Siemens Gas Turbine Technologies (SGTT), the only large gas turbines production facility in Russia, celebrated the fifth anniversary in June.The CEO of SGTT Nico Paetzold, who had carried out dozens of Siemens projects all over the world, spoke in the TASS interview about how SGTT is different from other international projects of the German conglomerate, what remaining issues have to be resolved before starting the activities to increase the localization level in Russia to 100%, and how he sees cooperation with the current Siemens’ partner, Power Machines, after their exit from the joint venture.
- Nico, please summarize SGTT’s key accomplishments over five years. What are you especially proud of?
- I came to Russia in February 2015 when the construction of the facility was underway, but already on June 18, 2015 during the SGTT’s opening ceremony we could present the first gas turbine assembled by our company to Siemens management and Leningrad region officials. As of today, the capacity of our factory is 10-12 turbines per year. We started from the assembly but focused on localization and technology transfer for gas turbine production resulting in the localization level of more than 60% at this point in time. As you know, we are committed to increase the local content with the global Siemens supporting this endeavor.
Another key aspect is that we have created the entire service chain for our turbines: we have our own Strategic Spare Parts Warehouse, which helps deliver necessary components to our customers within a short time, the Power Diagnostics Center, where we offer our gas turbine monitoring expertise; in 2018 we opened the Service Center for repair and refurbishment of hot gas path components, which enables repair of components without taking them abroad. Our service of power generating equipment is fully localized. Our Customer Service employs over 100 highly qualified local Russian experts, who have been also trained in Germany.
In addition, we produce the components of power-generating equipment for global Siemens network, assemble wind turbines in cooperation with Siemens Gamesa Renewable Energy, partner with Linde to manufacture heat exchangers for Russian and foreign LNG projects. However, I would like to emphasize that SGTT is not just a production facility for power-generating equipment, but an Energy Hub, where the team of engineers develops tools for production of hot gas path components, which is important to increase the localization level.
- Is SGTT any different from other Siemens projects in other countries?
- I have worked in Siemens for 28 years and carried out projects in a variety of countries: construction and commissioning of thermal power plants, wind power, joint venture for production of hot gas path components in China, B&V production facility in Hungary, construction of a factory similar to SGTT in Saudi Arabia.
As compared to my previous assignments, e.g. in China or Saudi Arabia, record investments of around 110 mln. euro were made in SGTT. The scope of works made in the Leningrad region is comparable to our headquarter factory in Berlin. Siemens rarely implements such projects outside Germany.
- One of SGTT’s primary objectives for the next few years is to increase the turbine local content up to the level when the power equipment can be supplied for modernization of thermal power plants under the government program. Siemens reported earlier about the commitment to increase the turbine localization level to almost 100% by the end of 2024. May these plans be adjusted if SPIC 2.0 is not concluded by the end of this year?
- We are currently analyzing the SPIC 2.0 requirements to work out our position in this matter. It is important that we obtain additional clarifications to this mechanism in order to secure both our and our potential partners’ investments. We are still interested to enter into SPIC 2.0, and if it happens this year, we will stick to our initial deadline commitments of 2024.
Essentially, we are ready to invest in the localization increase even without SPIC 2.0, but we have to be sure that we will have orders for localized turbines. According to our estimations, to ensure that the project pays back, we will need orders for 10-15 gas turbines for the period of 10-12 years. Now, SGTT is underutilized, even though we manufacture not only turbines for the Russian market, but components of power-generating equipment for the global market.
- Have the lack of understanding about some SPIC 2.0 provisions and the coronavirus crisis affected deadlines for turbine localization?
- With regard to coronavirus we have all measures in place to protect our employees on SGTT premises and at Customers’ sites. SGTT did not stop for a single day: with the production facility operating at full capacity and contract performance ongoing. During the pandemic we continued production of combustion chambers for projects in Asia, heat exchangers for Linde and assembly of wind turbines. We have secured workplaces for more than 300 employees and ensured factory utilization. SGTT and Siemens Energy have a motto - Keep the lights on. It means that we help to keep power plants and infrastructure operational, ensuring that lights are always on in our homes.
Getting back to localization, our engineers are now developing specifications for production of GT hot gas path components (the most difficult components to localize on the Russian market – comment from TASS) for our suppliers. And this is not just translation of documents from English into Russian, they develop tools and manufacturing processes for production of hot gas path components here in Russia. Works are in the active phase. But we all understand that the time frame for localization of a gas turbine to 100% is very challenging. However, it is realistic to complete the project by the end of 2024. And the coronavirus does not pose a serious challenge in this regard. As I mentioned earlier, before we would start to invest we must clearly understand the SPIC 2.0 requirements and be sure that we have enough orders; we would like to clarify some mandatory requirements of the Decree No. 719 as well (list of criteria specifying the localization level of equipment – TASS.) We are currently negotiating over this matter.
- How much does SGTT estimate it would cost to increase the localization of the turbine by the end of 2024?
