GENSET AND DISTRIBUTED POWER
No soft options in a tough market23 February 2004
The European genset market is plagued by contracting revenues, flattening unit sales and relatively low levels of growth. Manufactures must exploit suitable niche opportunities while improving products and service, according to new analysis by Frost & Sullivan
The European gen-set market is at the maturity stage of its lifecycle, with an overall reduction in revenues over the last few years caused by several dampening factors. However, while certain markets have experienced a severe decline there is some scope for growth and market competitors must find the right niches that can supply opportunities for expansion of sales. Signs of a general economic recovery, the enlargement of the power rental sector and increased biogas applications also present encouraging trends for market participants.
The market is in its most challenging period for many years.Overall unit sales in 2002 amounted to around 27 500 units generating revenues of $912 million. Frost & Sullivan expects the market to increase by a compound rate of 7.2 % to the end of the forecast period,in 2009.
At present,escalating component costs accompanied by falling genset prices have created a testing, competitive environment. Price pressures have deepened due to intensifying competition with high-volume, low-cost offerings from Italian and Spanish manufacturers in particular,precipitating price declines.
This situation has been compounded by the general economic downturn and steeply reduced demand from
the telecoms sector. Moreover, technologies such as fuel cells, wind and solar power are presenting strong competition to gas-fired technologies based on their cleaner, emission-free performance. All this has put tremendous pressure on the 300 to 350 companies active in the European gen-set market.
The recent economic downturn has adversely affected opportunities for sales of all product types. As orders have become more difficult to win, competition has become more intense.This has driven down prices and compelled suppliers to offer extra services in a bid to maintain order levels.
Electricity market liberalisation has mainly impacted the gas-fired technologies as diesel-fired gensets are being used for base-load and CHP applications less frequently.The process of deregulation has inhibited sales of units in individual domestic markets based on unstable consumption rates for electricity set by competing utilities.
Compression ignition units constitute the majority of all units sold with over 97 % of the total. Spark ignition units accounted for most of the remainder with gas turbine units accounting for just 22 packages out of the total of 27 500 units sold. Most unit sales are to the standby market in the compression ignition ranges from 30 kVA to 250 kVA and most spark ignition units are sold above the 250 kVA range for the generation of combined heat and power (CHP).Sales of gas turbines are also used primarily for CHP and most unit shipments occur in the ranges between 2 and 10 MW.
The diesel genset has been the work-horse of the on-site power industry for the past thirty years.Whilst newer technologies have recently become fashionable, it remains one of the most important sources of distributed generation.The two main advantages that compression ignition gensets continue to have are low cost and simplicity.A diesel genset is, in most cases, at least 50 % cheaper than any rival technology.
At the same time,the basic components of a set are the engine,alternator and control panel. Its main drawback is the levels of pollution that it produces,which means that cleaner technologies such as gas-fired and renewables are becoming common in baseload applications. In the future, diesel sets will be expected to utilised more often in stand-by applications,where price is often the key competitive factor.
Genset orders are forecast to increase as improvement in the major European economies increases business cashflow allowing capital expenditure and investment. The recent war in Iraq compounded economic instability in western Europe, especially markets such as Germany that were already economically weak.However, such markets are expected to perform better into the medium term to long term and lead to increased opportunities for sales of gen-sets.
Although the rentals market both drives and restrains the genset market, manufacturers currently view the rental sector as a growing niche for new sales opportunities in a mature market.The most established market for rental is in the UK although other markets such as Spain offer a rich source of market opportunities.
The rental market is also showing signs of developing in countries where it was traditionally weak. In particular France and Germany seem to be undergoing a culture change with rental taking an increasing share of the market. Evidence that the rental market is expected to take off in the near future can be seen in the increased activity by companies operating in the genset market. A good example of this is Caterpillar, which recently launched its Enegyst business.This is a rental operation set-up by Cat and 12 of its distributors to function on a European-wide basis with the aim of offering a superior level of service.
Growth in biogas applications has helped to offset the decline in natural gas cogeneration applications over the last few years.This is expected to provide a good source of market opportunities into the long term, especially for waste-water treatment plants, agriculture and industrial applications.
Opportunities in the landfill sector in Europe will begin to dry up owing to the fact that only a finite number of potential sites can be developed.The potential for landfill applications will be further limited by new EU regulations which ban the dumping of organic waste into landfill sites, thus reducing the amounts of methane generated.
One of the strongest drivers for gas-fired technologies is the ability to use them in efficient,decentralised systems to reduce emissions of CO2. However, there are other technologies that compete with the gas-fired genset,many of them cleaner or emission free. For example renewables such as wind and solar power have zero emissions and can operate where there is sufficient natural resources.At the same time fuel cells have long since been hailed as the technology to replace combustion engines, although it is likely to be many years before the technology achieves a market presence that represents an economic alternative.
Country by country
Spain is the largest market in Europe,with over 25 % of the market revenues,and is expected to remain so until the end of the period studied. This is primarily because of the relatively high consumption in a region fuelled by economic growth and the requirement for on-site power generation.
The markets of Italy, the UK, France and Germany are similar in size and forecast to have comparable annual growth rates.Italy and the UK are expected to grow slightly faster with Germany exhibiting the slowest expansion. Strong rental markets in the UK and Spain are being bolstered by the growing appeal of the rentals concept in countries where it has traditionally been weak. France and Germany, in particular, are moving towards a rental-friendly culture creating new prospects for genset manufacturers.
The former eastern bloc countries Poland, the Czech Republic and Hungary are much smaller markets.However, they are expected to show the largest development over the forecast period. In particular Poland is forecast to have the highest growth,driven by the strength of its gas-fired market.
In 2002, 300 to 350 companies were competing in one or more of the eight countries.The leading companies operate at the total level and usually have an established distribution network that operates in all geographical segments.The degree of competition is generally intense and the market is typified, and its dynamics likely to be shaped by, the acquisition of smaller players by the market leaders.Frost & Sullivan expects further consolidation during the forecast period, driven by market saturation and the inability of smaller participants to find niches that generate adequate levels of revenues.
The market competitors can be broadly categorised into three groups.Those at the high end, mid-range participants and players that compete at the lower end. High end competitors tend to be OEMs such as Caterpillar and Cummins.These players concentrate on providing highvalue, low-volume products with less focus on prices and more on the add-on features and services that can be supplied. Mid-range suppliers are a mixture of packagers, such as FG Wilson and SDMO,and OEMs,such as MTU.
These are generally higher volume suppliers that offer some added value to their gensets, but at a more competitive price.However, there is some movement to increase the services that can be used to complement a genset sale.The lower genset manufacturers are almost exclusively packagers, such as Himoinsa and GMI.These competitors are very high volume price-focussed suppliers that, until recently, offered very little added value when selling gensets.This has changed and many of these kinds of manufacturers are moving towards improving the service that they can offer and increasing their product range.
One of the most interesting issues in the market will be to observe how the leading players react to the changes that the others are implementing.
The European genset market is a mature and consolidating market.Levels of unit shipments are slowing and growth is forecast at relatively low levels to 2009. Development over the forecast period is expected to be strongest in gas-fired technologies.At the same time,eastern Europe is forecast to expand more quickly than western Europe.
Activity in the west is expected to be focussed increasingly on consolidation by leading market players. In addition,players are also attempting to increase their range of products and complementary services.The aim is to gain a competitive advantage, allowing them to capture greater market share. This will be the best way for participants to maintain revenue growth. But the correctness of their decisions will depend on the knowledge that they have of new products and markets, end-user trends, technological developments and competitor strategies.