ACWA Power is the largest renewable energy company in the Middle East. What do you attribute to your company’s success?
Pretty much everything we do is tendered, and typical contractor tendered mentality is to win on minimum margin compared to the next competitor. If you win with a bigger margin, then you have left with money on the table. Our business model is about investing millions or billions upfront, and spending this money in two to three years. We must provide the service, ensuring that our plants provide reliable power for decades – and that we get our money back over the long term. Our customer must have the ability to keep paying – which is about creditworthiness. But creditworthiness cannot be confused with willingness-to-pay. With the fact that technology keeps getting better and things are being built cheaper – as is being seen in the renewable industry – in the future, my client is going to buy new capacity and is inevitably going to be able to buy at a cheaper price. So, my tariff needs to be able to endure 25-35 years. The gap between today’s tariff and some new tariff that will be coming in at 10 years’ time, will become wider. And willingness to pay will be tested over time. We have already seen this with renewable, where many countries renege on feed-in-tariffs they signed up for.
Recognizing this upfront when the business was founded, we convinced ourselves to forget about market pricing and to focus on winning by the minimum margin thus mitigating the risk of not getting paid in the latter years of a 20-25 year duration contract. So, we focus on designing and developing solutions with the absolute minimum cost required – instead of being opportunistic to get as much money as possible upfront. Applying that philosophy, and working with a supply chain that understands and accepts this business imperative we pursue, we end up with some spectacularly low pricing compared to the second bidder. We can’t always get everyone to follow our model, and thus we don’t always win, but we win a disproportionate number of tenders; we win three out of four and with a big margin compared to the second bidder. This is what has really set us apart.
You have been awarded several multi-hundred MW projects in Oman, Egypt, and Ethiopia. What are the main differences and challenges of operating in the various countries of MENA and throughout Africa?
There are a lot of commonalities in each country, but of course, there are specifics that are different. For instance, if you take the GCC (Gulf Cooperation Council), with local currencies pegged to the U.S. dollar, it’s not that difficult to collect the tariff in Saudi riyal or UAE dirham and to make investments or loans in any foreign currency and take the obligation to pay back in that foreign currency. But when you go to South Africa, Ethiopia, Egypt, or other more challenging African countries, you have exchange controls – where you can’t simply take money out. Then the currency itself tends to be floating, so it changes by the day, and to compound the problem you cannot borrow enough local currency and even the small amount the local financing markets can make available will be for way shorter tenor, thus making the tariff high. In fact, you have no choice but to borrow the bulk of the financing in foreign currency and are stuck with figuring out how to hedge the fluctuating exchange rate and deal with the lack of certainty of repatriation to pay off the loans over the following few decades. Another significant difference comes from domestic construction capacity, which immediately impacts the price at which you can get something done. In one country, there is a lot of industrial capacity and capability so you can get things built, commissioned, and operating at a lower cost than in another country. Then of course, there are varying environmental conditions. There is nothing standard about what we do and every project is a custom-made project. Each component of risk has to be looked at in great detail – and then you have to ensure it, mitigate it, or manage it.
A lot of developers have seen the opportunity to enter the MENA region but haven’t achieved much success and exited the market. Why?
I wouldn’t say they haven’t been successful. EDF came a few years ago and have been very successful with partners, and others like Marubeni have been around for a long time and have successfully penetrated the renewable energy market. For newer entrants, the challenge is that everything will be “alien” – very different to what they have experienced elsewhere. For instance, we just started developing in Asia, with projects in Vietnam and Indonesia. It takes getting to know the lay of the land, the market drivers that are different, understanding who potential partners are, and the specific pieces that you can utilize to create more value. All of that takes a lot of effort and commitment.
For new entrants to come into the MENA region, it would be no different than for them to go to any other new market of the world. You must be willing to last the course. You need to be willing to not win the initial bids or be successful in multiple bids from the get-go. You should be committed enough to not just up and leave when you lose a few successive rounds – because, on that basis, you’re not going to succeed anywhere new. It is all about willingness to commit a significant amount of time and resources to meaningfully enter a market and understand it. In that process, nine times out of 10, it is about finding the right local partners, who are willing to not only open the door for you, but to roll up their sleeves and work with you – who understand the business model that you are pursuing, and to co-create with you. It’s easy to put together a PowerPoint, but pretty difficult to win, deliver, and reliably operate a power plant.
The Sakaka project has received a lot of attention, being the first large-scale PV plant tendered by Saudi Arabia. You decided to use TBEA’s Static VAR Generator (SVG). Can you talk more about this?
A Static VAR Generator is a device that is used in renewable energy plants to insulate the grid from the expected power supply quality problem. It is essentially a device that can compensate by providing reactive power to improve the power factor and manage the grid better. PV-generated solar energy is famous for its intermittency issue, such as generation drops when clouds go over the solar field – and power grids don’t like it when you inject a massive amount of power and then suddenly withdraw it. So, you have to somehow find a way to manage frequency and balance and keep the reactive power in place. There are other devices that can do it, but SVG is becoming more of a norm – it is more efficient and effective. In the case of Sakaka, TBEA provided a water-cooled SVG through the EPC contract. We are happy and have had no issues.