The epic of commissioning new generating facilities in Russia is almost over. Thus, now it is necessary to upgrade the old ones. The country has accumulated sufficient competence to address this problem and to create energy technological solutions of any complexity, - believes Mikhail Lifshitz, High-Tech Assets Development Director at Renova Group.
Today, 145 power gas turbines operate in Russia with a total capacity of about 17 GW. Three-quarters of this amount are maintained by manufacturing companies, and they are mainly foreign ones. More than 75 foreign turbines are soon to come. They have been already purchased, but not yet put into operation. The volume of the maintenance market is estimated in tens of billions of rubles, and continues to grow. Some Russian high-tech companies are also trying to stake out a place in this market. One of them is Rotec Holding, part of Renova Group.
Mikhail Lifshitz, Chairman of the Board of Directors of ROTEC and Ural Turbine Works (UTW) estimates the portfolio of "long" (8-10 years) orders of ROTEC associated with maintenance of gas turbines to be 21 billion rubles; last year alone, they grew by 75%. At that, ROTEC maintains about 20 percent of gas turbines under such contracts. Company experts - independently and in partnership with other service companies – provide maintenance for 24 gas turbines with a total capacity of 2.7 GW.
In the nearest future, the Center for Recovery and Production of Gas Turbines’ Hot Section Components will be opened in Ekaterinburg. The plant will be launched in the territory of UTW controlled by ROTEC. This project is worth 4 billion rubles. Its first phase will involve localization of modern technological solutions of turbine hot section components: moving and guide blades, combustion chamber nozzles, and other parts regenerative repair. The next phase will include launching the full cycle blades production: first, from purchased billets, and later, starting from 2019, with full localization.
The Center is created using technological solutions of such Swiss companies as Oerlikon and Sulzer strategic assets of which belong to Renova Group. To improve properties of thermal barrier and corrosion resistant coatings of gas turbines’ components, competence of Oerlikon Balzers and Sulzer Metco will be used. As for the maintenance of turbine equipment in general, we will use experience of Sulzer Turbo Services, being the global industry leader among independent companies offering maintenance of gas turbines.
This Center is located in the Ural Region. It is the only in Russia. A plant and a regional service center of Siemens Gas Turbine Technologies, being Siemens joint venture with OJSC Power Machines, were launched near St. Petersburg last summer. Siemens gas turbines and their modifications assembled under license by other manufacturers will be produce and repaired at the plant. However, "hot" items are still bought and repaired outside Russia. Some links of the repair & reconstruction process chain have been created in some other service companies such as Inter RAO - Coating Centre, in which hardening coatings are applied on the surfaces using laser cladding and gas-plasma method. In general, maintenance of gas turbine equipment in part of repairing and replacement of parts remains an area where Russian energy and service companies depend almost entirely on foreign suppliers and service centers, unlike steam turbines in which case this process is almost entirely provided by domestic spare parts and service companies.
We asked Mikhail Lifshitz about the new company, prospects of power equipment servicing market in Russia, as well as about modernization of steam-powered units in the traditional thermal power industry.
- Mikhail Valerievich, as we understand, the Rotec’s investment project implemented at UTW will allow Russian energy companies-owners of gas turbine equipment to refuse turbines repair services offered by foreign service centers, at least partially. The old phrase "increasing energy security of the country" comes to mind.
- As for the benefit to the country, our project may be associated with many other fashionable words: «localization of technological solutions", "upgrade", and "import substitution." However, creation of the service center in the Urals is exclusively related to business because we are going to make money there. Import substitution can be an overall goal only in a very limited number of situations clearly defined by the state. However, we work in a quite hard competitive market, and the need for localization may come to us exclusively based on demand and market analysis.
If we do not upgrade CHPs, before 2020, up to 60% of steam turbines might enter the risk area, including worn out machinery and equipment which is at the limit of its life span.
