Boom time for the generator sector as the Middle East region continues to outgrow its existing electricity distribution networks.
The Middle East is often described as one large construction site. Huge swathes of once inhospitable desert are being transformed into luxury residential developments, but as cities expand and new settlements spring up, electricity distribution networks are increasingly unable to stretch to reach these new customer bases. This has opened the way for generator suppliers to step in and plug the gap.
“A generator produces electricity where it is not available from the grid,” says Fernando Calle, managing director of generator manufacturer Himoinsa Middle East. “At the moment in the Middle East the main demand is for temporary generators for construction sites rather than for standby generators.”
Customers or companies are reliant on the utilities coming in and connecting them and that can be an unknown time period. – Colin Cavé
Colin Cavé general manager for RSS, which provides temporary power and cooling solutions, agrees: “We see the initial power requirement at the construction stage, but also backed onto that there is a requirement post-construction to run these new developments, hotels, warehouses and factories before the mains connection is made. With the explosion in development the local utilities are struggling to keep up with demand and, even if power is available at the power station, often the distribution link is still being built.”
Consequently, business in the generator sector is booming, as Julian Ford, marketing and business director for rental firm Aggreko International explains: “In the past 2-3 years, we have seen annual demand growth of around 50% and if we had more equipment we could rent it.
It is across the Middle East, not exclusive to Dubai: in Abu Dhabi there is the Yas Island development, there are the northern emirates and Qatar is a real hive of activity with the Dolphin gas project and in Saudi with pumping oil and refining chemicals, there is a lot of shipping work too.”
The length of hire ranges considerably, from a couple of weeks to several years. “A lot of the requirements start as a 1-3 month hire,” says Cavé.
“But often customers or companies are reliant on the utilities coming in and connecting them and that can be an unknown time period,” he adds.
Rental vs purchase
So at what point does it become more cost-effective to purchase a generator outright?
“The issue is it is going to cost x amount to buy a generator and so much to rent it, so in just a few weeks or months it seems worth buying it,” comments Ford.
“But what people overlook is that when you rent a generator you also get all the spare parts, the fuel tanks, cables, fuel lines and transformers.
“We rent the complete system and people overlook the fact that just buying the generator doesn’t get anything for you, you then have to look after it, to maintain it, you have to operate it and put the cables in and do the distribution systems. We tend to say anything over about three years and then you should look at a permanent solution.”
Ironically, rental firms are also being kept in business by customers who actually want to buy generators, but are unable to get hold of them due to a global lack of units.
“There is a world shortage of diesel engines and alternators so the delivery schedule has increased quite drastically over the last two or three years,” says Cavé.
“Whereas it used to take 6-8 weeks for a new generator to be manufactured and delivered it can take up to 9-12 months now. And that is where the rental comes in. Some customer rent because they are waiting purely for grid power others because they are waiting for new equipment to arrive.”
Ford agrees: “The advantage of renting is that in just a few days or a couple of weeks you can be up and running and you can be using that while you are waiting for the permanent plant to be delivered and installed.”
“If there is equipment available then a rental customer could have it in a couple of hours,” continues Cavé.
“If a specific size is not available the customer has the option to rent slightly bigger or smaller until that option is available. For example, a 500-kVA might be in short demand in the UAE or Saudi so customers could rent two smaller ones or a bigger one. So with rental it is relatively flexible.”
Engine trouble
The surge in demand for generators is having a knock-on effect down the supply chain. Generator makers are struggling to lift output because they are unable to source sufficient volumes of loose engines.
“Mostly it is the engine supply and obviously that is the heart of every generator,” says Ford.
“There are a large number of generator manufacturers who buy from a core number of engine suppliers. And there is bottleneck with the suppliers to engine companies as in the early part of this decade there was a power crunch and the energy market went through a bit of a consolidation.”
“What happened was that several of the major component suppliers went out of business or consolidated. Then as the market grew pretty quickly they weren’t able to keep pace with the engine companies and that has caused a backlog. They are beginning to build more capacity now but it is taking quite a while to do so.”
Dan Bentley from engines producer Perkins admits supply cannot keep up with market requirements: “We sell a full range from around 8 kw to just over 2 000 kw and we are seeing huge demand across the range, not just for the Middle East but worldwide.”
“We have a very healthy order book for engines for standby generators. There is strong demand from China where the national grid isn’t as good as in other parts of the world. There have been problems in South Africa where has been huge demand for product over the last 6-8 months and we have done whatever we can to divert product to that region, where we wouldn’t have normally sold as much.”
“From two years ago we are seeing a 25-30% increase in demand, or maybe higher.”
He says much of the demand for engines in Europe is driven by the requirement for standby generators for data centres, internet service providers and emergency generator backup systems for new big-value builds.
