With regard to solar project development PPA prices, normally, it is local deployment over time that gradually gets solar prices down. But the Middle East has only just begun to deploy solar. So what is behind Masdar’s bid for Phase III of the Sheikh Mohammed bin Rashid Al Maktoum Solar Park in Dubai – at the world’s-lowest-ever 2.99 US cents?
Oxford University Middle East Energy Expert Justin Dargin said partly it is the result of competitive auctions. In Dubai, as in other new solar markets in South Africa, Mexico and Chile, solar is not paid a set tariff.
“There has been a conceptual shift in the renewable energy sector. Governments prefer tenders over feed-in-tariffs,” Dargin explained. “Auctions shift costs from governmental budgets to developers.” Using auction-based renewable bidding; the offtaker; state-owned Dubai Electricity and Water Authority (DEWA) will be able to grow the project to its ultimate stated goal by 2030 of 5 GW.
Image: HH Sheikh Mohammed bin Rashid Al Maktoum inaugurates the second phase of the Mohammed bin Rashid Al Maktoum Solar Park. Credit: Government of Dubai.
Another factor in Masdar’s 2.99 per kWh solar bid for the Phase III 200 MW was suggested by Former Masdar co-founder/director Steven Geiger, now a partner at the U.S. investment firm Innova Partners.
Masdar’s startling bid followed last year’s loss to Saudi-based ACWA Power whose winning bid for Phase II was at a then-record 5.85 cents, he said. Masdar is closely tied to the Emirate of Abu Dhabi, the sister Emirate to Dubai.
“Masdar probably assumed Abu Dhabi’s close ties with Dubai would mean a sure win – at a nice profit. Losing to ACWA by a very large margin likely motivated this much lower bid. They wanted to ensure the win this time.”
As a subsidiary of Abu Dhabi’s sovereign wealth fund, Mubadala, Masdar benefits from government ownership. FGB, the financing bank is also owned by the ruling family.
Image: The 27th meeting of Dubai Supreme Council of Energy aligned Dubai Integrated Energy Strategy 2030 with UAE Vision 2021. Credit: Government of Dubai.
“We’re already in an abnormally low global interest rate environment, but a government can borrow at extremely low prices,” Geiger explained.
Ruling-family solar support will likely replicate oil support, Dargin said. In the Gulf region, the oil sector is dominated by state-owned national oil companies. Banks offered low project finance rates to state-owned companies.
“Many governments in the Gulf now view renewable development as a strategic goal, and provide low-cost funding to their solar sector,” he said.
Like any new technology, solar initially paid higher finance costs than traditional energy; resulting in higher prices. As more has been deployed, banking sector confidence has increased, reducing these costs worldwide. But in Dubai, solar finance rates are now about as low as those for natural gas – and even lower than for coal-fired projects.
“The financial sector is beginning to take notice of Dubai’s record-setting solar price; below coal-fueled power generation,” Dargin said. “If these low solar prices can be maintained, with acceptable return on investment, then we could see even lower solar prices in the future, with regional financial institutions developing an appetite to fund them.”
Geiger cautioned against assuming Masdar’s price is a new norm outside the Gulf states, however.
“I think the limbo bar is set so low that a lot of backs are going to be broken trying to get under it,” said Geiger. “That happened in Jordan. Companies underbid just to survive, and then couldn’t execute. Some short-term damage can be done as people try to match unrealistic results. Projects were set back and solar got a black eye.”
Geiger built Masdar’s PV factory in Germany, among the fallen in the big solar shakeout of 2012. He is leery of too-rosy expectations based on these startling prices.
“The risk is extrapolating that sub-3 cents is the new price of solar and it’s not,” he said. “It’s the price of solar that is largely government owned; at very low borrowing cost, in a country with no income tax or corporate tax.”
Today, First Solar is the only U.S. firm competing in the region but there is nothing holding back other firms from participating, according to Moritz Borgmann, a partner in the cleantech advisory, Apricum. “SunPower made a deliberate decision not to participate. But they certainly have the opportunity in this – and future – tenders. They chose not to,” said Borgmann.
The low bidders were Saudi, Chinese or French firms, with five bids lower than ACWA Power’s historic 5-cent bid last year. France’s EDF with Qatar’s Nebras Power bid 4.8 cents, France’s Engie (GDF Suez) and Japan’s Marubeni bid 4.4 cents, First Solar/ACWA Power bid 3.96 cents and Jinko Solar bid 3.69 cents.
Fossil fuel Prices
All five lowest bids are lower than current fossil energy alternatives. Coal in Dubai costs 4.5 cents per kWh, and natural gas, which must be imported from Qatar, is substantially higher. Jordan and most Gulf countries must import expensive coal or natural gas for electricity.
Surprisingly, many Middle East nations have no oil wealth. Of the seven Emirates making up the UAE, only Abu Dhabi is a major oil exporter. It holds a 97 billion-barrel oil reserve, while Dubai has only four. The remaining five Emirates have none. “Like Jordan, Morocco and Egypt, these are the countries that are going ahead with renewables, because they don’t have domestic fossil resources,” said Borgmann.
Meanwhile, the oil exporting nations Saudi Arabia and Abu Dhabi are in crisis.
Image: Dubai Supreme Council of Energy Vice Chairman visits the Mohammed bin Rashid Al Maktoum Solar Park. Credit: Government of Dubai.
“The extremely low oil price over the past two years has caused enormous financial distress in Middle Eastern energy-rich countries,” Dargin said. “So the goal is to produce renewable energy for domestic consumption, preserving exports for abroad; to reduce the burden on the governmental budgets.”
New Saudi Determination
Years ago, Dargin predicted that the Saudis would not be able to execute on their ambitious 2010 stated goal of 43 GW of solar. But that has changed, partly due to the now-desperate situation for oil exporters.
“This is not the Saudi Arabia of even a few years ago,” he explained. “Due to resistance by certain ministries, solar had been held back. But a new energy mega ministry has been developed to mitigate infighting amongst the various ministries that impeded development of energy-based projects before.”
“Ministers who resisted the reformation of the energy prices were removed from their positions or placed in other roles. This indicates the sincerity of the government to restructure its economy and energy sector. The new energy ministry will have significant streamlined decision-making ability to see solar energy projects moving forward.”
Saudi’s new initial 9.5 GW goal is a better start: “The new goals are rational, with a recognition of the current limitations, and the political will to rectify them. With the major shakeup and economic restructuring, Saudi Arabia can now devote more attention and political will to meet its solar energy goals,” Dargin said.
Geiger agreed that it’s likely that the Saudis could develop local industry with solar manufacturing. “In Germany, Masdar learned the challenges of manufacturing in a fast-changing high-tech industry and found investment and project development to be a better fit,” he said.
“But Saudi Arabia has a very different industrial profile – and desperately needs jobs, with a 30 percent youth unemployment rate.”
Saudi Arabia’s Abdul Latif Jameel (ALJ) is part of Abu Dhabi’s winning consortium led by Masdar. ALJ acquired French solar developer Fotowatio Renewable Ventures (FRV) last year. Masdar and ALJ/FRV will build 200 MW – and possibly all 800 MW to be announced – of Phase III, owning and operating it for the 25-year contract with DEWA, the offtaker.
The Gulf states already have high irradiance, extremely low land costs, extremely low-cost labor, favorable loan rates, and low tax regimes. With Saudi Arabia restructuring its solar energy policy landscape, Abu Dhabi’s manufacturing lessons learned and refocus on investment, and Dubai’s trailblazing of competitive auctions in the region, the Middle East is now uniquely positioned to be the world’s new low price solar leader.
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