Paddy Padmanathan
19/11/2015
In March 2015, the Dubai Electricity and Water Authority (DEWA) signed a 25-year power purchase agreement with a consortium of ACWA Power and TSK for a 200 MW net solar photo-voltaic (PV), under Phase II of the Mohammed bin Rashid Al Maktoum Solar Park, the Middle East’s largest renewable energy park. The bid tariff set a new global pricing benchmark for renewable energy generated from utility scale PV panels at USD 5.84 cents/kWh without subsidies. The second phase is based on the Independent Power Producer (IPP) model and is intended to be operational by April 2017. The project, which occupies 4.5 Km2, will help to achieve a reduction of 400,000 tonnes of carbon emissions.
This nationally strategic project fulfils the directives of H.H. Sheikh Khalifa bin Zayed Al Nahyan, President of the United Arab Emirates and Ruler of Abu Dhabi, to produce renewable energy locally, and conforms with the Green Economy for Sustainable Development initiative, launched by Vice President and Prime Minister and Ruler of Dubai, H.H. Sheikh Mohammed bin Rashid Al Maktoum, to make the UAE one of the global leaders of sustainability and a hub for the export and re-export of green products and technologies. The project intends to strengthen the position of Dubai as a global hub for trade, finance, tourism, sustainability, and green economy, as well as an international role model for achieving the highest standards in energy efficiency.
The power purchase agreement (PPA) also supports the Dubai Integrated Energy Strategy 2030, developed by the Dubai Supreme Council of Energy to diversify Dubai’s energy mix. Following the opening of the tariff bids in December 2014, it was reported in late January that Dubai planned to triple its target to increase the share of renewables to 15 per cent in its energy mix by 2030, along with increasing its 2020 target by seven times to 7 per cent. The entire Solar Park will produce 3,000 MW of electricity when completed in 2030 and will be one of the biggest IPP projects in the renewable energy market worldwide.
The ACWA Power led consortium was awarded preferred bidder status on 15 January 2015, based on a levelized tariff, which set a global benchmark for utility scale solar photovoltaic power plants. The signing of the PPA within 70 days of the award was a testament to the commitment shown towards the project by both DEWA and the winning consortium.
The Middle East’s demand for power is growing across the board at 7-8 percent, which should make it a seller’s market tailor-made for market pricing. However, ACWA Power’s pricing model is centered on its long term sustainability perspective, driving its relentless focus on delivering the most optimal value-for-money solutions that are technically and commercially viable to meet the off-takers’ need for quality and reliable service over the entire 20-25 year term of a PPA, while providing adequate returns to the private sector investors / developers.
Given that IPP projects are typically project financed to the tune of about 80 percent of the total project cost, the developer/investor has to factor in that the project cash flows in the initial first half of the PPA term mainly gotowards servicing the project’s debt. These financial structures enable a developer/investor to only collect the return on equity in the latter half of the PPA Term. However, the developer/investor has to ensure that the bid tariff stays relevant and market competitive to the client throughout these years, especially since the client will still be procuring new capacity at lower tariffs.
ACWA Power’s focus on creating shared value ultimately helped deliver the astounding tariff for the DEWA 200MW solar PV Independent Power Project (IPP). As with typical large power projects, the order of priority for cost reductions was CAPEX (Capital Expenditures), finance and then OPEX (Operational Expenditures). In broad terms, the breakdown of the ultra-low tariff was: 50 percent capital costs, a third for financing and the remainder for operating expenses. Under CAPEX, the PV panels accounted for slightly less than 40 percent of the cost, the inverters 12-13 percent, while the balance of plant and construction accounted for the remainder. One key success factor was the selection of the most efficient and cost competitively PV panels based on thin film technology from First Solar, the largest solar company in the world. Furthermore, the solid track record of both the Development team and its supply chain and the Off-Taker convinced the Financers to lend more money than standard, so that the project was able to raise 86 percent debt which is significantly above the normal threshold of 80 percent. This, coupled with the prevailing status that debt is cheaper than equity, further helped check costs.
ACWA Power is a developer, investor, co-owner and operator of a portfolio of power generation and desalinated water production plants currently with operations in 10 countries in the Middle East and North Africa, Southern Africa and South East Asia regions. ACWA Power’s portfolio, with an investment value in excess of USD 26 billion, can generate 16.9 GW of power and produce 2.5 million m3 /day of desalinated water to be delivered on a bulk basis to state utilities and industrial majors on long term off-take contracts under Public-Private-Partnership, Concession and Utility Services Outsourcing models.
ACWA Power, registered and head-quartered in the Kingdom of Saudi Arabia, is owned by eight Saudi conglomerates, together with Sanabil Direct Investment Company (owned by the Public Investment Fund of Saudi Arabia), the Saudi Public Pensions Agency and the International Finance Corporation (a member of the World Bank Group).
ACWA Power pursues a mission to reliably deliver electricity and desalinated water at the lowest possible cost while seeking to maximize local content and local employment creation, thereby contributing to the social and economic development of the communities and countries it invests in and serves.
Paddy Padmanathan, CEO and President, ACWA Power. ACWA Power is AFED corporate member.
http://www.afedmag.com/english/ArticlesDetails.aspx?id=119