An Integrated Strategy for Asset Valuation and Disposal of Surplus and Redundant Power Generation Equipment

An Integrated Strategy for Asset Valuation and Disposal of Surplus and Redundant Power Generation Equipment

Mike Craigie

Managing Director

Craigie Engineering Sales & Services Ltd.

SYNOPSIS

This paper outlines the recommended strategy for the valuation, marketing and disposal of surplus power plant.

In addition to assessing the overall extent and varied sources of such available equipment, the paper also looks closely at the various options which a utility can adopt when disposing of such plant, and also looks at the merits and potential difficulties to be considered when investigating the feasibility of adopting all or part of such equipment or plant into a new power project development.

A preliminary equipment/asset valuation guide is also included for discussion. The paper also takes a look at the industry’s changing attitude to the use of such plants, from the point of view of clients, OEM’s, owners and asset disposal managers.

SURPLUS EQUIPMENT:

The availability of ‘surplus’, canceled order, or ‘advanced order’ equipment at attractive cost and immediate delivery, is a worldwide phenomenon which has surprisingly few restrictions on capacity.

From our experiences over the past 20 years or so (while investigating the availability of such equipment), it is rare in fact to enter into discussions with any OEM, utility, major oil company, or large industrial group, and not find someone who does not have, or has had, ‘surplus’ unused equipment available from some project which was canceled, frustrated, or built ‘on spec’ and never found a buyer.

The term “surplus” equipment is most frequently used to avoid the pre-conceptions of some clients (and OEM’s) that what we are offering is basically someone else’s scrap:

Traditionally, up until the past few years at least, most of the leading manufacturers (OEM’s) would only consider offering refurbished equipment of their own manufacture, and even then only when their client could not afford the capital cost of new plant, or they could not convince the client that new equipment was a better option.

Most manufacturers have now dramatically changed their attitude to surplus equipment, with many more OEM’s now even purchasing, refurbishing and selling/renting other OEM’s equipment.  This trend is witnessed by GE’s strategic acquisition of GTS (Greenwich Turbine Services) and UNC-Metcalf, and Stewart & Stevenson (with Pratt & Whitney, Rolls Royce, Solar and now EGT/Ruston overhaul experience/capabilities).

Having now seen the successful implementation of several projects using surplus equipment, even the hardest of attitudes among clients (e.g. in the oil industry and with IPP developers) has changed remarkably and the general market perception is a move toward recycling and re-use wherever possible/practicable.

SURPLUS EQUIPMENT AVAILABILITY

The reasons for such equipment becoming available are varied:

  1. Political or Environmental:
  1. The 2 x 350MW oil-fired units from the ‘Shimaal’ project which were canceled due to Iraq’s excursion into Kuwait.
  2. Many aborted nuclear plants in Germany, Italy, Puerto Rico, Philippines, etc.
  3. 300MW CCGT Power Barges for Pakistan cancelled by new government.
  4. 2 x 110MW hydro/pumped storage plants for Northern Ireland cancelled due to security concerns for the site.
  5. 8 x 1250MW nuclear plant cancelled by TVA/US Government in mid 1980’s

Total estimate:                    20,000MW

  1. Availability of Fuel/Grid Constraints:
  1. The 4 x 660MW coal-fired units canceled by ENEL when their government made a policy decision not to increase the country’s dependence on imported coal.
  2. The 2 x 300MW units in Northern Ireland which have been unused due to their oil-fired design and reduced electrical demand.
  3. The 2 x Frame 9E gas turbines from cancelled re-powering project.
  4. 2 X 9MW diesels built as speculative/’back door’ IPP, with no PPA (Power Purchase Agreement).
  5. 2 x 150MW V94.2 gas turbines which can’t be run due to severe grid constraints.
  6. Several CCGT plants in India (6FA and 9FA) which do not have access to gas

Total estimate:                    20,000MW

  1. Overestimated Load Growth or Demand:
  2. 250MW Marsden B oil-fired power plant in New Zealand, mothballed since 1980.
  3. The 5 x 100MW coal-fired units in RSA which have seen little use due to large nuclear plant and larger coal-fired units running on base load.
  4. Many similar large coal and orimulsion power plants in UK now available as not competitive (under power bid process) with nuclear and cogen/CCGT plants.
  5. The 25MW backpressure steam turbine generator in Eastern Europe never installed due to cheaper power coming on line from adjacent large coal-fired station.
  6. The 400MW coal-fired unit at Salt River in USA on which construction was terminated due to reduced load growth.
  7. The 230MW combined cycle/cogen plant in Wisconsin which was cancelled by WEPCO when their load growth was covered by alternative power sources.
  8. Many thousands of MW of CCGT and open cycle GT plants in Italy, UK, Netherlands, Germany, etc which are now redundant due to reduces energy consumption and move to wind energy.

Total Estimate:   30,000MW

  1. Industrial/IPP’s with Financial Problems
  2. The 3 x 4 MW Centaur gas turbines in chp/cogen application for ceramics factory in Indonesia,
  3. 6FA cogen/CCGT extraction unit in Italy which had steam to paper mill which has now shut down.
  4. 64 MW condensing turbine generator in Eastern Europe from canceled project.
  5. 4 x 12 MW HFO-fired diesel engines from cancelled shipbuilding project
  6. Many paper mill cogeneration applications in UK, Finland, France, Italy, which shut down due to paper mills not being competitive with Far East

Total Estimate:   10,000MW

ADVANTAGES OF SURPLUS PLANT

Availability / Delivery:

This 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.

