Drive to diversify gathers pace

23 December 2015

Q&A with Mario Salameh, head of project finance Mena at HSBC Bank Middle East

With demand for power set to remain high and oil prices subdued in 2016, Mario Salameh, head of project finance for the Middle East and North Africa (Mena) at HSBC Bank Middle East, expects to see an increasing appetite for energy diversification and private financing as key trends in the Middle East’s power sector.

“In the [Mena] region, most of the power plants operating or under development are fossil fuel-based, either gas or oil,” says Salameh. “But now governments feel they need to use other types of power generation feedstock technology for various reasons, depending on the country.”

Salameh says that in addition to diversifying feedstock for power generation to improve energy security and reduce the possibility of interruptions to power supply in the future, the drive to diversify generation resources is due to the limited availability of gas for the majority of countries in the region and a desire to derive maximum profits from oil reserves.

“Even in a $40-50-a-barrel oil environment, both oil importers and exporters believe that there is a material benefit from reducing their dependency on fossil fuel as the main feedstock for power generation,” he says.

Different routes

A number of governments are moving towards diversifying their power generation feedstock through various methods.

“Some are looking for coal for power. Morocco has taken this route. The Dubai coal project has been recently awarded and Egypt has a number of coal power projects planned too,” says Salameh.

“Coal prices are currently low. This makes it attractive, but coal comes with limitations from an environmental perspective, so no one is expecting a Middle Eastern country to suddenly have a large percentage of generation from coal. It is a move for diversification.”

The financier also notes that there is an increasing move from regional governments to look towards nuclear power to meet the rapidly growing demand for electricity.

“Abu Dhabi is building its first reactors. Saudi Arabia is in advanced studies and there are also projects planned in Jordan and Egypt,” he says. “The main advantage of nuclear is that it provides substantial capacity with one project, but it is not for everyone as [capital expenditure] is very high. Very few countries can afford the cost of nuclear power, and the operational and safety requirements are extremely high.”

Further diversification

“The major shift that we are seeing is further diversification into renewables,” says Salameh. “This will be one of the major growth areas for the power and project finance sectors in 2016 and beyond.”

The costs of solar and wind have gone down… We are starting to see renewables as viable in their own right

Salameh believes the turn towards renewables is due to the significant fall in cost of the various renewable technologies in recent years.

“The costs of solar and wind technologies have gone down substantially in the last five to seven years. Before this time, renewable projects could not go ahead without heavy government subsidies.

“Now, and in this region, we are starting to see renewables as viable in their own right,” adds Salameh.

Low tariff

The region’s ability to produce renewable energy at low cost was illustrated in January, when a consortium led by Saudi Arabia’s Acwa Power was awarded the contract to develop a 200MW photovoltaic (PV) solar plant in Dubai for a world-record low tariff of 5.85 cents a kilowatt hour.

Salameh says Dubai will offer an exciting opportunity for the renewables industry in 2016.

“Dewa [Dubai Electricity & Water Authority] has already done a small solar project, and is under way with the 200MW second phase. The one that everyone is waiting for is the 800MW third phase; there is huge interest in this and there is a long list of developers lining up to bid for it.”

The HSBC project finance head highlights Morocco as one of the countries leading the region’s drive for renewable energy.

“Morocco has been successful in wind and solar, and has awarded a number of contracts, with more projects planned by Morocco’s government procurers ONEE and Masen [Office National de l’Electricite et de l’Eau Potable and the Moroccan Solar Agency],” says Salameh.

“Morocco has to go this route as it imports more than 90 per cent of its energy. For financing, they have been heavily supported by multilaterals – such as EIB, EBRD, and AfDB [European Investment Bank, the European Bank for Reconstruction & Development and the African Development Bank] – to get the projects under way.”

Egypt is also pressing ahead with a number of renewable energy projects through different independent power projects (IPPs), feed-in-tariff, negotiated and engineering, procurement and construction (EPC)-procured projects.

Biggest market

Salameh says that the game changer will be Saudi Arabia.

“The largest market where everyone is waiting to embark on renewable projects is Saudi Arabia, because of the scale and size of economy. When its renewables market starts it will offer huge opportunities.”

After announcing an ambitious 54GW renewable programme in 2010, Saudi Arabia did not make progress in developing renewable power projects. Salameh says establishing the right structure with a strong procurer or sponsor is imperative to developing the sector.

Private promise

While many in the region’s various projects sectors remain concerned about the prospects for planned development programmes in the era of lower oil prices, Salameh expects the power projects sector to remain robust.

“Even with the reduction of oil prices, essential projects for the economy – which include infrastructure projects such as power, water and wastewater, which are vital for economic growth – will go ahead,” he says.

“I would be surprised if these projects are cancelled or postponed due to pressure on the budget.”

However, Salameh does expect lower oil prices to have an impact on the procurement models chosen to deliver major power projects, and the project financier anticipates greater private sector involvement.

Methods of financing [will change], from direct government funding to a form of either project or corporate finance

“Will the cut in oil price get governments to do more BOTs and BOOs [built-operate-transfer and build-own-operate models] and less government-funded EPC power projects? I would say yes.”

He adds, “There is a huge industry of EPC [power] projects being done. Major projects have been historically directly funded by government, with no form of private financing. In certain countries, we are increasingly seeing governments reaching out to commercial banks and export credit agencies (ECAs) to finance power projects procured on an EPC basis.”

While independent power projects (IPPs) have been used throughout the region for the best part of two decades, Salameh says he expects to see an increasing use of contractor financing.

“Some of the largest new power projects in Egypt today are being developed on an EPC basis, but with private financing. The financing is provided by commercial banks under a cover from ECAs in support of the awarded EPC contractors.”

Key decision

Salameh says the strong demand growth rate for power will mean the key decision for the region’s power providers will not be if, but how to proceed with major projects into 2016 and beyond.

“I don’t think investment programmes will be materially affected,” he says. “What I see will change is the methods of financing, from direct government funding to a form of either project or corporate finance.”




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