheduled to provide 72MW by mid-2009.

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