Monitoring the Trends, Value and Availability of Surplus Power Plant

Posted on April 26, 2007
Posted By: Mike Craigie
 
The availability of “surplus,” cancelled order, or “advanced order”’ equipment at an attractive cost and almost immediate delivery is a world-wide phenomenon that has surprisingly few restrictions on capacity.

The procurement and sale of such equipment has developed its own vocabulary, like these broadly used terms described here.

Surplus or “gray market.” Gray market is the description most often being applied to equipment that is unused or new, but probably is now available with less than the original warranty. (i.e. negotiable warranty or performance, hence the term gray!)

Unused. The equipment has never been fully commissioned, for whatever reason, and may be still in the OEM’s factory, or in a long-term storage location, installed or partly installed but never commissioned, or fully installed and pre-commissioned but never put to use.

New (or “as new”). The equipment may be still in the factory, crated in storage, or installed but unused as above. This implies that the equipment is probably still under warranty, although the “transferability” of such warranty may be disputed by the OEM or owner.

Cancelled-order. Most likely to be still in the factory at an advanced stage of manufacture, or even completed. Usually comes with an “as-new” warranty and performance guarantee by negotiation, depending on site ambient conditions and fuel specifications.

Advance or advanced-order. May be at any stage in the manufacturing process, or even ready for delivery.

Refurbished/overhauled. This usually comes with such work undertaken by an OEM-owned or OEM-approved workshop or competing facility. A limited warranty may be available on labor or parts replaced.

Zero-houred/zero timed. This equipment is fully refurbished by an OEM-approved or similar workshop with a warranty on the work performed.

As-is or “as-is, where-is”. No refurbishment or overhaul has been carried out and the equipment is bought entirely at the purchaser’s risk.

Warranty. Most warranties are greatly overvalued by purchasers and financing institutions alike as they are not usually worth the paper they are written on. Most major organizations we are in touch with are usually embroiled in some long dispute over warranty on major items of plant. Inevitably it is only the lawyers and the OEM who win these arguments, because in the interim period they will usually charge you for both the manpower and the replacement parts.

The reasons for surplus power plant and auxiliary equipment becoming available are varied:

  • Political
  • Environmental
  • Change in fuel strategy or availability
  • Over-estimated load growth or more economical power available
  • Industrial clients, IPPs and utilities with financial problems
  • Over-estimated sales forecasts (in case of some ‘advanced-order’ equipment)

At the last estimate we totalled over 80,000 megawatts of surplus power plant as being immediately available, with trend towards mostly surplus 60 Hz equipment since 2002. Previously, the main surplus was in 50 Hz equipment just before and after the 1998 financial crash in Asia.

Monitoring Availability

Availability of such equipment is typically monitored through:

  • Industry contacts
  • Technical publications
  • Websites
  • Referrals from past clients

Once any new lead on the type/model, capacity and age/condition of the equipment is noted, each item of plant is cross-referenced with our existing equipment databases (i.e. of gas & steam turbines, diesels, transformers, boilers, alternators, barges, etc.) and if not already listed, a new & unique equipment reference number is allocated to that item of plant.

We can then start accumulating technical and historical operating information, scope of supply, images/videos, major maintenance information, etc.

Specific Valuation Considerations

If we first assume, as per most conventional asset management and generally accepted accounting practices, that capital plant such as power generation equipment is depreciated over 10, 15, 20, 25 or even 30 years, we can get a fairly accurate indication of the potential resale value of surplus equipment.

Over recent years the severe fluctuations in asking price of new equipment (particularly with gas turbine generators) has meant that equipment which was acquired in the period may have been greatly over-valued or undervalued.

For steam turbines the initial depreciation would be expected to be more rapid, mainly due to the extensive work required for installation (most particularly with condensing units) but with a subsequent and more gradual devaluation over e.g., 30 years or longer, provided that the unit has been supplied with good quality (‘dry’ and particulate-free) steam.

As with steam turbines, the low power/weight ratio for larger diesel engines (> 2,000 kW) typically means that there is a rapid depreciation in real value of up to 30% almost immediately that a diesel generator is installed and commissioned.

While all of the above factors are necessary considerations when evaluating surplus power generation equipment, no single factor is as important as the market demand for that type of equipment at the time it is released for sale or disposal.

Present Surplus/Gray Market

For the past three years the oversupply of 60 Hz units on the surplus market has been considerable. Many of the smaller units (LM6000, etc.), which could realistically be converted to 50 Hz, have now found homes (mainly in Iraq).

