Acwa Power builds up international portfolio

03 February 2015

Paddy Padmanathan, President & CEO of Saudi utility firm Acwa Power, has his sights firmly set on turning the company into the most cost-effective renewable energy provider in the Middle East and North Africa

For Paddy Padmanathan, president and CEO of Saudi Arabia’s Acwa Power, 2014 was an important year. Not just because it marked the tenth anniversary of his company’s founding, but also because he sees it as the year renewable energy entered the mainstream.

What makes this more important for the man who has been leading the power developer since its inception, is that his firm has been at the forefront of this transition.

“If we look back in 10 years time, I think we will find that 2014/15 was the turning point for the renewables sector – not just in [the Middle East and North Africa] – but also in the world,” says Padmanathan. “Why? Because I think you will find that this is the time that renewable energy finally became sustainably mainstream – even against subsidised fuel.”

In November, Acwa Power submitted the world’s lowest tariff for a photovoltaic (PV) solar plant in Dubai. And in January, the developer was selected as the preferred bidder to build the 200MW second phase of Dubai’s maiden solar development (double the initially planned capacity for the second phase).

Its selection for the Dubai project came days after the developer was awarded a contract to build more than $1bn-worth of solar projects in Morocco, and capped what has been a remarkably successful first decade for the company.

Grid parity

Acwa Power has found itself at the centre of regional and global attention following the approval of its tariff price of 5.85 cents a kilowatt hour for the Dubai solar project. Many in the sector see the scheme as the possible game-changer that will establish the foundations for renewables to finally take off in the Middle East.

The way to get the cost down is to focus on every element… and keep margins at a reasonable level

“I define mainstream as the grid-parity panacea,” says Padmanathan. “We want renewable energy to compete head-to-head with conventional forms of energy. In this part of the world, this has been a huge challenge because fossil fuel energy is hugely subsidised, so it is an extra challenge to get renewable energy to parity. And while renewable energy has achieved parity elsewhere a few years ago due to no subsidies, we’ve now got a point where it is starting to get competitive with subsidised fossil fuels.”

Padmanathan says it is not just significant that grid parity has been achieved, but also that renewable energy has now moved from “the venture capitalist/private equity era into a utility era”.

Lower margins

“We have come out of expecting a 20 per cent-plus rate of return on investment [on renewables] – because it was seen as niche and high risk to now thinking of it as a mainstream utility,” says the Acwa Power head. “It is a mainstream utility now because you can provide reliable long-term services, but that means returns drop to a steady rate of 10 per cent.”

Acwa Power project pipeline

Under construction

  • 6,147MW of power, 55,000 cubic metres a day (cm/d) of desalinated water and 1,015 tonnes an hour of steam capacity in Saudi Arabia
  • 160MW concentrated solar power (CSP) plant at Ouarzazate and in Morocco
  • 50MW CSP plant at Bokpoort in South Africa
  • 926MW combined-cycle gas turbine plant at Kirikkale in Turkey
  • 56,825 cm/d of desalinated water in Oman

Awaiting financial close

  • 120MW wind and 350MW CSP plants in Morocco
  • 275MW coal-fired power plant in Mozambique
  • 100MW CSP plant in South Africa
  • 260MW photovoltaic solar plant in the UAE

While Acwa Power’s groundbreaking tariff for the Dubai scheme has been met with much excitement from proponents of renewable energy, it has also been met with equal scepticism among many in the power sector.

“We have had an amazing amount of interactions [regarding the Dubai project]. Ranging from envy, scepticism, denial – to also, thankfully, well-wishers,” says Padmanathan.

While sceptics say the price is unsustainable and unprofitable, Padmanathan says the key to achieving the tariff was to concentrate on reducing costs at every stage, and turning the focus away from market pricing.

“The only way to get the cost down is to focus on every element of the cost, and keep margins at a reasonable level.”

Interest rate

While Padmanathan acknowledges the sharp drop in technology costs in recent years played a major role in Acwa Power achieving the record-low tariff, a further factor behind the bid price was the highly leveraged financing it was able to acquire.

“Roughly, 50 per cent of the tariff is the capital cost, getting the plant built, 35 per cent is the cost of the finance and 15 per cent is operation and maintenance,” he says.

“For the 35 per cent cost of financing, we focused on getting this as low as we could. Due to Dubai’s high credit rating, and our track record of delivery, we were able to break through the 80:20 equity/debt ratio and get 86 per cent debt at an interest rate of 4 per cent. This helped enormously.”

Padmanathan says that while there has been much debate on the potential impact of falling oil prices on the viability of renewables projects, the interest rate is actually the key factor.

“Had oil prices dropped two years ago, it would have been a problem for renewables, but not today,” he says. “The real concern should be interest rates – because if interest rates go up, we have a problem. That 35 per cent financing cost is directly impacted by interest rates and it is all to do with risk. If the base rate goes up, all the costs will go up.”

