WFES Interview: BNEF's Michael Liebreich


pv magazine: There is a feeling that the solar sector is beginning to accelerate in the MENA region here at the 2015 WFES. But it has been a long time coming. What do you make of where the solar and renewables market is currently at here in the MENA?

Michael Liebreich: In this region specifically I think the renewable energy sector is accelerating. It is almost as if it has been the missing region for some time now and that it’s produced more press releases that clean kilowatt-hours. There have been a variety of reasons for that.

If you talk about the broader region including North Africa, then you have some wind, solar and CSP projects, but it hasn’t really set anyone’s pulse racing. But I think this has changed with the $0.06/kWh DEWA (Dubai Electricity and Water Authority) deal with ACWA Power because that is now the lowest cost solar globally and apparently without subsidy.

ACWA’s Paddy Padmanathan is absolutely insistent that this is going to be a profitable project. Around the edges [of the project] there are things like land cost, but basically that is the new benchmark now and it is in the MENA region. It’s [the lowest cost project] not in Brazil through its reverse auction, which has delivered project bids at a very low cost; it is not in Chile where there fabulous solar with a very low cost of capital; it is not in the U.S. It is here. So suddenly it is almost the project that is going to be heard around the world.

MENA has been a very slow market for PV and renewables as you have mentioned. How will these low solar and renewable penetration rates affect the market in the short term?

Renewable penetration in MENA is coming from a very low level. It is not like you have six or seven percent penetration of solar and therefore grid integration issues, there is almost nothing. The grid, in most Middle East and Gulf countries is pretty well engineered and so renewable penetration can go from zero to five percent pretty darn easily. And you can well beyond that.

A lot electricity demand in the region is during the day, from air conditioning so the load matching [with solar generation] will be pretty good. You may have to do some solar thermal at the edges to ensure supply through the evenings, but fundamentally there is no barrier.

Ultimately the only potential barrier is subsidized electricity. In some countries in this region there are very low electricity prices. Conversely though, there are some countries in the wider region in which there are very high electricity prices such as Jordan and in North Africa. So I think the DEWA/ACWA deal is the starting gun for something pretty substantial.

This particular deal and many of the headlines that you have mentioned relate to utility scale solar and large projects. Distributed generation is in many ways a better fit for PV and this was reflected in recent BNEF global investment figures. What potential is there for distributed PV in the MENA region?

I think that will take a couple of years. That is where the electricity subsidies are making an impact. There have been the classic stories of the Saudi or Emirati who goes on holiday and leaves the air-conditioning on because it doesn’t cost anything. I think that really won’t change until subsidized electricity goes.

I think distributed PV will grow much more quickly in Morocco, Tunisia and Jordan. These are places where there are high retail electricity costs. There is also a lacking installer base in this region. So I think it will take another two years for distributed solar in the region really to gather steam.

Some of the subsidized electricity that you are talking about is sourced from the burning of oil for generation in some parts of the MENA. The discussion about the rapidly falling oil prices and the impact this will have on solar is an ongoing one. How do you think cheaper oil will play out in this region?

The crash in oil prices will have first and second order effects. In Saudi Arabia the question is whether the huge $110 billion commitment to solar is competing with $46/barrel oil or $100/barrel oil and whether the falling oil price will mean that the Saudis will lose their solar mojo? That’s the question everybody wants to know the answer to. I think the answer the Saudis will give is no. But they must surely lose some [solar] mojo at that [low oil price] point. In Saudi Arabia and Kuwait there is a lot of oil being burnt.

So the time of low oil prices may not be the time for solar. At BNEF we don’t see oil prices going back above $100/barrel for a very long time, throughout this year and next. We are not envisaging a quick spike down [in oil price] and then a bounce back in price. But nevertheless going solar is an insurance policy: to go solar and not burn oil.

Another interesting thing about low oil prices is that it stresses national budgets of the oil exporters. Oil importing nations are not burning oil for electricity, so there is no direct competition with solar. For the oil exporters, a time of low oil prices is a great time to do away with the electricity subsidies.

Some counties may indeed have to it[do away with electricity subsidies]. Not so much the Saudis, who have huge foreign currency reserves, but for some other countries, in a time of low oil prices it may be too painful to maintain these subsidies. Stabilizing national finances may become more important. So consumers may begin to get the message, “you know what, you can’t have $0.01 or $0.02/kWh electricity, it will go up to normal prices.”

