The weekend read: Shedding light on PV in MENA

ACWA Power has an installed capacity of more than 1 GW of PV projects across MENA, Southern Africa, and Southeast Asia, and was awarded the landmark Sakaka Project – Saudi Arabia’s first utility scale PV project – which it began to construct in November 2018. pv magazine caught up with Paddy Padmanathan, CEO of the Saudi-based energy giant to discuss the Middle East’s growing solar markets.

Paddy Padmanathan, President and CEO of ACWA Power International.

Image: ACWA Power

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From the June edition of pv magazine

pv magazine: What obstacles have you faced in the MENA region?

Paddy Padmanathan: There is a great deal of disbelief with people still questioning the technology. People are slow in coming forward and launching projects because they’re nervous. There’s still a misunderstanding to calculating the costs and in many instances, people aren’t calculating the amount of money they’re spending on current generation right now with fossil fuel plants. If they saw those numbers, they’d realize that it’s so different than what renewable energy can provide. That said, what we are seeing is more entrants jumping into the market as it grows. There’s been about 20% more newcomers over the past five years – the companies have tripled. Every tender brings new people. If you look back at Dubai’s Mohammed bin Rashid Al Maktoum solar park’s second phase, there were 14 bidders. No one else has achieved that yet, but if you look, you’ll notice three or four of the same companies in recent tenders, but the rest are all new. Some come, try, and leave. Then they return. It’s a very dynamic sector right now.

Speaking of costs, what kind of return on investments are you typically seeing with ACWA?

Listen: Electricity tends to be calculated in local currency. In places like Egypt, this matters.

Once we take the currency risk away, these are all single-digit investments. However, once you have the currency risk, that puts you into the double-digit domain. A rate of return may be 2% and all that means is your cost of financing has gone up by 7.5%.

That’s only 20% of your overall tariff which only goes up 1.5%. Just like any other project, whether it’s gas or wind, it’s all financed the same way. Typically these are highly leveraged.

Of course, the lender wants payment immediately. On every dollar that you have extra, you pay your O&M and so forth and the lender will allow you keep a little money but they’ll want you to pay $8-9 out of $10 up-front.

With the little that you get to keep, you start making sensible money around year 14 or 15.

Until then, it’s hand-to-mouth. Return on investments in MENA are comparable to elsewhere in the world. These are utility-scale projects and they’re essential. Utilities will think hard before stopping a payment or else the lights will go out, so the risk profile is very different.

Have these contracts changed over the past five years?

The framework is the same and as people become more experienced, it’s a temptation on the part of the clients to move more risk onto the private sector. However, the private sector pushes back, but most of the procurers now are experienced enough to know that the more risk they transfer, the higher the costs will be.

Now we must keep tapping different pools of liquidity.

In certain pools, more money is available, then it drops off. In the international banking market, less money is available due to regulations post-financial crisis, risk aversion, balancing assets and liabilities, and more.

[However], the MENA region is more liquid and China has more liquidity [than in previous years].

What benefits have come to the region thanks to China’s Belt and Road Initiatives?

China is reliable and a capable source of construction capacity. They’re also a competitive source of technology, with companies such as Huawei, Chint, and Jolywood – who are capable, reliable, and cost competitive. And China can provide access to finance with a great deal of debt financing at durations that we need in a cost competitive way.

The notion that China is dumping cheap money is untrue. They evaluate in the same way as others, but the big difference is that China has the bandwidth to provide instant large sums. With a typical non-Chinese or regional lender, there will be a struggle to lend $50 million. In a $1 billion project where you need $800 million in debt, international banks will be hard-pressed to be able to provide $40-50 million apiece. The regional banks have more capacity, perhaps they can provide $150 million. However, the Chinese can coolly write a check for $100 million.

How is artificial intelligence impacting the solar PV sector?

Technology will continue to improve and that means so will solar panel efficiencies – which all drive down costs. The second layer of cost removal will be AI.

Though it’s still in its early days, we do see AI bringing multiple benefits including in the way we predict climate.

For instance, if I know what’s going to happen tomorrow in a reasonable level of detail, that will help me profile a dispense plan to inform the procurer as to how we can dispatch energy tomorrow.

