Paying Increasing Attention to Overseas Markets

Subsidiaries of the Korea Electric Power Corporation (KEPCO) are flocking to overseas markets one after another, trying to compensate for the limited growth of the domestic power generation market abroad. As recently as several years ago, only a few Korean power generation companies were found in the global market, but the number has been rapidly increasing.

For example, Korea Western Power has won a series of international contracts lately, including one to build a gas combined cycle power plant in Myanmar and a US$1 billion-worth concession agreement for a hydroelectric power station in Xe Namnoy, Laos. Korea South-East Power, as well, has signed a contract with SK Engineering & Construction and the Turkish government earlier this year to set up an independent power plant at a cost of US$2 billion. The corporation’s overseas business unit is gearing up to process sales of six trillion won by 2020.

Korea East-West Power is also currently engaged in electricity generation projects in no less than 14 countries. In addition, it has recently signed export agent contracts with power generation equipment suppliers in four Southeast Asian countries in an attempt to provide more support to small firms in the industry.

Not to be left out, on October 18 last yearKorea Midland Power held a completion ceremony on Java Island, Indonesia for aCirebon Coal-fired Power Plant, which is the first large-scale coal-fired independent power plant built outside Korea by a Korean company. Korea Midland Power is anticipating that the export of the technology will result in profits of at least US$1 billion.

Korea Southern Power is also thinking of the overseas power generation business as one of its future growth drivers. At present, it is in charge of the repair and maintenance of a 373MW-capacity combined cycle power station in Al Qatrana, Jordan. It is planning to take part in more such projects abroad, building on the business know-how and experience it gains from this project.

“From this year on, power generation companies have to take care of their financial structures on their own, which is quite a burden for them,” said an industry insider.“It seems that they will be further striving to open up global markets, out of the already saturated domestic market, to deal with the burden more effectively.”

Electricity generation companies in the private sector are following the exact same trend these days. One example is POSCO Energy, a daughter company of POSCO. It has obtained five orders over the past two years, including those for a 300MW-capacity photovoltaic power plant in the United States, a 1,200MW coal-fired station in Vietnam, and a 200MW by-product and 600MW coal power plant in Indonesia. Daewoo International is particularly distinguishing itself in Africa, where it concluded an MOU with one of the largest companies in Kenya and an agreement worth US$1 billion to construct a combined cycle power station in Algeria.

Strengthening Partnership with Construction Companies for Joint Market Penetration

One of the most interesting aspects of the global market penetration of Korean power companies is the joint participation of construction companies in overseas power generation projects. An increasing number of builders are taking part in such projects as consortium members, instead of participating in international EPC tenders as a single entity. The new trends of participation can be divided roughly into two types: equity investment and bidding-based contracting.

Examples of the former include the Xe Namnoy project. During its early days in 2005, SK Engineering & Construction and Korea Western Power invested 26% and 25% of the shares to form a consortium, respectively. Not only did SK E&C get the construction rights estimated at 750 billion won through this equity investment, it is also entitled to future operating profits. Hyundai Engineering & Construction is going to make a similar type of investment in a500MW gas combined cycle power station to be built in Myanmar by Korea Western Power, as well.

Meanwhile, the Cirebon project is one of the instances of bidding participation for overseas business cooperation. Doosan Heavy Industries & Construction joined the undertaking as only a partner builder, and obtained orders worth US$600 million in total. In the project to build a 270MW coal-fired power plant that is underway in Ramada, India, in which Korea Southern Power has a 49% share, a tender is scheduled soon for the selection of the builder as well.

This type of business cooperation is especially conspicuous in the field of independent power plant (IPP) construction. One of its advantages is that KEPCO or its subsidiary, as a developer, can partner with one or more domestic builders with advanced construction quality and technologies, while construction firms can obtain overseas orders with greater ease. The government is also encouraging the establishment of consortiums by domestic companies.

Lotte Engineering & Construction has participated in the IPP-3 diesel power plant project in Jordan as the EPC builder. The project is led by KEPCO, and KEPCO KPS is slated to maintain the management rights for 25 years starting from the day of completion. Lotte has joined the state-run power company’s Al Qatrana project as a consortium member as well. As a member of the KEPCO-Sumitomo Consortium, Daewoo E&C has been constructing an S3 Gas-fired Combined Cycle Power Plant in Shuweihat, UAE since last year, while discussing more IPP projects with KEPCO in the Dominican Republic, Chile, and Croatia.

Samsung Engineering has also taken part in the construction of the Norte 2 Gas-fired Combined Cycle Power Plant in Mexico with KEPCO as its EPC builder. SK E&C and GS E&C are mulling over joining Korea Western Power’s thermal power generation project in Takalar, Indonesia. According to industry sources, the subsidiary is trying to persuade the two to make equity investments, beyond participating as constructors, in the first overseas development project led by a Korean power generation company. SK E&C, in fact, has already formed a consortium with Korea Western Power through equity investment in the Xe Namnoy project.

“With Chinese firms increasingly entering the EPC market by means of price dumping, more and more overseas plant construction projects are likely to take the form of IPP,” said a construction industry expert, continuing, “Under the circumstances, it will be more frequent that builders join global projects in conjunction with KEPCO and its subsidiaries.”

Another expert echoed by saying, “It is true that equity investment incurs some financial burden in the early stage, but it is not entirely unfavorable for construction companies if long-term profitability is taken into account. As a matter of fact, there have been some cases in which a construction firm first made a proposition to set up a consortium. It is likely that business cooperation based on equity investment will increase down the road with the IPP sector gaining ground the world over.”

Risks Remain to be Dealt With

As of last year, KEPCO’s overseas power generation sales were approximately 800 billion won, and the total overseas sales, including those from resources development and power transmission and distribution, are almost three times the amount. Although the figure is just 5% of the corporation’s gross annual sales, it is currently making great efforts to increase the ratio, investing about 1.5 trillion won in its overseas power generation business alone.

KEPCO is planning on the construction of new power stations and the replacement of obsolete equipment in a bid to record overseas sales of 47 trillion won and a sales ratio of 40% by 2020. Of course, there are still some hurdles to surmount. Most power generation projects are and will be in progress in developing countries, not developed nations, and therefore it would be well-advised to pay close attention to public safety. Additionally, an unstable governmental situation could put a sudden halt to projects indefinitely in the event of regime change. “In-house consultants are a must for any company intending to participate in an overseas project,” advised a company executive. “Risks, especially political ones, should be controlled appropriately, and thorough market research must be conducted before starting a project.”