Perkins is boosting capacity in response to the rise in demand.
“Last year, we produced around 370 000 engines, when you are already producing that sort of volume if you have a 5-15% or more increase [in demand] it is a sizeable task to meet that and you cannot do it at once, you have to pick if off in chunks and look at where you are going to invest to give you the best return.”
The firm already has manufacturing facilities in the UK, Brazil and the US and is opening a new plant in Jiangzu China.
The unit will have an initial capacity of 60 000 diesel engines per year following its startup at the end of 2009.
But difficulties in procuring essential engine components are hampering efforts to ramp up output.
“We are doing every thing we can to increase production but you can only do that so fast, like the generator manufacturers are hindered by the loose engine supply into the market we are also hindered by the supply of engine blocks, engine cranks and other components into our facilities, so it is a knock-on effect all the way down the line,” Bentley adds.
Engine component manufacturers are in turn being squeezed by the global shortage of steel and other key raw materials which is taking its toll on all manner of equipment suppliers.
As for lead times, Bentley says it depends on the size of the engine and the customer accounts: “The standard industry lead time for an engine is 10 weeks and we are double that now if not more. At a time of high demand we cannot build for stock.”
Generator makers are also expanding capacity. Himoinsa is investing €15 million (US$23 million) in a new factory also in Jiangzu, China.
In 2007, the Spanish firm produced some 34 000 generators but is aiming for 84 000 this year.
The company already has manufacturing plants in Europe, Asia and South America.
Despite fears of a downturn in the global economy, the generator industry does not expect demand to slacken any time soon.
“There is all this talk of the credit crunch, but we have not seen it hit the sectors that we deal with just yet,” remarks Bentley.
“Especially with the larger engines it is very much a project related business and tenders can be worked on up to two, three or even four years in advance, so a lot of the business with the larger engines would have been sold and signed for and completed maybe 12-18 months ago.”
Cavé also sees a bright future for the generator rental sector: “The beauty of a global fleet that is designed to be moved around is we can move the fleet to where there is demand. Demand may drop off in the Middle East in 10-15 years’ time, but Africa could have a sudden demand or South America.”
Emissions legislation
Furthermore, the introduction of emissions standards are expected to generate new waves of orders as operators and rental firms are obliged to upgrade their stock to meet the latest guidelines.
The big change to the genset industry since 2000 is emissions standards.
“North America has taken the lead with Europe following suit. We already have engines developed to have the best fuel consumption and to produce the best power and to have the best performance, now suddenly you have another thing to think about, and that changes the whole performance and design of the engine. All the new engines that are coming through are designed for the new levels of emissions.
It really has changed the face of the genset business; where before we were just selling one engine anywhere in the world now we have multiple engine platforms and line ups for different territories. We cannot sell an American emissions compliant engine into say Nigeria as it just wouldn’t be competitive. Not only do we have to develop for performance in emissions compliance we also have to consider noise and vibration,” he adds.
Engine producers are investing millions of dollars into researching and developing cleaner and more efficient designs in response to these tougher emissions standards that are continually being rolled out.
This type of legislation has yet to hit the Middle East market though, but, as the region’s environmental conscience grows it, similar rules could follow.
Future fuels
One area that is tipped to change here in the Middle East, however, is fuel preference. Across the industry as a whole there is growing interest in using gas-fuelled gensets.
Generators can run on diesel, heavy fuel oil (HFO) or gas. A construction site would typically use a diesel powered unit, while HFO would be used in larger power generation engines for sets that are permanent installations.
Similarly, gas engines are used for constant speed, base-load power applications, particularly combined heat and power installations. Gas is perceived as the cleanest fuel, but these engines typically produce about half the power of a diesel engine.
“As diesel is going up in price significantly these days, if clients have their own gas reserves they often prefer to burn natural gas rather than diesel,” says Ford.
“The important factor to remember when you are running a generator and running it fairly hard, maybe 75-85% of the running costs is fuel, so the choice of fuel is one of the most important factors a client has to make. We introduced a gas-powered range for rental about two years ago and that was a major shift for us. We saw the opportunity certainly in Africa for supplying gas-powered generators for the utility market there and increasingly I think we are going to see that in the Middle East in the next two to three years.”
Further down the line, Bentley expects to see a wider use of biofuel blends in diesel generators. “With the world going green and the cost of diesel becoming such an issue as well we are looking to develop new engines and we do offer engines that run on a percentage of biofuel. The use of biodiesel will be a good area for the future,” he observes.
Other firms are taking a look at the possibility of utilising renewable sources of energy, such as solar power, with generators.
While these developments may still seem a long way off, one thing is sure – generator and engine manufacturers as well as rental companies operating in the Middle East look set to remain busy for the foreseeable future.
