Transmission and Distribution Investment

China is no doubt a major player in the transmission and distribution sectors, however, some have queried whether the Chinese level of investment will be sustainable and we have given this some thought. The elasticity of electricity demand in China with respect to GDP hovered around .8 up to 1999 when it jumped to 1.2 and is now 1.3 to 1.4. In the large developing countries only Brazil, Mexico and Vietnam have this elasticity. We do not believe that Chinese elasticity will remain at that level permanently but it may well continue at 1.2 for some years. China has the funds and it also has a huge and expanding installed base of generating capacity which needs to be transported to the consumers. Electricity is such a fundamental driver in the Chinese economy that it may falter unless the T&D momentum is kept up and this is something the Chinese government cannot countenance. India, in contrast to China has electricity demand elasticity of .5 to .6, a fall from around .9 in 2000 and it has been falling steadily since the early 1990s. This indicates that the shortfall in electricity supply is a serious brake on economic development in India and it is now receiving the necessary attention.

The fastest growing markets will be South America with real growth of 7.2% followed by Western Europe with 6.5%. North America and Asia will be slower, at 4.7% and 2/3% respectively. The reason why Asia is lower than might be expected is that China is already so high in capex. Europe will be driven by increased capital expenditure, with essential investment lead by expansions of interconnections, replacements and refurbishment, adn smart metering, Asia by transmission expansion and smart metering in China and both transmission and distribution expansion in India will be required. Central and South America will lead by transmission interconnections. Some regions of Africa will also have high growth but the overall market share is small.