Even when we’re operating during the day and see cloud cover approaching, a longer lead time will help how we arrange dispatch.

And ultimately, this helps my buyer who is consolidating supplies from various sites and technologies to manage fuel.

The worst aspect from a central buyer’s perspective is that a 200 MW supply has suddenly dropped to 20 MW because of cloud coverage.

Normally we can tell the dispatcher that within the next half hour, we’re likely to drop the load. The short-term burst of energy needed can be very expensive for a buyer.

In integrated systems moving forward, we’ll have various types of energy storage to help frequency fluctuations. A well-planned system will have many devices to mitigate these issues provided that the change in weather can be seen earlier.

For O&M, we can be cleverer about stocking spares which means that we decrease the amount of items we currently have in stock that may not be necessary while increasing necessary stock components.

Basically, we can improve inventory and reduce downtime, but it’s still early. There are so many opportunities to optimize the overall process.

How do you see the industry evolving in the future, globally and regionally?

In the region, I see the dramatic uptake in pace of deploying solar PV because everyone is now completely sold on its cost competitiveness. PV is a no-brainer in our part of the world for a significant source of load. There’s anywhere between 35-45% of energy consumed during the day when the sun is shining. There’s no way to have a gas fired power plant that is idle for periods of time, then purchase gas and have it deliver electricity at $0.025/kWh.

All of a sudden, you’re already seeing 200-500 MW and even 1 GW projects everywhere, and within the next five years, there will be a real race to deploy as much PV as possible as the costs keep coming down.

Interview with LeAnne Graves

Timeline to Sakaka

Saudi Arabia’s first utility-scale PV project, known as Sakaka, began construction in November, and it heralded a new era in the kingdom of “more to come.” The wheels began moving in 2016 with the kingdom’s Vision 2030 strategy, a plan to pivot Saudi Arabia away from its long-term reliance on oil. Mohammed bin Salman (MBS) is credited with creating the vision, which has evolved into much more since those early days. However, the country was up against memories of how an earlier plan from 2010 had failed to materialize – so why would this be any different? The biggest reason was that this was the first time that renewable energy had been directed by the government. Described as the “risk-taker,” MBS set forth a strategy aimed at increasing its renewable energy consumption threefold with an initial target of 9.5 GW by 2023, a scheme known as the National Renewable Energy Program. Another difference was that incremental targets were released under the National Transformation Program (NTP) of 3.45 GW by 2020, an investment that would require between $30 billion and $50 billion. Progress continued just two months later with the creation of the Renewable Energy Project Development Office (REPDO), a team falling under the energy ministry’s umbrella, tasked with the overall responsibility for the execution and delivery of the program. REPDO oversaw the tender process and immediately began work with the Sakaka power plant as its first undertaking. Companies began preparing for the 300 MW Sakaka solar power project after the request for proposals was announced in April 2017. By the time bids were announced six months later, eight consortia had submitted bids. But in January 2018, the short-listed bidders only included two companies: ACWA Power and Marubeni. REPDO said at the time that each bid had been “subjected to a detailed evaluation of material compliance to RFP requirements, including the 30% local content component for round 1 NREP projects,” and that companies were invited to participate in future projects. This was the first time in the region’s solar power tendering process that the lowest price consortium was not selected, and it piqued the interest of those that were previously wary about stepping into Saudi Arabia’s renewable energy sector. That was the point: that the Sakaka solar power plant had begun moving rapidly. The next month, the ACWA Power-led consortium with Al Gihaz Holding, was awarded the 300 MW project and financial close was met in November totaling $320 million. A project company was created, Sakaka Solar Energy, with ACWA holding a 70% stake and Al Gihaz with the remainder. Through the project company, the 25 year build-own-operate power purchase agreement was signed with Saudi Power Procurement as the offtaker. The Sakaka project is expected to be complete in October, providing power to 45,000 homes in the Al Jawf region while offsetting 430,000 metric tons of carbon dioxide per year. Currently, ACWA Power has just under 1 GW of solar PV projects in the Middle East and North Africa (MENA) region including Egypt (165.5 MW), Jordan (100 MW), Morocco (177 MW), Saudi Arabia (300 MW), and the UAE (260 MW), but the road hasn’t always been easy.

By LeAnne Graves

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