Solar Gains Ground in the Middle East

Publication June 6, 2016

The world-record-breaking tariffs received by the Dubai Electricity and Water Authority last month to supply solar electricity from phase III of the Sheikh Mohammed Bin Rashid Al Maktoum Solar Park in Dubai have sent shock waves through the global energy sector. 

Bidders were invited by DEWA to submit a mandatory base bid proposal for a 200-megawatt photovoltaic plant and had the option of also submitting alternative proposals for a 500-MW PV plant and an 800-MW PV plant. If Dubai decides to go with an 800-MW proposal, then this plant will be the largest solar plant in the world.   

A consortium of Saudi Arabia’s Abdul Latif Jameel, Spain’s Fotowatio Renewable Ventures and the United Arab Emirate’s Masdar, submitted a bid for the base proposal with a world-record low tariff of US3¢ per kilowatt hour. Jinko Solar, on the back of its recent success in Mexico, submitted the second lowest base proposal tariff of 3.69¢ per kilowatt hour. A consortium of First Solar and Saudi Arabia’s ACWA Power is in third place with a tariff of 3.96¢ per kilowatt hour. Engie (formerly GDF Suez) and Marubeni are in fourth place with a tariff of 4.44¢ per kilowatt hour, and EDF Energies Nouvelles and Nebras are in fifth place with a tariff of 4.48¢ per kilowatt hour.  Significantly, each of the five consortia that submitted bids offered DEWA tariffs of less than 5¢ per kilowatt hour. 

The tariffs offered by bidders in connection with the alternative proposals have not been made public.

It was unclear as the NewsWire went to press which of the bidders will be awarded the phase III project. The bids are still being evaluated by DEWA and its advisers. The bidders that remain in contention will need to demonstrate that they can deliver the project based on the tariffs they have offered. We think it is fairly safe to assume that phase III will be awarded to one of the top three bidders, each of whom submitted a base bid proposal with a tariff of less than 4¢ a kilowatt hour. 

This will be a very significant outcome for the energy sector in the Middle East. 

Only a few years ago, parity between conventional and renewable energy in the Middle East seemed a long way off.  Until very recently, few would have believed that by April 2018 (scheduled date for completion of DEWA phase III), the cost of solar power would fall below the cost of conventional power, particularly given the subsidized price at which gas and oil are sold to developers of conventional oil and gas-fired power plants in the Middle East. 

Bids for the Sweihan 350-MW solar PV IPP in Abu Dhabi are scheduled to be submitted in September. It is expected that the winning bid for this project will be less than 3¢ a kilowatt hour.

The tariffs set by Dubai and the anticipated result in Abu Dhabi in a few months’ time may prove to be the catalyst to the opening of the flood gates for solar power in the rest of the Middle East.  

All eyes are now back on Saudi Arabia following an announcement in April by Saudi Arabia’s deputy crown prince that Saudi Arabia intends to procure 9,500 megawatts of renewable energy by 2023.  

The Saudi government is under tremendous pressure to reduce its domestic energy consumption.  The ambitious Saudi K.A.Care renewable energy program appears to have been discarded and the Saudi energy crisis will only worsen with any further inaction by the Saudi government on energy reform.   

Ironically, the challenge that may now be faced by the solar industry in the Middle East is a softening of appetite among developers to compete in a market where tariffs are at world record lows.

Phase I of the DEWA program is a 13-MW solar PV plant that was constructed by First Solar pursuant to an engineering, procurement and construction contract with DEWA.  Phase II is a 200-MW solar PV plant procured as an independent power project and is currently under construction. This project is being developed by a sponsor consortium consisting of ACWA Power and TSK. The tariff bid by the consortium to win this project was 5.84¢ per kilowatt hour which, at the time of bid submission in 2014, was the lowest tariff for a solar PV plant anywhere in
the world.

DEWA has, in the last few days, announced the launch of phase IV, an IPP for a 200-MW concentrated solar power plant. All four phases of the Sheikh Mohammed Bin Rashid Al Maktoum Solar Park are part of a DEWA-backed plan to invest US$3.3 billion in solar power in Dubai as part of a wider goal of installing 3,000 megawatts of solar PV by 2030.  

Underachievement

While not wishing to diminish the importance of some significant achievements by the solar industry here in the Middle East over the last 10 years, solar power has so far not lived up to anything like its full potential. There are a number of reasons for this.

Consumers along the Arabian Gulf benefit from some of the world’s lowest electricity prices due to government subsidization of the price of natural gas and oil. State-owned oil and gas companies supply conventional power producers in the Middle East with cheap oil and gas at a fraction of the prices prevailing in the international markets.  

