Abhayjit is a Director at EY’s (Ernst and Young) MENA Infrastructure Advisory practice based in Dubai, UAE. He has more than a decade’s experience working in the Infrastructure sector with a focus on Power and Utilities. Views expressed below are personal and may not reflect the stated position of his employer.
- How is the Middle East solar market coping up in 2021 after the pandemic crisis?
The Middle East (ME) solar market has been on a roller coaster ride during this pandemic. The sector witnessed record low consumption, much like around the world and then a very quick bounce back, unlike the rest of the world. The best example of this bounce back are the numerous PPAs executed for Solar IPPs. Case in point are the recently executed PPAs for KSA’s 600 MW Al Faisaliyah solar IPP and 1.5GW Sudair solar IPP, at record shattering tariffs of $0.0104/kWh and $0.01239/kWh, respectively.
- Interesting, how has the pandemic helped the growth of the Solar industry?
The Power and Utilities’ sector has benefited from the pandemic. In other words, the Infrastructure sector always benefits during an economic downturn, be it due to the pandemic or otherwise. This is on three key accounts: First, during any economic downturn, investors (as well as lenders) are drawn to stable, non-cyclical, low risk investments. ME Solar projects, backed with 15-25 years PPAs offer an annuity-based business opportunity, i.e. low risk and stable cash flows. Second, during such times, interest rates are soft. For example, 3M USD LIBOR dropped from 2.79% (02 Jan 19) to 0.24% (04 Jan 21). Interest costs contribute to 12-18% of total capex for a Solar IPP. Hence, this drop significantly reduces the capex and therefore, the tariff.
Lastly, Governments offer financial stimulus packages to revive the economy. One of the best ways to induce this stimulus in the economy is by promoting local manufacturing and Infrastructure development. This jump starts the SME and capital intensive sector, with a ripple effect on the consumer spending and economy. A 2019 World bank report quantifies the economic benefit as $4 in benefit for each $1 invested in Infrastructure in low-middle income countries. Triangulating these components, of greater investor interest, cheaper finance and Government support, you see Infrastructure projects, inter alia, Solar projects being clear winners.
- What are the distinguishing attractive factors for the development of solar power in the Middle East market, when compared to India, for example? In other words, why are the Solar IPP tariffs lower in the Middle East compared to India?
Some of the key factors benefiting ME Solar projects (especially GCC markets) are matured financing projects, dollar-based returns, rapid project development lifecycle and Government credit risk and support.
Regarding financing products, most ME Solar projects utilize soft mini-perms (with Abu Dhabi allowing hard mini-perms in Al Dhafra project). Other products under sustainable financing like green bonds & loans, sukuk, project bonds provide developers access to a greater pool of funding, with increased bargaining power on financing costs. Most of the GCC/ME currencies are pegged to dollar, allowing for dollar-based returns. The general equity return expectation on a utility scale Solar IPP is in the mid-high single digit numbers. The regulatory framework allows for rapid project development. For example, for GCC in most Utility scale projects, the procurer provides encumbrance-free land to the developer. There is no time lost in land acquisition related issues.
Lastly, many of the Utility scale Solar IPPs have significant shareholding of the Government/ Utility. For e.g. DEWA invests 51-60% equity and Qatari SNIs invest 60–70% equity in the projects. This substantially reduces the risk profile of the project sponsors, leading to better financing costs. Another major factor, when compared to India is the Procurer’s credit risk. As an example, there has not been any PPA termination in recent memory and hardly any long-drawn litigations involving PPAs. Procurers honour the payment obligations under the PPA, and project companies receive payment within the stipulated due date. Take DEWA as an example, that holds a strong balance sheet and is debt free since end-2020.
- With everything going so well for Solar projects in the Middle East, where do you see challenges for the sector?
There is a new kid on the block – hydrogen economy! The Hydrogen economy has the potential to tilt the balance against Solar projects. The big benefit of Hydrogen is its direct use for energy’s largest consumer, i.e. transportation. Currently, there is research for using solar cells as well as hydrogen cells for electric vehicles (EVs) and seems like hydrogen is winning the race. Goldman Sachs says that hydrogen could supply up to 25% of global energy needs by 2050 and its market potential is pegged at the $10 trillion mark. The risk is for hydrogen being produced through non-Solar energy sources and transported to end consumers, within and outside the ME. Hence, it could be a strong challenger to Solar projects. However, I foresee a convergence of these two wonderful energy sources, i.e. the green hydrogen economy, with ME becoming the world’s factory for producing hydrogen using Solar energy. All major Government sponsored as well as regional private players have committed to/ already invested in this field. Hydrogen Power Abu Dhabi (Masdar-BP’s JV), DEWA-Siemen’s solar power hydrogen electrolysis project, ACWA’s Air Products are some examples in this field.
- How do you think the Renewable Energy sector is going to be in the next 5 years in the Middle East?
The ME is blessed with abundant solar energy, in terms of irradiance as well as hours in a year. This is a natural competitive advantage for this region, and one that will remain. Hence, the RE sector will remain and thrive in the ME in some form and shape. I see this sector maturing on multiple fronts.
On the financing front, the hunger for cheaper financing and access to funds will drive the sector to innovate. Whether it is in the form of collaborative financing like the Yellow Door philosophy or sustainable financing with greater focus on ESG. Mini-perms are now considered vanilla products and will give way to more complex financial products.
On the technology front, ME has always been an early adopter. ME accepted bi-facial modules much before there were internationally accepted forecasting methodology for degradation and generation for the albedo. Today, ME is reaping the benefits of its calculated risk, with most projects deploying bi-facial panels leading to better efficiency and lower tariffs. Enhancements in core technology like the real-time forecasting of solar irradiance, supported by small storage, makes it a highly “dispatchable” generation source.
The third big change will come from the changing market definition. Gigacities like KSA’s Neom and Red Sea Development Company have paved the way for large-scale distributed/ off-grid Solar generation. Moving away from concentrated utility scale grid-connected projects, such distributed generation will play a big role. This is already seen in the areas like BiPV (Building integrated PV panels) and simple solar panel energized street lighting. Electric Vehicles and charging stations will provide an impetus to such small scale distributed generation.
In conclusion, this is still an exciting time for the industry. Solar energy/ RE will see fast paced evolution on all fronts. While it will keep cannibalizing into the share of global thermal generation, the sector needs to align itself to new entrants like the hydrogen economy to remain relevant.