Record low Dubai solar bid based on technical costs

04 May 2016

Bidder’s banking group say cost of finance not unusual

The reduction in tariff for the third phase of Dubai’s Mohammed bin Rashid al-Maktoum solar park is based on equipment costs rather than finance costs, according to the banking group which is supporting the world record low bid.

The banks include Abu Dhabi’s First Gulf Bank (FGB), and France’s Natixis.

A consortium of Saudi Arabia’s Abdul Latif Jameel (ALJ) Energy and Abu Dhabi’s Masdar offered a tariff of just 3$c a kilowatt hour (kWh) for the 200MW base proposal of the 800MW project.

“The solar market is driven by two things, the equipment and O&M costs, and the financing,” Steven Perry, global head of debt markets and syndications at FGB told the Project Financing Clean Energy in MENA conference in Dubai on 3 May. “In my view the financing at the moment is a very limiting factor on the competitiveness of the bid. It’s all down to EPC and O&M, that’s where the bids are won.”

The banks involved offered similar terms to other bidders, and the pricing was not especially low.

The ALJ/Masdar bid is 49 per cent lower than the second phase tariff of 5.85$c/kWh. Saudi Arabia’s Acwa Power submitted the earlier world record bid in 2015, and is now developing a 200MW project. FGB was one of three key lenders for Acwa’s project finance transaction.

In mid-2015, the cost of finance in Dubai was at historic lows, while government support for the project also keeps finance costs low. This was one factor in Acwa’s ability to submit a very low bid.

However, loan pricing has risen in early 2016 due to falling liquidity in the GCC. 

The cost of photovoltaic solar energy fell 50 per cent between 2009 and 2014, and is expected to fall by more than 50 per cent again between 2016 and 2025, according to the Abu Dhabi-based International Renewable Energy Agency (Irena).

The banking group also believes that the project is bankable at the 3$c tariff, and debt service coverage ratios and risk reserves are adequate.

“The sponsor is looking to get the most competitive IRR they can, so they prepare a case and we prepare a base case alongside them and a downside case,” says Perry. “The terms of these transactions are getting to the stage in the Middle East now where there’s little room to move… banks here are pretty clear on where they see that level, where is you go over it, we won’t be there, and if you are at it or under it we will be there.”

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