"The current decline in the market has been mainly due to the global economic recession, excess generation capacity and low demand for power due to low industrial growth," notes Frost & Sullivan (http://www.power.frost.com) Industry Analyst Rajeev MS. "High gas prices, low electricity prices, absence of price incentives, interconnection issues with national grids and a historic lack of framework have also served to dampen the market."

However, there are now signs that the cogeneration market is on the rebound. The ability to effectively utilise waste heat is giving cogeneration a distinct advantage over conventional thermal power generation processes where levels of heat energy wasted are considerably higher.

The waste heat recovered through cogeneration can be channelled towards additional power generation, generating process steam, district heating and cooling applications. The subsequent saving in energy costs is likely to appeal to end users who would otherwise need to invest money in these applications.

Motivated by the need to save heat energy wasted during power generation, several utilities are moving to replace their conventional old power plants with cogeneration plants. Combined cycle cogeneration plants are a suitable choice for such repowering programmes and are creating new growth niches for cogeneration equipment manufacturers.

Rising demand for reliable, high-quality and uninterrupted sources of power from critical industries is creating new opportunities for distributed cogeneration plants. Heightened demand from semiconductor manufacturing, software, banking, insurance and chemical process industries is set to make the industrial sector one the fastest growing end-user segments of cogeneration.

From a policy perspective, the new EU Cogeneration Directive is likely to boost the prospects of the cogeneration sector over the next two to five years. While unlikely to offer an immediate or all- encompassing solution to existing problems, this pioneering legislative initiative is geared to break down market and institutional barriers and advance the use of this energy- efficient power generating option.

"The Directive should provide a transparent and beneficial structure that clarifies rules and regulations while providing an incentive to install and/or operate," explains Rajeev MS. "With this in place, cogeneration installations should increase, and the industry is likely to move away from the market decline it suffered over the past few years."

At the same time, existing government incentives in terms of electricity tariff, lower interconnection charges and emission credits have played a key part in promoting the installation of cogeneration plants in several European countries.

Forecast to grow steadily from 2006 to 2009, annual cogeneration capacity addition is estimated to reach 4,000 MW by 2010, up from 3,345.9 MW in 2002. One factor in this spurt is expected to be escalating fuel costs with customers increasingly adopting energy- efficient equipment so as to reduce operational expenditure and maintain profitability.

Megawatt growth is also projected to be driven by renewed interest in the cogeneration sector due to environmental concerns and related efforts to limit fossil fuel consumption. Significant opportunities exist, therefore, for more efficient and less polluting products, as demonstrated by the success of newer combustion technologies in gas turbines and engines.

Gas turbines accounted for just under half of the total megawatt added through cogeneration route in 2003, followed by steam turbines and reciprocating engines. Gas turbines were also the largest revenue-generating segment in the European cogeneration equipment market in 2003 trailed by electric generators.

Positive signs notwithstanding, a series of challenges await market participants. In some countries, for instance, cheaper power from old and depreciated power plants is posing a serious threat to the viability of cogeneration plants. Another critical challenge has come from intensifying competition and excess manufacturing capacity, which has led to price erosion and low profitability.

In order to arrest falling profits and to establish customer loyalty, manufacturers are bundling their products along with services such as erection and commissioning, annual maintenance contract (AMC) and breakdown maintenance. "While giving end users better value for their money and prompt service, bundled packages offer good margins for manufacturers and are emerging as a key area of new business opportunity," comments Rajeev MS.

If you are interested in a summary of this research service providing an introduction to the European cogeneration equipment market, please send an email to Kristina Menzefricke, Corporate Communications at kristina.menzefricke(at)frost.com with the following information: full name, company name, title, contact telephone number, email. Upon receipt of the above information, the summary will be emailed to you.

Title: European Cogeneration Equipment Market

Code: B277

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