Further subsidies are then applied to the price at which electricity is sold by state-owned utilities to consumers.  

Cheap conventional power has, until recently, proven to be a barrier to market entry for renewable energy developers.  The governments of some of these countries have embarked on electricity price reforms, but they are happening very slowly. The cost of water and power is a very sensitive subject in the Middle East, and the governments and rulers of the Middle East must tread carefully when it comes to energy and water reform.   

Another key factor has been the lack of government support for renewable energy in the form of feed-in tariffs or other government backed incentives for renewable energy investment. Various commentators on this subject have for a long while championed the need for support in the Middle East similar to the European models. Apart from a few notable and quite recent exceptions, the governments in the Middle East have chosen not to embrace such reforms.

Solar plants procured as part of Dubai’s solar program do not benefit from any form of feed-in tariff or subsidy. Developers of IPPs benefit from sovereign support through long-term power purchase agreements backed by credit support from the government in the form of a payment undertaking. The Dubai government also takes an equity stake in the project company (60% for phase III).  This very bankable structure should help developers secure competitive margins and favorable terms and conditions from their banks.  This structure is not unique in the Middle East. The DEWA structure is similar to the Abu Dhabi and Saudi conventional IPP models. Each of the different conventional IPP models in the Middle East features significant elements of sovereign debt support.

The Shams 1 concentrated solar power plant in Abu Dhabi that was commissioned in 2013 benefits from a subsidy in the form of a direct payment from the Abu Dhabi government to cover the difference between the average price of electricity produced in Abu Dhabi from conventional power and the cost to produce power from the Shams 1 concentrated solar power plant. However, this is a project-specific incentive and is not underpinned by any wider government policy or regulation.   

The Sweihan 350-MW solar PV IPP that was launched recently by ADWEA is not expected to benefit from any form of government support, other than through government participation in a project structure that is similar to the DEWA structure described earlier.

Jordan has so far led the way with an unsolicited proposals scheme that was launched in 2011 by the Ministry of Energy and Mineral Resources. The first round of this program saw development of two wind projects and 12 solar PV projects with an aggregate capacity of 370 megawatts. The second round includes four solar PV projects with an aggregate capacity of 200 megawatts.    

Egypt, in 2014, launched an ambitious program to procure 12,000 megawatts of renewable energy by 2020, the largest renewable energy target in the Middle East and North Africa region after Saudi Arabia.  Egypt’s feed-in tariff program was approved by the Cabinet of Ministers in September 2014. The deployment of the program is phased over so-called regulatory periods or rounds. For solar photovoltaic projects with a capacity of between 20 and 50 megawatts, the round 1 feed-in tariff is US14.34¢ per kilowatt hour. Projects that have qualified for round 1 must be fully funded by October 28 this year. Any projects that do not meet this deadline will not be eligible to receive the round 1 feed-in tariff. Unless a solution is found to some key bankability issues that continue to undermine the financing of these projects, there is a real possibility that the round 1 projects will not be funded in time to meet the October 28 deadline.  

Solar energy projects on the Arabian peninsula also face challenges thrown up by the elements.  Much of the Middle East falls within the “sun belt.”  The Gulf region receives the highest daily solar irradiation in the world, an average of approximately 2,200 kilowatts per square meter.  In contrast, Germany, the world’s largest producer of solar power, has less than half the solar irradiation of the Middle East. This should make the Middle East ideally suited to solar power.  However, the deserts of the Middle East are dusty and windblown.  High levels of dust and particles in the air and the prevalence of sandstorms can, in a short space of time, leave solar panels and mirrors caked in a thick layer of dust, significantly reducing their efficiency. High levels of humidity caused by proximity to the sea also contribute to this problem. 

Mirrors used in connection with CSP plants need to be cleaned almost daily in order to maintain adequate levels of efficiency.  Much has been written about the impact of dust on the performance of the Shams 1 CSP plant in Abu Dhabi. Inefficiencies caused by dust required the installation of additional mirrors in order to ensure the 100-MW capacity of the plant could be achieved. This significantly added to the cost of the plant. Now in operation, the plant’s 258,000 mirrors, covering an area of 2.5 square kilometers (or 285 football fields), are cleaned daily by a series of trucks with robotic arms spraying water over the lines of mirrors. 

Most methods of cleaning dust and sand off solar panels and mirrors still involve using water. However, there have been some important advances in technology that does not require water.  