We are introducing hot section components of gas turbines production line at our plant. First of all, it will be reconstruction production. It can be called import substitution or simply optimized activity in the current market conditions. Now, we remove such blades from the units and send them to repair to Sulzer service centers in Europe. Logistics is the "tail" which we are willing to cut off if we make it possible to do this in Russia in such a convenient transportation location as Yekaterinburg. As a result, we get repair cycle time reduction. Therefore, customers will get an opportunity to cut losses. Moreover, now we can benefit from a sharp fall of the ruble against euro. Although, we started UTW project before our national currency actually dropped. Once demand came to a certain level, it became clear that it was advisable to set the production in Russia.
- In any case, we can say that your goals and objectives are of opportunistic nature if we talk about public policy. Does it help you somehow?
- If it were so, and if our hopes for the state support were justified, we would have started to make money at least a year earlier. We expected that we would manage to do something with the state support funds through the mechanisms of the Industrial Development Fund (EDF) for subsidizing the interest rates of the loans taken for implementation of projects like ours because it paves the way for launching really high technology in Russia, the most advanced industry super high-tech. As a result, we dealt with arranging project financing with participation of commercial banks, IDF, and involvement of state subsidies within the framework of programs to support strategic civil industries for too long. But, in the end, we decided to launch the project relying on our own resources.
- Traditional bureaucratic delays?
- Not at all. Moreover, we have to give credit where credit is due. Ministry of Industry and Trade and IDF did a good job. Everything was just remarkable. However, in order to get funds from a state fund, I have to prove I have a confirmed bank loan, but the requirements set forth by the bankers were such that it was very difficult to accept them. For example, we had to agree on not paying any dividends. Tell me, what kind of an entrepreneur would I be if I did not pay dividends to my shareholders? Secondly, to take out a loan we have to provide security four times the amount of the loan. Moreover, we have to get a personal guarantee of the founder. Thus, we started creating the center independently, while at the same time, we continued working with our partners trying to lead them into the common-sense path.
- You plan to launch a full-scale production of turbine blades within the next three to four years at best, right? Why do you put in so much time on the implementation of this part of the project?
- Opening the reconstruction plant has already cost us more than a billion rubles. But this is not the most important thing. Before we pass into the next phase, we need to gain a foothold in the previous one, to understand what kind of feedback we get from what we have already built. Now, we focus on reconstruction of components; we will also deal with coatings, because it is clear in terms of the economy. It consists of optimization of logistics, customs, reducing order execution time and already signed services agreements. The next phase - machining of blades made of purchased billets - is also clear to us, but as for our own production of blades, we will have to take an important decision. We will have to decide whether it will be metallurgical casting or we will use additive technologies.
So far, everything seems to be in favor of casting, but we have analyzed operation of such companies, as General Electric and Alstom, which are leaders in this market, and we are seriously afraid to spend all the money on outdated technology. General Electric and Alstom already produce some elements of the guiding unit using a sizing method for small turbines. In any case, efficient production of blades requires high performance. According to estimates, we will have to cast seven thousand blades per year to ensure the production is commercially viable. As we see it today, we are able to provide demand only for half of this amount.
- Maybe this missing half will be supplemented by global demand?
- If we want to enter the world market, we need to have a reference base. We hope to, first of all, use Sulzer’s experience. Renova is the main shareholder of Sulzer. In addition, we hope to agree with one of machine building companies in Russia to share responsibility for the development of this direction. Another possible area of demand is again maintenance of power gas turbines based on the forecast of their number increase. According to our calculations, it is about 70 more gas turbines until 2020.
- Many people talk about stagnation of the gas turbines market in general according to figures in Europe.
