Global electricity upheaval breeds new elite By Andrew Callus

LONDON: The deals are coming thick and fast among former monopolies in the liberalising, privatising world power industry, but a new breed of financially driven companies is threatening to snatch all the benefits.

Cambridge Energy Research Associates predict that some 767 gigawatts of new power capacity will be installed globally by 2010 -- equivalent to one and a half times total installed capacity in the United States.

About one third of this is expected to be developed not by the integrated industry incumbents, but by Independent Power Producers (IPPs).

"It's a good place to be," says Peter Giller, Chief Executive of the newest IPP, Britain's International Power , listed in London at the start of this week.

IPPs are the opportunists in an industry where no opportunity at all existed a decade ago.

Authorities ranging from U.S. municipalities to the European Commission have decided to encourage a competitive environment by forcing monopoly breakup and encouraging competitive tendering.

Shunning capital-intensive wires, pipes and customers where they can, the IPPs concentrate on generating power where fat profit margins are to be had.

They harness cheap, new-build gas technology here, buy an undervalued coal power station there, and exploit wholesale electricity trading and hedging skills.

With fewer regulatory issues to address than the integrated companies, they can start up then shut down or sell out anywhere in the world. They call it a portfolio approach.

In the United States the secret is out already.

Shares in companies like AES Corp , Calpine and PPL Corp have outperformed the S&P Utilities index by between 25 and 100 percent in 2000 so far, thanks to prospects of 20 to 40 percent earnings growth a year.

Integrated utilities such as TXU and Cinergy by contrast have underperformed the same index by around 10 percent.

JP Morgan analyst Waqar Syed illustrates the seriousness of current U.S. capacity constraints.

"All manufacturing slots at the three major makers, General Electric , Siemens Westinghouse and Asea Brown Boveri AG are already taken through 2004," he says.

"If a company went to any of them today and offered cash for a turbine it would have to wait until first quarter 2005 to take delivery."

In Europe, new build plays a less important part in IPP strategy. A long period of low power prices and continuing overcapacity has made the industry cautious.

But there's plenty up for sale.

Governments are forcing the major players with monopoly and monopolistic positions to divest assets.

In Italy alone, the former monopoly ENEL is selling 15 Gigawatts of capacity.

Another 14 are likely to be on the market if Spain's two market leaders Endesa and Iberdrola go ahead with their tentative merger plans.

IF AES and International Power are the opportunist generators, Enron , one of the most established U.S. companies in Europe, and Suez Lyonnaise of France, are their half sisters, the opportunist traders.

Suez, originally a water company and a relatively recent entrant to the power industry through its Belgian affiliate Tractebel , calls its strategy "Smart Play".

This approach puts electricity trading and hedging in the front line, deploying as little capital as possible, and using its own generating capacity as backup when the trading runs into trouble.

But the principle is the same -- dont get bogged down with the regulators, and make sure your assets are liquid.

On Thursday, Suez reported 144 percent growth in first half earnings from its energy business to 381 million euros, a rare feat in the low-growth European electricity sector.

Heavy antitrust action combined with increased competition around the world is making the lives of integrated giants like RWE , E.ON and Endesa look increasingly difficult, and the nimbler new generation more attractive.

"They're much sexier than the integrated utilities for one reason," says Vincent Gilles, European utilities analyst at UBS Warburg. "They can just pull out when they're not making money any more." (Reuters)

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-- Martin Thompson (mthom1927@aol.com), October 08, 2000