Financing PV projects in Iran remains challenging

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pv magazine: Mr, Roghani, can you briefly describe what Iran is doing to promote solar?

Sharam Roghani: In the coming years, Iran aims to increase the generation capacity of renewable energies – primarily wind power and PV – to 5 GW. For this purpose, a legal framework and dedicated authority were created. The head of the authority reports directly to the Minister of Energy. This shows how Iran is taking this matter seriously. The legal framework provides for a fixed feed-in tariff for renewable electricity supplied over 20 years, with a reduction to the tariff after 10 years. There are a lot of other details, all of which are agreed in the PPAs between the Department of Energy and investors.

Has this policy driven new growth in 2017?

First of all, I want to point out that the Iranian calendar is different from the western one. By the end of 2017, Iran had signed PPAs for wind and solar with a combined capacity of 2.2 GW. According to the competent authority SATBA, about 1.2 GW of wind turbines and 1 GW of solar plants may result from these contracts. So far, wind farms totaling 89 MW and 63 MW of photovoltaic systems have been connected to the grid in the country, according to data published by SABTA.

Your company has also secured a PPA for a large-scale solar park. Can you provide more details?

After four years, we managed to secure a PPA for a 120 megawatt project. To my knowledge, it is currently the largest photovoltaic project with a signed PPA in Iran. The most time consuming business for us, was to secure land for the project.

What is included in the contract?

The contract has a volume of about 100 pages. In addition to important parts, such as lease, grid connection, the nature conservation permit and planning permission, additional technical information on the project and the legal and economic agreements are listed.

How much time do you have for the project’s construction?

For solar projects, the implementation period is 15 months after signing the PPA, regardless of the size of the system. For wind turbines, 24 months are given.

Is a further postponement conceivable, for example paying a compensation?

An extension of the contract after expiry of the period is possible, provided that it can be shown that the construction has already started. However, the tariff will be adjusted if the statutory feed-in tariff is lower than the value agreed in the PPA at the then applicable time.

Are the PPAs bankable?

According to our lawyers, the PPAs are not bankable. However, it is probably possible to declare certain legal risks as country risk. This leaves some economic risks in the contract that make financing difficult or expensive.

Can you name concrete risks?

First, the formula for adjusting the feed-in tariff to inflation and currency fluctuations does not take into account the construction phase of 15 or 24 months. It only starts from the completion of the system. This fact implies considerable economic risks when looking at the development of the exchange rate over the past twelve months.

The second point is that currently, modules in Iran are imported with a 15% duty. Duties were recently introduced, and this should lead to an increase in market share for modules manufactured in Iran. Furthermore, the newly introduced VAT of nine percent, which is due on the construction price of the power plants, cannot be applied to the feed-in tariff. There are also rumors that inverters will soon be affected by customs duties. All these additional expenses are not included in the current feed-in tariffs. Investors and EPC companies should consider these costs in their calculations.

Are there any other risks?

The limitation of the construction period to 15 months for PV plants is particularly critical, if the plants are larger than 30 MW and a separate substation must be built. Another problem is that most lease contracts are not fixed to 20 years. In our case (before contracting the lease), we saw that the rent increased 37 times within one year. A project cannot cope with that repeatedly, even if the rent is at a low level. In addition, there are two foreign currency exchange rates in Iran. The risk is the availability of foreign currency at the time of exchange, and the delta value between the official and free exchange rates.

Does Iran provide investors with state guarantees as a hedge?

State guarantees may exist in exceptional cases when foreign financing to Iran is at very low interest rates, such as the Libor interest rate. As a rule, there are no state guarantees.

What is the hedge of PPAs against currency fluctuations?

There is a formula in the PPA that corrects the feed-in tariff according to inflation and currency fluctuation. You can focus on the correction factor on inflation or currency fluctuation. As such, there will always be an adjustment of up to 70 or 80 percent, as long as public authorities publish the statistics.

This has not always been the case in the past. In addition, as already mentioned, the formula refers to the official exchange rate. In this respect, care must be taken to ensure that, in the case of foreign financing, the investor has the right to change the money at the official exchange rate and out of the country.

What about the financing of projects in Iran?

Most projects I know are financed from equity. I hear again and again of the possibilities of bank financing, but so far we could not secure any bank financing for our project.

What role do the political instabilities in the region play in the lack of funding?

In addition to market risks and contractual problems – which means the fact that the PPA is not bankable – political uncertainties play a significant role. Most banks are worried that in case of financing projects in Iran their dollar credit line could be cut. In addition, the banks fear billions in punishment from the U.S. government, as this has happened in the past. In this respect, the tweets of U.S. President Trump play an important role when it comes to financing projects in Iran.

What would have to change to improve the conditions for adequate funding?

In my view, in the PPAs all the flaws I have listed must be eliminated. I have been in Iran for the past three weeks and have seen that the budget of SATBA has been spent by state agencies for other government spending. As a result, the feed-in tariff of many systems has not been met by SATBA in recent months. Such activities scare investors.

Financing in Iran can only be achieved on a large scale if there is sufficient security for investors to realize their chances of success. In this respect, Iranian state guarantees would be appropriate and necessary for projects. On the other hand, Iran needs access to cheap capital from abroad. In this respect, there must be consent from the political side in Germany towards banks. As long as banks fear sanctions, they will not invest in Iran. This requires political guarantees in Germany and other European countries.