- In Europe, this can be explained by renewable energy which is widely used there. Another reason for that is a high level of system energy efficiency. We believe there are other markets. For example, Egypt has signed a huge contract with Siemens for supply of gas turbines with a total capacity of 20 gigawatts. Iran has enormous potential; Southeast Asia still has demand. Shale gas has brought the combined cycle industry to a new level in the United States. Thus, market situation will, of course, be constantly changing. Some regions will choose alternative energy, some, like Kazakhstan, Mongolia, North China, will hold on to powered units. As for the Russian market, it will not face stagnation, at least when it comes to maintenance of gas turbines: many owners of energy assets start facing maintenance issues just now, and they are looking for new opportunities in this industry.
- Do you mean new players?
- No, I mean modern technological possibilities provided, for example, by our Center for Remote Monitoring and Prognostics in Khimki. Actually, many companies provide remote monitoring services, watching turbine operation mode and tracking deviations from operating parameters. We are proud that our experts have developed adaptive models for rotating machines based on their own algorithms, and in our case, it is prognostics of a future state of the machine, rather than monitoring parameters. General Electric representatives told us that this was the first time they actually saw such a system, especially in terms of mathematical data processing capabilities. So, industrial Internet is not just a fashionable thing for us. We started doing it four years ago. For the first time, we introduced the system last year. Its operation on four units shows that we begin tracking the development of a failure two to three months before a breakdown or an accident. This means that over time, we can expect a transition to repairs on condition from routine maintenance.
- Don’t you think you are damaging your maintenance business? Because if the system is successful, consumers will likely have to pay less than in case with normal maintenance.
- I do not; I believe we, on the contrary, stimulate this business to a great extent. We begin operating, for example, the stock of extremely expensive components for gas turbines, while reducing unnecessary costs. Yes, consumers will have to pay less, but we, as a service company, will free up a considerable amount of working capital and not only because of the possibility to get rid of the need to keep a certain amount of reserve components in stock. When forecasting repairs, our experts will be able to plan, for example, standard hours. Whereas now, we face overlaps and have to involve subcontractors, reducing our own profit. Moreover, when reducing customer's costs, we will eventually become more competitive, attracting new users.
According to power purchase agreements, almost all power units put into operation in recent years in the thermal energy sector are combined-cycle plants mostly produced abroad, including gas turbines.
- This is the case if they understand that it is cheaper to prevent damage than deal with its elimination.
- You are right. We are working on it. It is complicated. Generally, it is difficult to invest in a high-tech service infrastructure. Moreover, there are different potential consumers of these services. It can be a station, but it can also be a TGC. While shareholders still somehow consider their enterprise economy as a whole, then, for example, service companies often behave as if they are interested in more frequent breakdowns. We understand that a generating company should definitely be interested in prognostic monitoring. Right now we are processing annual statistics: how many working hours we have saved, which emergency situations we have eliminated, and how much money, both our own and our customers, we saved not buying unnecessary spare parts. We will process these data and will present justified figures to support interest in our product.
- Does that mean you are confident in growth prospects of your service company?
- In any case, the strategy in favor of power provision agreements (PPA) with a primary launching stations based on gas turbines once selected by the state, will provide enough maintenance work for Rotec as a service company. After all, when you buy a large gas turbine of over 100 megawatts, you spend the same amount as if you bought it anew over a ten-year cycle of its work. It is the actual price of its maintenance. When it comes to smaller capacity equipment, the maintenance cost and price of the turbine itself ratio can be up to three.
- I read your publications in which you say that, at the same time, reliance on the PPA seriously damaged investment potential of the industry modernization. As a result, new launches, having exceeded 20 gigawatts, made up only 10 per cent of the capacity fixed in the Russian energy system and failed to lead to qualitative improvement of efficiency of the domestic power industry consisting mainly of steam-powered units.