A company, named Nomadd, came up with an innovative solution a few years ago. The company takes its name from the technology it has developed, a no-water mechanical automated dusting device known as a “Nomadd.”  The Nomadd robots are mounted on tracks along rows of panels that they pass at least once a day cleaning them with a brush designed not to damage the panels. Importantly, the Nomadds do not require any water. This technology allows entire arrays of solar panels to be cleaned in a short space of time which is essential after a sandstorm.  

Another water-free cleaning solution is known as electrostatic cleaning.  This technology, which was initially developed by NASA for lunar missions, involves using an electrostatic field to repel dust and particles on solar panels. When dust accumulates on the surface of a panel, an electric charge flows over the panel pushing the dust off the surface and back into the air.  

The challenges have not by any means disappeared, but the future for solar in the region looks good. 

Breakthrough

A number of factors have led to the record-breaking solar bids in Dubai.  

Fierce competition among bidders has helped drive prices to rock-bottom levels. This highly competitive bidding environment is to some extent the result of a lack of opportunity elsewhere in the Middle East. For many bidders, winning either DEWA phase II or phase III has been just as much strategic as anything else: an opportunity to gain a foothold in a market with significant but largely untapped potential.  

The bidders have been helped by the dramatic fall in the cost of producing solar power over the last few years.    

According to a recent study by Oxford University researchers, solar power costs are falling so fast that the technology is likely to outstrip mainstream energy forecasts quickly. Solar technology is currently on course to supply 20% of global energy requirements by 2027. The International Energy Agency had previously predicted a generation figure of 16% of electricity by 2050.

Since the 1980’s, solar panels have gotten 10% cheaper each year. Most of the reductions have been due to falling equipment costs: for example, module costs fell by nearly 30% annually between 2008 and 2013. The global blended average price for a tier-1 Chinese-produced multi-crystalline PV module reached 57¢ per watt in the fourth quarter of 2015, from 1.31¢ per watt in 2011. This is primarily due to a reduction in prices of consumables such as polysilicon -- driven mostly by oversupply -- and the falling costs of Chinese labor and processing, and an improvement in technology and conversion efficiencies. Further price reductions are likely to occur in response to improvements in scale and operating efficiencies with some predicting that global blended prices will reach 44¢ per watt by 2020. 

Inverter prices are also falling by about 10% to 15% per year. Larger solar installers are now achieving 25¢ per watt with cost reductions in components and production efficiencies helping to drive savings. Balance of system (i.e. the components of a PV system other than the panels themselves, including wiring, mounting system, inverters, battery banks and battery charger, etc.) costs also fell rapidly between 2007 and 2014, and account currently for between 39% and 64% of the overall cost.

Reductions in “soft costs,” such as installation, maintenance and financing, could be even greater: the 2013-2014 fall in the cost of solar was almost entirely due to reductions in soft costs including marketing, system design, permitting and inspection aided by information technology improvements.

These dramatic cost reductions should prove to be the game changer for solar power in the Middle East. Bids for Abu Dhabi’s 350-MW solar development at Sweihan are scheduled to be submitted by September 19.  Based on the bids received in connection with DEWA phase III, it is expected that the winning bidder for the Sweihan IPP will need to submit a tariff of less than 3¢ per kilowatt hour.

The interesting next question is the extent to which developers will continue to have an appetite to develop solar IPPs at DEWA prices. The number of bids that the Abu Dhabi Water & Electricity Authority ultimately receives in September in response to the Sweihan IPP tender should prove to be a reliable indicator of the continued appetite among developers for utility-scale IPPs at low pricing.

If the results of DEWA phase II and III are anything to go by, solar PV can now arguably stand on its own two feet in the UAE without incentives. The era of feed-in tariffs in the western world is coming to an end and it is unlikely that they will now be adopted by the governments of the Gulf countries who will be keen to avoid implementation of incentive schemes that are generally perceived as being expensive.  

It is important for the sake of the sector’s growth beyond the Gulf countries that the same conclusions are not drawn by Middle Eastern governments whose sovereign credit ratings and balance sheets cannot offer investors and lenders the same level of equity and debt support that some of their oil rich neighbors are able to provide. The feed-in tariff program in Jordan has been critical to its development of solar power. Foreign investment in solar power in Egypt is dependent on a feed-in tariff.  Project financing and other development costs in these countries are higher than in the UAE, and this will remain the case for the foreseeable future. It is also important to acknowledge in this context the relative stability that the UAE has enjoyed since the Arab Spring in comparison to any other country in the Middle East.  This has undoubtedly contributed to the high level of support DEWA has received from developers, investors and lenders.

Saudi Arabia

Saudi Arabia’s domestic consumption of oil and gas and its rising energy demand are not sustainable.  The statistics on this are mind blowing. Some of these are set out in the table below.

