By Jon Lane

The most important development in the global gas turbine market during 1999 was the merger of the power generating activities of ABB and Alstom. The new joint venture, ABB Alstom Power Corp., registered in Amsterdam, encompassed all of Alstom Energy, except the heavy-duty gas turbine business, which operated under license from General Electric. That was sold to GE. ABB kept its nuclear power business.

The GE H-class turbine, shown here, will be installed in combined-cycle operation at a plant in Scribna, N.Y. The turbine is owned by Sithe Energies.

Now, Alstom has offered to buy out ABB for 1.25 billion euros and bring the entire power business under the corporate wing. As Mechanical Engineering Power went to press, Alstom expected to close the deal early this month.

The effect of the merger will be felt globally. GE gained access to an installed base, and sales and marketing operations in Europe, while ABB Alstom, now the world's largest power group, will be strongly targeting the U.S. market-which is expected to have high order volumes for the next few years.

The merger resulted from two major forces:

• Both ABB and Alstom lost out to their major competitors, GE and Siemens Westinghouse, on the large number of power plant orders in the United States during 1998.

• Increasing customer pressures are forcing companies to become larger in order to compete.

The U.S. gas turbine market boomed during 1998, and order volumes remained strong during 1999. Following years of underinvestment in power plants by leading generating companies, the U.S. market suddenly caught fire during the second half of 1998. Uncertainty over the deregulation of the electricity market led to uncertainty over return on investment for power plant developers. Investment had been so low in the United States that reserve margins remained thin, and in some areas power shortages were felt. This spurred the market for gas-fired power plants, which are quick and cheap to build, and offer better environmental performance than coal- or oil-fired plants.

GE and Siemens were quick to capitalize on this demand growth and booked the majority of orders in the market, leaving ABB and Alstom out in the cold. The U.S. market makes up 40 percent of total global demand.

Siemens' acquisition of Westinghouse Power Generation earlier in 1998 meant that both ABB and Alstom lost ground to their major European competitor. The merger of the ABB and Alstom power businesses was the only way to catch up quickly with both GE and Siemens, which was newly strengthened in the Americas by the Siemens Westinghouse Power Corp., based in Orlando, Fla.

The pressures on all power plant suppliers are also a major factor behind the companies' decision to merge their power operations. As electricity market deregulation sweeps the globe, power plant suppliers are increasingly expected to take on higher levels of project risk. This includes most power plant completion risks, and they often have to take an equity participation in power projects to secure the equipment order. The bigger the company, the more these risks are spread over a number of projects. It is expected that these pressures will become even greater, and that equipment suppliers and contractors may need to fund power projects in their entirety.

Prepayments to equipment suppliers are also becoming less common, which means that power plant suppliers are having to fund the construction of many projects through their own cash flow, and will not get paid until completion. To take on the required number of projects to spread the risk, companies must become larger.

ABB Alstom Power is the world's largest power generation equipment and turnkey power plant supplier. It reported orders worth 11.44 euros for 1999. About a quarter of its business was in the U.S. market.

Size will be a significant advantage in bidding for turnkey power projects, as the new company will be able to increase its margins on the basis of taking on more projects. Predicted savings of $450 million over the next three or four years will also stimulate both companies' profitability.

The first commercial installation of the Department of Energy's heavy-duty gas turbine program was announced in September 1999. The GE H-class turbine is to be installed in combined-cycle operation at a plant being built in Scribna, N.Y., near Lake Ontario, and owned by Sithe Energies of New York City, an independent power producer that operates some 40 plants in the Northeast. The GE turbine still requires verification, but is far enough through the program to let Sithe announce plans to install two units. Factory verification tests are complete and delivery is scheduled for the third quarter of 2001, after which field tests will begin.

Siemens Westinghouse, GE's major competitor in the United States, is developing its own version of the product.

Both GE and Siemens Westinghouse turbines will be able to break the 60 percent efficiency barrier in combined-cycle operation, and a 3 to 6 percent reduction in CO2 emissions should be possible because of the increased efficiency. Improvements in turbine designs, cooling systems, and materials achieved through the program have allowed turbine temperatures to be pushed to more than 2,600°F, well above the capabilities of any previous system.

