Financiers raise concerns over solar pricing

04 May 2016

Current tariff levels may not be sustainable

Project finance experts are unsure if the record low bid prices submitted for the third phase of Dubai’s Mohammed bin Rashid al-Maktoum solar park are sustainable, they told the Clean Energy Business Council’s Clean Energy Project Financing in MENA event in Dubai on 3 May.

A consortium of Saudi Arabia’s Saudi Arabia’s Abdul Latif Jameel Energy and Abu Dhabi’s Masdar offered a tariff of just 3$c a kilowatt hour for the 200MW base proposal.

The second lowest bid, submitted by China’s Jinko Solar Holding, was 18 per cent higher, at 3.65$c/kWh. These tariffs suggest that solar prices are now on a par with all conventional power generation.

“My reaction is excited and uncertain,” says Frank Beckers, global head of project finance advisory at the National Bank of Abu Dhabi. “What concerns me is less the absolute level of the price but the relative difference between the bid prices - to some extent it is an expression of the fact that the industry has not yet matured.”

This is partly due to the variety of solar technologies and products available.

While lenders involved say the Dubai project is bankable, the levels of risk and the reliability of equipment in solar photovoltaic projects is still a new area.

“The key thing for us is to enter into the actual details,” says Karim Nassif, associate director infrastructure finance at US-based Standard & Poor’s. “It is one thing to have a fixed tariff at a reasonable level and sponsors, but if we are comparing with CCGT [combined cycle gas turbines], what is the track record in terms of resource risk, the technology itself, what are the contractual features, the warranties?”

There are sizeable concerns over the costs of long-term maintenance. Solar photovoltaic equipment tends not to be covered by warranties for the whole period of a power purchase agreement, and the technology is still too new to collect data on performance over decades.

There is also a risk that suppliers will go bankrupt or be bought out by competitors, meaning their products and parts will no longer be manufactured.

The tariffs will also cut into developers margins, and therefore the extra revenue available to cover major problems.

“The DSCRs [debt service coverage ratios] are what we look at when rating these deals,” says Nassif. “If you have a contingency against unexpected costs or mismatch of operational revenue and O&M [operations & maintenance] costs, that gives us confidence in our base case and downside.”

While the cost of solar equipment continues to fall rapidly, these prices may not be matched in other projects. This is partly due to the support of Dubai Electricity & Water Authority, the offtaker, and the specific project structure, but also the returns that developers are willing to accept.

“It throws up more questions than answers,” says Hani Ibrahim, managing director and head of capital markets at Qatar’s QInvest. “Bankability is not in question, but is it sustainable? It’s difficult to say but probably not given how many sponsors can accept that level of prices. Is that really reflective of what the market will become?… It’s not sustainable for most of the bidders.”

The very low tariffs in Dubai will also reduce the potential for project bonds and initial public offerings to finance projects while banking sector liquidity is constrained. This would require transparency, and often ratings, to attract institutional investors.

“These very low prices are not going to help us mobilise alternative financing,” says Becker. “Because as soon as we talk about bond markets, institutional investors simply look at risk and return and act on a global scale.”

This means that institutional investors will seek better returns in other countries such as India, which attract liquidity away from highly competitive GCC projects.

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