- The state preferred to use the PPA mechanism to prioritize new construction focusing investments on new power units; and for the existing 600 thermal power stations, only repair budgets remained. As a result, having built new blocks for more than twenty gigawatts, we left the remaining 130 without maintenance. In the post-Soviet countries, Kazakhstan, for example, did not use the PPA mechanism, but rather actively, effectively, and clearly upgraded the existing equipment. As a result, about 60 percent of the units have been already upgraded. In our country, even responsible people do not distinguish between repair and upgrade. Repair is restoration of the characteristics set during manufacture, while upgrade is their qualitative change. And not always it is upward upgrade. For example, once you purchased a 12 megawatts pump, and now you use only half of its power. You do not need excess power, for example, due to changes in its specifications, and it costs a lot for you. You can either throw away this pump and buy a 6 megawatts one, or upgrade it, spending less money than on buying a new one, and lower specifications down to the required. As a result, you do not buy new capacity, but rather raise the system efficiency of your enterprise.
Here is another example more relevant to our conversation: there is a cogeneration turbine on the power station with steam extraction for a nearby chemical plant. But once the plant’s demand for heat reduces (due to changes in specifications or energy-saving measures), you have unused thermal power. To avoid wasting it, excess steam can be directed to another smaller turbine, and converted into electricity. When we talk about upgrade, we do not mean update of a single piece of machinery, but rather changing properties of the entire system. In addition to recovering reliability and service life, we do everything in order to adapt the entire system connected to this piece of machinery to meet the conditions which have changed since the moment of its creation. - How high is demand in this area of your business?
- At the moment, we have only one big project in Russia. This project is modernization of a T-250 turbine with upgrading its capacity to 300 megawatts at CHP-22 Mosenergo. We have successfully completed several contracts in Tatarstan. We, as the owners of the Ural Turbine Works, are, of course, concerned about the lack of systemic progress in upgrading steam power stations. This is something that could provide enough orders for the plant. Actually, upgrade of existing units is a key market for any machine building enterprise in the world. In other words, capitalization of any plant is not what can be potentially produced there, but rather what has already been produced and delivered, and needs to be replaced at some point. For example, Alstom has upgraded 830 steam turbines of different capacity over the past decades! While UTW, which has delivered 790 steam turbine units since 1941, has only several equipment upgrade orders in Russia. These 790 steam turbine units formed the basis of central heating throughout the former Soviet Union.
- Mikhail Valerievich, why do you think there is no system progress in this direction? Is it due to overcapacity?
- In our activity, we always face the fact that there are managers of a new generation who believe an annual bonus to be their planning horizon. They think the most important thing is to show some EBITDA. The easiest way to achieve this is to cut funding wherever possible. Unfortunately, existing equipment (which works in any way) is usually written off by such managers.
As for the notorious overcapacity, I am sure there is no ground under these conversations. Will Russian economy be always in the same situation as it is now? Will it not grow? And even if we have overcapacity, it is just 6% to 8%. In Germany, they have more than 40%! Economic growth will entail demand for all available capacity. Taking into account reducing financial resources of the energy companies which had to spent money for large-scale projects, I believe upgrading existing equipment is the only way out. It is also expensive, but in any case it pays off within 5 to 7 years. Capital expenditures are less in this case because construction of new buildings is not required, and generating equipment is integrated into existing infrastructure. We intentionally put a new generation machine in the form-factor of the old one in our projects. Modernization of infrastructure, not only electric power one, hides huge energy efficiency improvement resource, a source of demand for innovations, and just a huge market for our enterprises. And if high technology is in demand in this area, we are ready to satisfy it. In Russia, we have accumulated sufficient competence to solve virtually any power machine building tasks.
JSC Rotec is an industrial holding. It provides maintenance of gas and steam turbines, produces energy equipment, provides engineering services, and develops a series of high-tech projects in various industries, including power machine building, automotive, aviation industries.
Rotec was founded in 2010. Renova Group is its shareholder. The company's head office is located in Moscow.
Rotec Holding includes CJSC Ural Turbine Works, engineering offices in St. Petersburg and Yekaterinburg, Center for Remote Monitoring and Prognostics in Khimki, Center for Recovery of Gas Turbines’ Hot Section Components in Yekaterinburg. The holding employs about 1,700 people. Revenue in 2015 amounted to 6.5 billion rubles.