Financing has historically proven to be one of the biggest obstacles for solar power developers, and even more so in the Middle East and North Africa (MENA), where the lack of a track record of renewable projects poses a persisting challenge.
But the picture is finally changing. Plummeting solar system prices, improvements in module efficiencies, and an industry-led movement to seek alternative means of raising capital, are together leading to an imminent revolution in solar financing in the region.
One of the latest signs of falling costs is the unprecedented, record-low tariff of $5.98 cents/kWh bid by Acwa Power for the construction and operation of DEWA’s 100 MW PV plant, followed by a bid of $6.13 cents/kWh made by a consortium of Fotowatio Renewables and Abdul Latif Jameel Energy.
“The low tariffs, bid in a fully commercial, unsubsidized setting, disprove persisting misconceptions in the region about the allegedly high cost of PV and should provide a boost to other governmental procurement programs in the Gulf, in particular, Saudi Arabia,” says Apricum partner Dr. Moritz Borgmann.
According to him, a key ingredient of low tariff is low-cost finance. “In the politically stable environment of Dubai, very inexpensive loans proved to be available, with some regional banks confirming a large appetite for project finance deals with attractive terms”.
Local banks have been rumoured to provide financing at an average margin as low as 175 bps, he says, resulting in all-in cost of debt around 5%.
However, the criteria used by DEWA for the current project are designed for conventional power projects, which usually require enormous amounts of documentation and investments of several hundred million. This calls for an urgent need to simplify tender mechanisms and criteria to make renewable energy projects manageable and financeable.
A funding strategy
Internal discussions on creating a green fund are now ongoing amongst the Dubai Supreme Energy Council (DSCE), having signed an advisory service agreement with the World Bank last April.
The tie-up will see the two entities collaborate on the design of a funding strategy for Dubai’s green investment program, which may include green bonds and sukuk products. Such financing methods, as seen with yield companies (yieldcos) in North America and Europe, could further drive down the cost of financing, and thus the tariffs.
Described as “the cheapest equity you can find in the market” by Abengoa, the “yieldco” concept has spread at an astonishing pace. In the last two years alone, renewable energy giants NextEra Energy, NRG Energy, Abengoa and SunEdison have all set up yieldcos to raise millions of dollars through initial public offerings, while SunPower is actively considering the formation of a yieldco.
As separate subsidiaries set up by energy companies to transfer a portfolio of operational energy projects, yieldcos generate stable cash flows by selling electricity under power purchase agreements with utilities, and the cash is distributed through quarterly dividends.
Moreover, the model allows investors to single out the cash flows generated by the power plant assets without getting exposed to other aspects of the parent company’s business. All this enables yieldcos to offer some of the lowest costs of equity funding for renewable energy projects.
In MENA countries, Sukuk – the Islamic equivalent of bonds – could be the answer for clean energy financing; mobilizing the funds needed for projects in a manner the region is already familiar with.
“Green Sukuk could be used for solar finance in the future – much like yieldcos are emerging as financial tools for solar in North America and Europe,” says Browning Rockwell, executive director of the Saudi Arabia Solar Industry Association.
While annual Sukuk issuances have increased from less than $32 billion in 2010 to an expected $70 billion in 2014, Islamic finance has yet embrace green financing.
Malaysia is probably the first to step into this promising sector, having introduced guidelines for “green and socially responsible” sukuk last August. Now, the country’s state-owned sovereign wealth fund, Khazanah Nasional Berhad, plans to issue the nation’s first such sukuk in the second half of 2015, helping finance the domestic renewable energy and education sectors.
Conventional green bonds, meanwhile, are far ahead of the race, reaching an estimated value of $40 billion in 2014, according to the Climate Bonds Initiative (CBI), an independent body promoting green finance.
This includes the World Bank’s 77 green bonds that have raised over $7 billion since 2008, and GDF Suez’s first green bond, a $3.5 billion issuance announced in May and three times oversubscribed.
“The funds of this bond issue will be used to finance the group’s growth, not only in renewable energy projects such as wind farms and hydroelectric plants, but also in energy efficiency projects”, GDF Suez stated.
The crucial role of banks
For the time being, developers in the MENA region will continue to rely on national and multilateral development banks to fund large-scale solar projects.
SunEdison, for example, is borrowing $50 million from the European Bank for Reconstruction and Development (EBRD) and Overseas Private Investment Corporation to finance the construction of its 23.8 MW PV power plant in South Jordan.
Similarly, Norway’s Scatec Solar and its Jordanian partners recently secured $100 million in debt financing with the EBRD and French development agency Proparco, to be used in the construction of three solar power plants in Jordan with a combined capacity of 43 MW.
And a larger debt package, totalling $207.5 million, is being arranged by World Bank-member International Finance Corporation (IFC) to fund the construction of seven PV plants in Jordan with a total capacity of 102 MW.
In Egypt, however, domestic finance for solar projects seems to be easing up, thanks to the Ministry of Finance’s decision to facilitate soft loans for solar projects under the feed-in-tariff program, with interest rates ranging from 4% to 8%.
The decision was welcomed by the industry, given the high interest rates in the country, in the range of 7% to 15%. Local banks too are showing confidence in solar power, such as the Bank of Egypt, which signed an agreement with Onera Systems to fund its purchase of PV equipment.
Potential sukuk powerhouse
As for Saudi Arabia, the country has a substantial track record of fossil-fuel plants, including Independent Power Projects (IPPs), and therefore, local banks are familiar and comfortable with financing the energy sector.
“Saudi Arabia’s 13 banks are extremely conservative, but they have experience in IPPs and massive liquidity is available. Most are waiting for the first projects to get on the ground,” says Rockwell. “Once a few get in and the first PV plants are operational in the Kingdom, it’s likely that other banks will quickly follow suit.”
It’s worth noting that the world’s first international 30-year sukuk was issued by Saudi Electricity Company in April 2013. The $1 billion issuance demonstrated the increasing accountability of the sukuk product in the global market.
“The Saudi market has the potential to be a real powerhouse for the entire region’s sukuk markets,” says Stuart Anderson, regional head for Standard & Poor’s Middle East and chair of the Regional Steering Committee at the Gulf Bond and Sukuk Association (GBSA), the regional trade association representing the GCC bond and sukuk market.
Anderson’s comments were made during the launch of GBSA’s Saudi chapter last May. “What happens there will undoubtedly be watched carefully or even emulated.”