The rented power business has done well in turbulent economic times
Business has done remarkably well in turbulent economic times, say providers of temporary power, as companies are seeking to keep their investments down, while utilities are struggling to meet rising demand.
A global economic downturn will not pass anyone by unnoticed. And so providers of temporary power, used to making good money from supplying the construction business, keenly felt the effects of the slump in building activity in the region.
“We were heavily involved in the construction industry in the Middle East, so the downturn did affect that part of the business in particular,” says Phil Burns, managing director at Aggreko, one such provider of generators.
The construction slump has not stopped Aggreko in its tracks, however. The company was able to remain utilisation rates, and even add US$30 million worth of generators to their Middle East fleet, as it benefited from clients adapting to the uncertainties of the recession.
“The rental option is becoming increasingly popular as it has a cushioning effect for companies who are uncertain about the long-term future of their projects. If a company which has purchased large amounts of equipment decides that a project must be put on hold, the financial damage incurred can be a major blow. Ultimately, renting equipment means that because ownership lies with Aggreko, so do all the risks,” explains Burns.
The appeal of rental power is not confined to construction, it is now popular with companies in all industries, including manufacturing, cement production, events and the oil and gas industry, who are all trying to prevent a large capital expenditure.
“Capex might affect the cash flow of the clients and rental power is a viable option during the economic crisis,” says Robert Bagatsing, group marketing head at RSS, another rental provider. Bagatsing also notes a broadening of his client base.
“Our market has not only deepened, but also widened. Instead of focusing on construction and real estate projects, we are now seeing a wide demand in industrial, oil and gas, commercial and defense related projects.”
In spite of the recession, RSS have managed to grow their business every year since its inception in 2007, and has beaten its forecast for 2009.
Having kept the ship steady in troubled waters, rental companies are able to profit from the demand placed on utilities in the hot summer months in particular.
In the baking Middle Eastern heat, demand for electricity shoots up in line with increased air conditioning usage. Furthermore, as Burns points out, temperatures around the 50 degrees Celsius mark are hamper power production.
“Due to elevated temperatures in the summer, power plants, especially those powered by gas turbines, operate at reduced efficiency and with larger transmission losses, which makes the impact of increased loads even greater. This yearly trend puts a significant strain on the utility grid.”
Aggreko has recently signed a contract with the Oman Power and Water Procurement Company to provide 117MW of power across five sites during the peak load period in summer.
Utilities in the Middle East are, of course, not just sweating over power shortfalls during peak load times since yesterday. Nor will the problem go away tomorrow.
Racing to keep up with the increasing demand for power from a growing and industrialising society, many countries have failed to convince companies that a secure power supply can be taken for granted.
“Production cannot be compromised due to insufficient power supply, so companies are taking ownership to keep business at peak capacity by installing their own power plants," says Michael Sagermann, regional business line manager at Atlas Copco, who manufacture generators.
“We expect this to continue for some time, as expanding or building new power generation plants is not an overnight exercise.”
One often overlooked aspect of the difficulties utilities are facing in building up their power generation capacities is the access to finance. With large power plants coming at a big price, it is challenging for utilities to procure the funds, says Lee Cox, RSS general manager for the Southern Gulf.
“Most of the power problem is financially driven, due to the enormous amount of investment required. Banks, government, independent power provider companies, distribution companies and investors must agree on terms and conditions. This requires years of negotiations and most of the time, the conclusion changes due to the economic environment.”
Other reasons for power shortfalls are unexpected rises in demand in certain areas, especially industrial zones, the late delivery of equipment to power plants for the delayed completion of power grids.
Whatever the reason, there seems plenty of scope for rental companies to fill short term voids in a developing power infrastructure.
Against this backdrop, it is small surprise that rental providers name utilities as their biggest sources of income in the region.
“The biggest proportion of our business in the Middle East is focused on working with utilities. Over the past year, we have provided multi-megawatt power projects to support local utilities in Oman, Saudi Arabia and Yemen,” says Burns.
Do rental companies experience a similar rush for their services from the private sector, with clients keen to safeguard against potential shortfalls, especially prior to the summer heat? No, says Cox.
“Seventy percent of the companies leave it up to the last minute. After the 2009 economic crisis, companies tend to be more reactive and passive. If they can delay the hiring of the power, they will do so. There are cases where problem already exists and they will only increase their power requirement after the problem has been triggered.”
Cox believes that this cheapskating can come to haunt companies, as they face the prospect of production gaps and subsequent sales shortfalls.
Another money maker for generator rental companies is the events sector. Events only account for around five percent of RSS’s total segment share, says Bagatsing. Nevertheless, the company provided power to such high profile events such as Yas Island after-race-concerts, powering the performance of Beyonce, Aerosmith, Jamiroquai.
For Aggreko, events are increasingly important both in the region and globally. “The events sector has been an area of growth over the past 18 months.” This year alone Aggreko provided temporary power for the World Cup and the Vancouver Winter Olympics.
In the Middle East, the company has powered the Bahrain Grand Prix since its inception in 2004 and the Dubai Rugby 7s for over a decade.
Clients might at times be a little tardy when it comes to renting power, but they do seem to know what they want. Providers have seen a number of trends developing both in a regional and a global context.
“Regionally we are pleased to see the shift away from open-type generators and towards silenced units in the construction sector. In the West, this has been mandated for decades, and it does offer the users and the surrounding environment benefits,” says Sagermann.
“Worldwide we see more electronics integrated within the products, and greater attention given towards environmental aspects like exhaust emissions and spill containment. This has been long a cornerstone feature of our products, since ours are built with European norms conformity as a key driver.”
This is not the only example where generator manufactures and rental companies may need to adapt to keep abreast with the changing demands of their clients.
“One of the trends we are currently seeing is that customers are looking to diversify their energy portfolios,” says Burns. "Rather than relying on one type of fuel, they are looking to expand their generation capacity to include two or more fuel types.
For example, one of our customers, a cement company in Ras Al Khaimah, had their own gas-powered turbine but they contracted a diesel-powered package from Aggreko to provide additional capacity to their facility.”
In response to this demand, Aggreko in 2005 diversified their product range to offer generators that run on natural gas, and
is now working with customers to determine how they can utilise gas resources in their respective regions.
In addition, most of Aggreko’s generators can be run with biofuels, as the company proudly point out. Rental providers, it seems, will be finding, and providing, opportunity in the Middle East for some time to come.