What is clear is that gas prices fall, as a result of falling oil prices, it will shine a spotlight on subsidized or expensive renewables. But then I come back to $0.06/kWh. That price is cheaper than gas powered electricity. I don’t think gas can compete with $0.06/kWh even with $4/ British thermal units (MMBtu). So this [DEWA auction] price is absolutely a game changer.

Public policy will also play a role in the opening up of the MENA region to solar and renewable energy. What do you see as being the best policy framework to facilitate the roll out of renewables here?

Get rid of electricity subsidies and allow prices to go to where they should be. One of the secrets to cheap solar is a high level of stability. The ACWA project has 86% leverage. That can only be done with a very stable policy environment and a very stable off taker. And that’s pretty much it!

I was asked by somebody from the Egyptian government here [at WFES] this week whether the country should be thinking about a FIT or a reverse auction? The PV industry loves the FIT because it provides super returns. But those returns translate into higher costs, a loss of political support, and instability because it introduces the possibility for retroactive savings etc.

On the wholesale level, reverse auctions have surely now swept the board when it comes to delivering low cost photovoltaics.

Some would argue that is leads to low quality PV…

Give me an example.

But it is an argument that is made relatively frequently. That reverse auctions can result in a race to the bottom in terms of PV component quality and park design. How do you respond to that?

In a reverse auction, all that is happening is that a 15 or 20-year price is being provided and that is only paid if the electricity is delivered. The other thing is that the auction design is very important. I think that penalties play an important role in all of this. If you don’t have a penalty then what you are essentially doing is awarding an option.

This was the problem in the UK when reverse auctions were offered. The orthodoxy in the UK is that you can’t do reverse auctions for renewable energy or even for energy more widely.

The reason given for this in the UK is that in the 1970s and 1980s, there were reverse auctions held, but without penalties. So there were winning bids where project developers walked away.

A penalty design can be that as soon as there is a winning bid awarded, a bond must be taken. For the sake of argument say 10% of the value of the project, and in the DEWA case that would make up two-thirds of the equity. The right level for the bond is determined by the amount of equity in the project.

The reverse auction needs to be designed in such a way that it is painful or even impossible for bidders to walk away. And if some go bankrupt, then another developer will buy that project and in a sense that ‘s the sign that the price [being paid for the project] is not too high.

The auction shouldn’t squeeze companies out of business systematically, but if the winner’s curse strikes and a company bids too low in order to win and loses its deposit, then that’s business. If that can’t be envisaged then it’s not business. Then it is just the bad use of public money.

What is your assessment of the political will now in the MENA region regarding renewables and solar?

I may not be able to provide the most nuanced answer. But Saudi is certainly one case in which a big commitment was made and it hasn’t really started to deliver on it. But I think the will has really been there for a few years but the level of confidence in delivery has not been there.

At BNEF we track the costs of renewable energy and we have been talking about the very low costs of solar and wind almost more than any other group.

Well pv magazine is naturally pretty bullish on solar’s price competitiveness.

Yes your magazine and BNEF, we know what is happening in the industry. But it is extraordinary how many people who have a poor knowledge of the industry, simply don’t where the cost of solar actually is. And it’s not only that people don’t know what the costs are, but they often actually don’t even believe it!

Very recently I had some interaction with the energy ministry of an African country, which had produced an energy plan that included geothermal, burning gas and burning peat. I knew this was just ridiculous.

When I looked at the plan it had solar PV at $0.35/kWh. This was 18 months ago and even then I could guarantee that if a tender was set out and it was run transparently that financiers would be interested and the project built in this African country for $0.14/kWh. The ministry then responded that it had done a deal for solar that came in at $0.26/kWh. It simply hadn’t been a properly run tender.

The point is that this ministry was done using information that had come from 2010 or 2011 and it had come from a stakeholder, part of the development community, who should know better.

So in this [MENA] region the political will has been there, but when further investigations were carried out there whispers about problems about intermittency, which doesn’t apply because there are such low penetration levels so a lot can be built right away. That’s why I love this DEWA $0.06/kWh deal because there are no whispers. If governments want more information, they can go and speak to ACWA’s Paddy Padmanathan because he is very transparent. If interest rates go up, maybe the price will be pushed out to $0.07/kWh, but what it is not is $0.35/kWh. We can move on from the $0.35/kWh era, we can move on from the $0.15/kWh era, because I think the will is there.

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