Although the technology has clear benefits, the competitive U.S. electricity generating market may take some time before installing the technology on a widespread basis. Both GE and Siemens have had some problems in the United States with advanced turbines cracking. Plant availability is the primary concern for generators in the U.S. market, and it will take thousands of hours of operation before the technology becomes field-proven.

The microturbine market received considerable attention during 1999. The development of distributed generation provides a good platform for the growth of this market, particularly, but not only, in deregulated markets. The key difference between mature on-site power plant markets and distributed generation markets is that the latter is driven by deregulation rather than regulation.

Electricity market deregulation is designed to give customers the choice of whom they purchase their electricity from, or to allow them to generate it themselves. As electricity suppliers compete to provide their customers with the lowest cost, one of their major weapons is the use of on-site supply.

Furthermore, to increase competition, spot electricity markets have developed in the United States, the United Kingdom, and elsewhere. Electricity prices fluctu-ate according to supply and demand. There is a clear competitive advantage for companies that can start up smaller plants to take advantage of high prices and then switch them off when prices are low.

The use of small power plants in the distribution network, known as embedded generation, is becoming an increasingly feasible option in many countries. Embedded generation allows distributors to relieve congested distribution networks, increase the flexibility of the network, avoid transmission loss and costs, and improve power quality for their customers.

The microturbine makes it possible for smaller energy consumers than ever before to generate their own electricity. Microturbines will compete directly with reciprocating engines for such business.

There has been a massive interest in microturbines across the world, and especially in the United States and, with companies such as GE and Kohler Co. becoming involved in the industry, it must be treated with credibility. The sales and marketing strategy used by microturbine suppliers will prove to be the key to the success of the technology.

Like gas engines, microturbines have a low heat output, so a large heat demand is not required to make them economical. Microturbines also have some key advantages over gas engines: lower emissions and reduced maintenance.

Although they are less fuel efficient than gas engines, in low-load applications (standby and peak shaving) fuel efficiency and therefore fuel costs are less important than maintenance costs to overall plant expenses.

The microturbine also performs well in higher loads, and some estimates have put maintenance at just a few hours for a plant in continuous operation. In such plants these cost savings are balanced by higher fuel costs brought about by a lower electrical efficiency. Thus, there is a balance: Engines will be most suitable for some applications, microturbines for others. Each project is individual, and it is the job of the contractor to offer the best solution to the owner.

The deregulation of the world's electricity markets continued to gather speed during 1999. In Germany, prices fell as much as 50 percent for some large industrial customers connected directly to generators. Unlike other European Union countries, Germany has deregulated its electricity market all at once, rather than in stages starting with the largest users. The country has not installed a market regulator, and both strategies have had the effect of putting the market under intense pressure. Merger activity between generators is expected to be rife for the next few years.

Unlike the experience in the United States and the United Kingdom, German deregulation has not yet provided a boost to the gas turbine market. This is due to the differences in the structure of the power generation market in the three countries, which means that the key market drivers act in different ways.

In the United States, the massive gas turbine market is being driven by the requirement to meet demand. In some regions, capacity has simply not been large enough to meet the daily demand growth at peak times, and generators are now reacting to this and the high prices that can be obtained at peak times. Deregulated markets encourage larger amounts of over-capacity than monopoly markets, as a larger number of companies are chasing peak-load revenues. Once the United States has a sufficient level of over-capacity to operate an effective competitive generation market, gas turbine order volumes will subside. This trend is already in evidence as the market moves from simple-cycle gas turbines to combined-cycle gas turbine power plants.

The United Kingdom has also had large order volumes for gas turbine power plants throughout the 1990s. These plants are replacing older coal-fired power plants. This is not happening in the United States, where the cost of coal remains low and in baseload operation generating costs for coal plants are lower than for gas plants. There has been a small amount of displacement in the United States as generators move toward the enhanced flexibility of gas-fired plants.

In Germany, displacement has not yet taken hold. German generators are suspicious of gas-fired plants in baseload operation because Germany does not have sufficient domestic gas reserves to guarantee security of supply. The leading generators also own their own coal mines, providing them with more control over price and quality.

During the coming years, this will have to change. As the complex web of cross-ownership among the various utilities and municipal Stadtwerke unravels, some displacement of coal-fired plants is inevitable as electricity prices fall below the level of generating costs for a medium-load coal plant. n


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