- We have made a detailed calculation of the entire investment volume required for localization, including machines, technology transfer, training, support of Russian suppliers. The total amount is not less than 1,1 bln rubles. We are confident about this number because the calculation was made based on the experience of establishing a JV for production of hot gas path components in Shanghai As you can see, we have accumulated experience and can transfer it to Russia.
- What work has SGTT accomplished as of now to localize hot gas path components in Russia?
- As regards the delivery of components of castings and forgings, such as casing, rotor discs and shafts, we have already completed qualification of suppliers and received first components from them. For example, OMZ in Saint Petersburg and steel foundry BVK in Chelyabinsk. But the hot gas path components are more difficult to localize. We conducted technical audit of companies, who were capable of casting and machining of blades and vanes, 2-3 years ago and realized that suppliers needed to invest in modernization and new machines for their facilities.
-Is SGTT ready to invest in modernization of existing and establishment of new production facilities of company's future contractors?
- Talking about investments from our side I did not mean direct investments in the production facilities of Russian suppliers. We can support them by providing all necessary documents, transferring knowledge, so that the suppliers can estimate the amount of necessary investments and devise the production modernization plan. We are ready to conduct trainings, support product development, organize know-how transfer.
The most advanced production facilities will be included in the global suppliers database of Siemens Energy. For example, BVK has been qualified and included in such list. Now they can participate both in Siemens Russia and international Siemens Energy projects.
- Can one speak about SGTT’s management transfer to a Russian company after the localization of the turbine is completed in 2025?
- Considering tight deadlines for localization, instant management transfer seems unreasonable.
Based on my experience from China and Saudi Arabia, transfer of management control during the period of know-how transfer involves a certain risk, as local suppliers and SGTT itself do not have necessary competencies yet and fully rely on support from Siemens Energy specialists and their knowledge. When transferring technologies, it is also important to maintain Siemens product quality. This will be difficult without management control; it will also be challenging to persuade future buyers that Russia-made products fully comply with international standards.
- How are you organizing the work with your shareholder Power Machines, that was against SPIC 2.0 and is currently developing its own technology for domestic turbines? Is there no conflict of interest?
- I would like to mention that Siemens has more than 30 years of experience in transfer of gas turbine technologies to Russia under license with various partners. Power Machines’ experience, especially in production of hot gas path components, is rather limited. Under the current joint-venture agreement Power Machines have the right to develop their own technology, but if they make their own turbine, they can sell it either only via our JV or after the exit from the JV, as the rights to sell gas turbines with a power output of more than 60 MW in Russia and almost all CIS countries belong to SGTT. I would like to point out that this situation does not hamper our efforts on increasing the localization level of the SGTT gas turbine to 100%.
On the operational level we cooperate actively. Power Machines is our supplier of some gas turbine components. And considering our past experience of cooperation, I can say that by combining our expertise in gas and steam turbines, our joint venture could be a good solution supplier for projects under the new government program of thermal power plant modernization, in particular for repowering projects. As it was the case for the modernization of Inter RAO power plant in Verkhny Tagil several years ago.
- Nevertheless, early this year Power Machines announced the exit from SGTT. What is the status of this matter?
- Both teams representing SGTT’s shareholders are currently working on this process in full compliance with the provisions of the current joint-venture agreement. Negotiations are underway; the parties are trying to find common ground.
- Is SGTT ready to continue cooperation with Power Machines combining the competencies in gas and steam turbines under the modernization program, even if they withdraw from the JV?
- SGTT is primarily focused on gas turbines. With regard to other products, e.g. generators for gas turbines, there are two companies on the Russian market, which could be potential suppliers for SGTT turbines - Elsib and Power Machines. I would consider Power Machines as a potential supplier even in the new company set-up.
- Will the change of JV shareholders affect the efforts to increase the localization level?
- SGTT’s mission remains unchanged - to localize production of the gas turbine in Russia to the full extent, including hot gas path components. Localization does not depend on shareholders but on access to orders and to the market.
- Do you believe in the high demand for gas turbines in Russia after completion of the power plant modernization program?
- I see two large market elements. First, we must consider that as of today more than 50 Siemens large gas turbines are installed in Russia, and sooner or later they will need to be replaced. Second, the Ministry of Industry and Trade estimated the mid-term demand to be 30-40 turbines. In such gas-rich country as Russia, it would be strange not to exploit the CCP technology with the efficiency 50% higher than that of traditional steam turbine power plants.
In addition, replacing coal-fired stations with combined-cycle GT units would reduce CO2 and NOx emissions. CO2 emissions of a 2000E-based CCP are 35% lower than those of a gas-fired Steam power plant and 65% lower than those of a coal-fired steam power plant. A shift to the combined-cycle technology would be a great contribution to reaching the Paris Agreement climate target. This technology combined with renewables, nuclear and hydro power would help protect the environment.
We have a comprehensive localization program, a clear understanding of where the components for our turbine could be produced, and we are aware of all technical challenges we may face. I would like to highlight that SGTT does not seek financial support from the government or any tax benefits, which other companies avail themselves of. What we need is a clear understanding and certainty with orders to ensure return on required investments and to be regarded as local suppliers.