Latest prices indicate that LM6000 units, which “bottomed out”' at about $8-9 million are now being quoted at about $14-17 million, and the larger SWPC/MHI (501F) and GE (7FA) units being offered at around $20-25 million.

Advantages in the Use of Surplus Plant

Availability or delivery is not only a major factor favoring the use of cancelled-order, advance-order and unused equipment, but in many cases the available used equipment may already be overhauled or removed into storage ready for overhaul and rapid delivery, well in advance of corresponding delivery schedules for equivalent new equipment.

The greatest advantage of utilizing surplus equipment is of course usually the capital cost, but immediate availability also means that the equipment can be commissioned and online, generating power (and steam/heat) within a very short period of time, leading to considerable savings in a number of areas:

1. Construction cost is reduced due to lower overheads during the shorter period,

2. Interest during construction (IDC) is reduced in direct proportion, and

3. The developing company’s overheads in an IPP situation are also minimized to the extent that “up-front” profit can be increased by inflating the cost of the installed plant in line with the maximum installed cost, which will satisfy the lead financing agency (albeit within the realms of ‘transparency’).

4. In addition to these is the considerable benefit of early revenue.

The other significant, and possibly the most important feature of utilizing such immediately available and surplus equipment is that the owners may often be willing to retain part equity in any viable IPP development, thereby making overall project finance more accessible. (And in some instances, even operate and maintain the plant with their O&M team from the original site, thereby minimizing the need for redundancies.)

With most equipment that has been installed and operated, a full maintenance and operational history is usually available. Technical Service Bulletins will also be available, highlighting the changes in maintenance and operating procedures which have been recommended over the years for best performance-based operating experienced within not only the existing plant but all other similar plants world-wide.

New equipment manufacturers (OEMs) continue to drive forward at a relentless pace to achieve that extra 0.5% increased efficiency and/or that 1% reduction in emissions, by techniques such as dry low NOx combustion.

The further reluctance of OEMs to “interact” with their competitors, and in particular to share their own operating knowledge and experience on major failures or operating problems, have given rise to concerns that proprietary secrecy is not in the best interests of advancing technology, nor in providing for the best relationship between insurer, OEM and the end-users.

Another major benefit of surplus equipment that has been installed within the market for several years is that there will be many sources of supply, not only for spare parts and overhaul but also for upgrade and experienced O&M contractors.

Two main reasons that can prevent a sale are failures to provide information in time, and failure to agree to a price.

Summary & Conclusions

Unused and used power plants are available from the smaller gas and steam turbine units, right up to even 1000 megawatts or larger, and the known surplus equipment presently totals something well over 80,000 megawatts.

The strategic use of available surplus power generation and related equipment in industrial, IPP, oil-field and even utility developments can be most attractive from a technical, commercial and scheduling viewpoint, and such equipment or opportunities should not be overlooked when assessing the best solution.

 
 
Authored By:
Mike Craigie originally studied to HND level in Marine Engineering and Oil Drilling Technology, and has accumulated over 25 years experience in power plant and related equipment.Most of this time has been spent in gas and steam turbine installation, maintenance, valuation, marketing and relocation.His company - Combustion, Energy & Steam Specialists Limited - was first established in 1990 and has subsequently developed as one of the leading valuation and marketing
 

Other Posts by: Mike Craigie

Related Posts

Energy Asset By Rick Barnett
Managing aging assets By Joshua Smith
 
 

Add your comments:

Please log in to leave a comment!
back to top

Receive Energy Central eNews & Updates



 

Basis-Risk nodal price forecast for the US interconnects

Friday Jul 26, 2019 - 2:00 PM Eastern US - Atlanta, GA - United States

ABB has developed a new, favorite go-to resource, the Nodal Reference Case, an annual, off-the-shelf database of 25-year Locational Marginal Price (LMP) fundamental forecast prices for thousands of nodes and hubs across the three transmission interconnects in the U.S. Join more...

Clean Cities Renewable Power Procurement

Tuesday Jul 23, 2019 - Thursday Jul 25, 2019 - Denver, CO - United States

What Does It Take for Cities to Buy Their Own Renewable Energy? Hear from pioneering cities who are developing and executing a successful game plan for renewable power procurement. Profit from their experience and learn the most sophisticated approaches to more...

Renewables: Extracting Value from Power Markets

Tuesday Jul 23, 2019 - Thursday Jul 25, 2019 - La Jolla, CA - United States

Take an Intensive Deep Dive into How to Extract Value for Renewables from Power Markets. This summit will cover price forecasting, regulatory outlook, structuring, merchant tails, hedging, and risk management. more...