A few years ago, Khalid al-Falih, Saudi’s new energy minister and chairman of Saudi Aramco, observed that, if left unchecked, domestic energy consumption in Saudi Arabia would rise to 8.2 million barrels of oil a day by 2030. To put this in perspective, Saudi Arabia’s current oil production averages at around 9.22 million barrels a day. A widely circulated Citigroup report in September 2012 also concluded that Saudi Arabia could cease to be an oil exporter by 2030. 

Significant reforms are needed.  Reducing oil and gas subsidies and raising the price of energy would be the most effective way to restrain domestic consumption. However, this is a very sensitive area for any Middle Eastern government, particularly in the aftermath of the Arab Spring.  Implementation of energy price reform in Saudi is expected to be gradual.

Diversification of Saudi’s energy mix is probably a more realistic medium-term goal. Solar power is expected to be a significant part of this.

The King Abdullah City for Atomic and Renewable Energy or K.A.Care was established in 2010 to oversee the realization of the country’s renewable and nuclear energy ambitions. In 2012, Saudi Arabia launched an ambitious renewable energy program through K.A.Care.  However, ever since issuance of a white paper on the program’s tendering procedures in March 2013, the K.A.Care program amounted to nothing more than a distant mirage.  For the last three years, the renewable energy industry has been waiting for renewed direction from the Saudi government.  

This renewed direction now appears to have come. In April, Prince Mohammed bin Salman, the Saudi crown prince, unveiled plans as part of the “Saudi Arabia Vision 2030” policy paper to develop 9,500 megawatts of renewable energy. No date by when this goal is expected to be achieved was given by the crown prince in his April address.  However, the Saudi government has subsequently confirmed that the 9,500 megawatts are an initial target that Saudi Arabia plans to achieve by 2023. The information released by the Saudi government so far is limited on detail and no quotas for solar and wind have been provided.  However, this announcement, which has been made against the backdrop of a major shakeup within the Saudi government, is significant. 

Development of 9,500 megawatts of renewable energy is an ambitious target, but it appears to be a more meaningful and realistic target than those set by K.A.Care a few years ago.  The K.A.Care program contemplated development of 41,000 megawatts of solar capacity by 2032. This would have required the development of more than 2,000 megawatts of solar power each year over a 20-year period.  

K.A.Care appears to lack the authority needed to implement its renewable energy program. A number of Saudi government entities have a significant say in energy policy. These include the Saudi Electric Company, the largest utility in the country, and Saudi Aramco. It has been widely reported that the K.A.Care program has been stifled by bureaucratic disagreements over the scale and ownership of the program and how it should be implemented. At the time of writing, K.A.Care’s role in implementation of the Saudi governments’ new plans for solar development appears to be much diminished.

Ever since K.A.Care, in 2011, announced its intention to develop 16 nuclear reactors by 2030 at an estimated cost of US$7 billion per plant, the development of the nuclear energy program has been sluggish. Last month at the Menasol conference in Dubai, Ibrahim Babelli, Saudi Arabia’s deputy economic minister (and former K.A.Care representative), cast doubt on whether Saudi Arabia would proceed with its nuclear plans. He indicated that he did not think nuclear power plants are needed in Saudi Arabia and that solar power is preferred to nuclear energy. 

The Saudi government must address the challenges faced by K.A.Care or any other entity that may replace it. Otherwise the recent announcement by the crown prince will end up being just another ambitious statement about Saudi energy reform consigned to the policy waste bin.

Saudi Arabia – At a glance 

  • Approximately 90% of Saudi Arabia’s revenue comes from oil.
  • Saudi Arabia consumes an estimated three billion barrels of oil per day or one quarter of its total oil production.
  • Saudi Arabia now consumes more oil than Germany, a country with a population three times the size of the Saudi population and an economy nearly five times as large.
  • Saudi Arabia is the world’s largest consumer of oil for electricity, burning an average of around 700,000 barrels per day. According to the US Energy Information Administration, Saudi Arabia burned 900,000 barrels per day in July 2014 .
  • The International Monetary Fund estimates that energy subsidies cost Saudi Arabia US$107 billion in 2015 or 13.2% of its gross domestic product .
  • Estimated 2016 installed generation capacity: 58,000 MWs.
  • Saudi Arabia’s domestic energy demand has increased at an estimated 8% per year for the last three years.
  • Forecasted installed generating capacity by 2032: 120,000 MWs.
  • Average price of electricity sold in Saudi Arabia: ranges from US1.3¢ to 6.9¢ per kilowatt hour.

Recent publications

Subscribe and stay up to date with the latest legal news, information and events...