Local dominance

Acwa Power has risen rapidly to become an international leader in the utility field. Focusing at first on its home market, since in 2004, the developer has won seven of the nine grassroots independent power projects tendered in Saudi Arabia, marking a 78 per cent success rate.

The firm is now involved as a developer, investor and operator in utility schemes across 10 countries, with a total investment of almost $30bn. As with its recent success in Dubai, a key component of Acwa Power’s formula has been submitting comfortably the lowest tariffs. Padmanathan says this has been central to the company’s strategy since its foundation.

Our business ethos was… to deliver reliable electricity and water at the lowest possible cost

“When the company was set up, the business plan was only half an A4 sheet of paper. It said we are going to focus entirely on power and water generation, and not get deviated. We set out to be a developer, owner and operator  and to create value for ourselves by doing real things.

“The key part of our business ethos was that we were going to deliver reliable electricity and water at the lowest possible cost. Because business is about maximising shareholder value, we set out to ensure the returns we promise our shareholder at time of investment are achieved.”

Padmanathan says the fact the firm has consistently achieved lower tariffs than its competitors is due to focusing on its own activities.

“We have tried to not pursue the conventional practice of market pricing,” he says. “Typically, in a contracting environment, you look around at who else is bidding and if you think other bidders will be much higher, you jack up your prices.

“It is difficult not to look around and look at what others are doing, but we try to put all our efforts into our design, our costs, our model and get our tariff as low as possible. And if someone is cheaper, then good luck.”

International expansion

Having built up a strong position in its domestic market, Acwa Power is now turning its attention overseas. In late 2014, the company won contracts in Turkey and South Africa, and has followed this up in 2015 with the major awards in Morocco and Dubai.

However, Padmanathan says the firm is in no rush to enter uncertain markets.

“We are in the long-term business. We are looking to countries that have a track record of protecting the law, social stability and steady economic policies that allows these countries to grow,” he says. “And, of course, where there is a power market that is growing and embracing the private sector.”

The company’s current target markets were identified in 2009. In addition to the GCC and Jordan in the Middle East, and Egypt and Morocco in North Africa, Acwa Power set itself the goal of becoming active in four countries in southern Africa: Botswana; Mozambique; Namibia; and South Africa.

“We wanted to locate places [where] we could potentially build 4,000MW to 5,000MW on multi-fuel platforms that we could run optimally with decentralised management.”

Padmanathan says that, five years later, progress is on track. “In southern Africa, we have 1,000MW under construction, 1,000MW in the pipeline and another 1,000MW we have submitted prequalifications on, so we are there.”

In Turkey, the firm has gas and coal projects under execution, and the recent success in winning the Noor 2 and 3 solar projects in Morocco has further bolstered its presence in the North Africa state, with 510MW of renewable projects in the pipeline. Importantly, Padmanathan expects the country to create opportunities for the desired multi-fuel platform.

“Morocco has just announced a plan to bring in LNG [liquefied natural gas] and build some gas-fired plants, and we are also currently preparing a tender for 850MW of wind projects – so the 4,000MW target is attainable.”

Ownership changes

The past 10 years have not only seen an evolution in Acwa Power’s business strategy, but also in its shareholding.

In January 2013, two Saudi state-owned investment funds, Sanabil Direct Investment Company and the Public Pension Agency, acquired stakes totalling almost 20 per cent in the developer. This was followed by the International Finance Corporation (IFC), part of the World Bank, making a SR375m ($100m) equity investment in the firm in August 2014.

Padmanathan says that while not bringing extra work, the investments have benefited the developer. “It gives counter-parties confidence when very large sovereigns like the Public Wealth Fund in Saudi Arabia or the Public Pension Agency is a partner,” he says. “In certain quarters, it is an immediate stamp of approval, an immediate insurance policy for them.

“And as we start to grow beyond the kingdom, the [state] investment, and subsequent investment by the IFC, are extremely important to put us in the right place to broaden our asset platform – even our construction and financial partners.

“In terms of financial partners, does it mean I get money at a lower rate? Who knows, it’s difficult to quantify. But in the conversations I undertake, and the way we engage, it is clear that it is delivering value.”

Further changes are on the cards.

Going public

In 2012, it was reported that Acwa Power was planning to launch an initial public offering in 2014 as part of its ambitious expansion plans. While this date may have passed, Padmanathan says the company is firmly committed to listing.

“It goes back to our initial half-page business plan,” he says. “We also wrote that water and power is a very socially emotive business – and it is inconceivable that we could be significant if we were only owned by a few people – it will benefit from wider public ownership.

“We are absolutely committed to achieving a broader-based shareholding, and we intend to embark on that process during the year. But execution is subsequent to regulatory approval.”

Follow Andrew Roscoe on Twitter: @MEEDAndrew

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