Cost / Economics:

The greatest advantage of utilizing ‘surplus’ equipment is of course usually the capital cost, but this option can not only be most financially advantageous, but also means that the equipment can be commissioned and ‘on line’ 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.
  4. In addition to these is the considerable benefit of early revenue.

For example, if one was to place an order on a 4MW cogen plant and wait 12 months for delivery with 6 months to deliver and install, a client purchasing a similar surplus unit with foundation designs and wiring diagrams modified easily to suit their site conditions could have the unit installed and commissioned in 3 – 4 months.

During this advantageous 14 month difference, that same plant could generate power alone worth over US$ 1 Million, (excluding the extra profit from steam sales) at 2.5 cents/kWh, and this is only a 4 Mw plant.

Imagine then the comparative savings in having a 300MW CCGT plant on line 14 months or more ahead of schedule. (US$ 75 Million in earned revenue using the same 2.5 cents/kWh)

Note:  Most modern turbine packages (e.g. Frame 6, Taurus or W251) are either 50 or 60 Hz machines with only a gearbox alteration required.  In fact the 60 Hz alternators at 13,800 V (1800 or 3600 RPM) are the same as used in the 50 Hz machines and re-adjusted on the voltage regulators to give 11,000 V at the relevant 50 Hz speeds (1500 or 3000 RPM)

Retained Equity

The other significant, and possibly the most important feature of utilizing such immediately available and ‘surplus equipment’ is that the owners will often be willing to retain part equity in any viable IPP development, thereby making overall project finance more accessible.

It is of course more attractive from their point of view to take a steady return on a retained equity/investment on the plant over several years, rather than continue to absorb the often substantial costs of storing the completed equipment at the OEM’s (original equipment manufacturers) factory and see its residual or resale value diminish at an even more alarming rate.

Valuation of the available plant:

At this stage it may be worth making a brief study of the likely cost or value of such surplus equipment. – Refer to Graph A

Firstly, let’s look at a typical depreciation in any type of power plant (diesel, gas or steam turbine) and the value of regular major overhauls and “zero hour” overhauls – Graph A.

Secondly, if we make the assumption (as most accountants would do) that straight-line depreciation of power plant takes place over 10, 15 or even 25 years.

From our own past experience and our ongoing involvement in the valuation, marketing, and sourcing of suitable surplus equipment, we have found it best (i.e. closest match), in the case of gas turbines particularly, to assume the designed 20 year life span of the equipment.

“Negative Equity” – Refer to Graph B

Obviously, the recent and substantial reductions in the delivered cost of new equipment have had a significant impact on the inherent value of both used and unused power plant. (e.g. Frame 6 units sold for US$ 10-11 Million 7-8 years ago, then dropped to US$ 7-8 M with over-supply 3-4 years ago, and now are listed (GTW Handbook 2001-2) at around US$ 13 Million.

This has given rise to the most unlikely scenario about 4 years ago, where the equipment value (in book terms), which an owner believed his equipment was worth, was substantially more than the real cost of similar/identical replacement units.

Aero-derivative Gas Turbines – Graph C

With this in mind we would note the anticipated selling price (FOB) for a 15 year old Centaur T4000, in operating condition, with basic/operational spare parts and full maintenance history, recent overhaul, and all ancillary equipment (coolers, inlet/exhaust, etc.), of around US$ 550,000.

Industrial Gas Turbines – Refer to Graph D

Here we have chosen to highlight the estimated cost for a 10 year old GE Frame 6 (38 Mw), again delivered FOB, with operational spares, auxiliaries, recent overhaul, and full maintenance history, at around US$ 6.5 M.

Proven Reliability/Availability

With most equipment, which has already 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 on operating experiences within not only the existing plant but all other similar plants worldwide.  User symposiums will also have identified specific areas for concern and a wealth of historical documentation can usually be easily accessed.

Insurability

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

These efforts often lead to reduced flame instability and less margin for error in T1 and T2 temperatures, giving cause for concern, particularly now by the insurers of such plants.

Overhaul & Maintenance Facilities/Support:

Another major benefit of surplus equipment, which 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 Operation & Maintenance (O & M) contractors.

There will also usually be a wealth of supporting services available for replacement blades, coatings, upgrade/replacement of control systems, vibration monitoring equipment, etc.

Valuation & Disposal Strategy

We typically recommend that surplus plant owners give themselves the maximum period of marketing prior to final decommissioning or dismantling. This then gives them a longer and more realistic period of finding the ‘right buyer with the appropriate project application.

With most owners preferring to sell such plant on an as-is, where-is basis, the frequently onerous cost of decommissioning and dismantling can be avoided, as this would then typically be borne by the purchaser, further saving the owner substantial costs.

Prior to entering into the marketing phase the most important criteria for successful disposal is to set realistic and attainable recovery/selling prices which match other surplus and new equipment in terms of price, scope and availability, with reasonable balancing of residual and elapsed lifetime. Allowance has also to be made for performance, spare part availability, terms of purchase, location and accessibility of site, etc.

Many brokers or marketing agents will attempt to secure lucrative contracts, which often require burdensome provision of project and on-site managers, advertising costs, with little or no margin for success-based incentives.

CESS usually recommend, and prefer to enter into, contracts which allow recovery of some or all of the hard costs, but with all of the profit-based elements of the contract linked directly to the success in finding the right end-user, willing to purchase at the best terms and highest recoverable cost to the owner.

Summary & Conclusions:

Unused and used but serviceable or overhauled power plants are available from the smaller 1 – 2MW gas and steam turbine units, right up to 1200MW, and the availability of such equipment is rarely a reflection of the lack of demand or unsuitability of the equipment, but can more commonly be linked to a lack of market knowledge of what is available.