Lack of capacity fuels global battles over power suppliers

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The Independent Online

On the face of it, the two deals, announced yesterday on opposite sides of the Atlantic, looked entirely unrelated.

Chloride Group, a provider of "uninterrupted power supply"—big batteries and smart technology boxes that keep the servers running and the refineries pumping in the event of a blackout—yesterday rejected a £657m takeover bid from American industrial conglomerate Emerson.

Having recently hiked its growth forecasts against a "background of deteriorating power quality" around the world, the company is predicting major growth in demand for its kit. The approach, it said, "materially undervalued" its business. Emerson, a company that has built itself into the largest supplier of power equipment to the oil industry through a string of acquisitions, is not keen to be drawn into paying much more for the company. If it can't reach an agreed deal with Chloride's board, it may just look elsewhere.

International Power meanwhile agreed to pay £439m to the US buyout group Warburg Pincus for four power plants in the mid-west and eastern part of the United States: plants that will spend most of their lives standing idle. The "peaking" plants make most of their money via subsidies from government in America, which pays for them to be kept "hot"—something akin to idling an engine—so that they can immediately go into action when demand spikes surpass the capabilities of the fleet of plants in place to provide baseload power. Much less efficient than so-called combined-cycle plants, which utilise waste heat from one turbine to power another, the peaking plants are built to run only when they can capture the high prices companies will pay when demand is highest.

There is a commonality to both transactions. Both can be boiled down to an issue that has economists increasingly worried: energy supply and security. There is a causal relationship between energy usage and economic growth. It was a point made yesterday by Rodrigo de Rato. In a speech in London on energy's role in the economy, the former head of the International Monetary Fund issued a stark warning about the growing gap between demand and new supply.

"Since 2006 we've seen more and more constraints of supply," he said. Manifested in part by the soaring price of oil, he pointed out that under-investment in new supply has become severe, calling it "very dangerous for growth. It is clearly a constraint." He added: "There is no question that we are at a peak in term of energy prices, but we are also at a low in terms of spare capacity."

In short, economies can't continue to grow if they are starved of the power they need to do so. With power scarcity worsening, it is of little surprise that price inflation is rampant. The oil price has reached new highs almost weekly in recent months. Centrica, the country's biggest energy supplier, yesterday warned of unprecedented increases to household energy bills, coming as they would on top of the average 15 per cent hikes pushed through earlier this year. Economists had already begun to fret that rising bills were diverting money that would otherwise be spent on other sectors of the economy, adding another brake on growth. In response to Centrica's hints yesterday, Joe Malinowski of the said: "Now would be a good time to start panicking."

Thus far, emerging economies like China and India have been proceeding relatively unscathed by the problems being experienced by the likes of the United States – which is sliding toward recession if it's not there already – and much of Europe. Yet the sheer rate of growth in the developing world has begun to put the energy system under increasingly heavy strain. China, India and South Africa all hit the headlines this year after power cuts led entire industries – especially the power-hungry mining industries of China and South Africa – to shut down for days at a time. Thousands of Indians took to the streets earlier this month after swathes of the country were left without electricity. The growth of these economies is acting as a ballast against the global economy following America and Europe on their downward slope. If they are dulled, it could exacerbate an already deteriorating situation.

It is little wonder then why Emerson has shown such an interest in Chloride. Earlier this year, the company opened regional offices in Singapore and Russia to capitalise on the opportunities in those burgeoning markets. Specialising in high-end sectors like information technology, financial services and oil and gas, the company's clients will happily pay to keep the lights on when sudden shut-downs can damage sensitive equipment or lead to data loss. Chloride also ensures that the power that does come through is "clean", evening out the spikes and troughs that come through the system and can be potentially ruinous.

The deteriorating energy backdrop means that Chloride's services can command an increasingly high premium. It also bodes well for those providing the desperation wattage – like International Power's new acquisitions. In the two regions in which the new plants are located, spare generation capacity is predicted to fall sharply every year out to 2013. That will force prices ever higher. "The tightening supply-demand conditions are the rationale for this investment," an International Power spokeswoman said.