Renewable projects will continue to attract financing

14 April 2015

Gulf solar plants maintain investor interest despite low oil prices

  • Middle East governments encouraging solar sector
  • Funding could come from bank loans or capital markets
  • Energy reforms make sector more attractive

Renewable projects in the Middle East will remain appealing to banks and investors despite the current low oil price, according to a new report from rating agency Standard & Poor’s (S&P).

“We don’t think that the bankability of these renewable projects will be impacted… in fact, there is a more of a push towards renewables here,” Karim Nassif, credit analyst at the ratings agency, told reporters on 13 April, outlining the findings of a global report on the impact of oil prices on project finance.

“This region has really taken the bull by the horns in the last year or so,” he added.

With oil prices hovering around $55 a barrel, conventional power projects fuelled by fossil fuels would typically be the more cost-effective projects to develop.

But the region’s governments are pushing forward with plans for renewable projects in an effort to maintain the diversification of their economies away from the hydrocarbons sector.

Dubai’s Supreme Energy Council is aiming to ensure that renewable energy sources generate 7 per cent the emirate’s energy needs by 2020.

The Dubai Electricity & Water Authority (Dewa) is also developing its Mohammed bin Rashid al-Maktoum solar park in Dubai. A consortium led by Saudi Arabia’s Acwa Power is leading the second phase of the development and is raising approximately $300m in bank debt.

Dewa has also launched Shams Dubai this year, a public-private partnership (PPP) aimed at encouraging the development of commercial and residential solar power projects.

Egypt is planning to develop 4,300MW of solar plants and could require project finance to support its efforts. It launched an attractively priced feed-in tariff scheme last year to boost investments in the solar power sector.

According to the S&P report, the independent water and power project (IWPP) financing model used to develop and fund conventional power plants in the region could be “replicated relatively easily” to support renewable energy project financings.

Efforts by several Middle East and North African (Mena) countries to revise their subsidy schemes in light of low oil prices is also likely to help attract investors to the renewable and conventional power sector, S&P’s report said.  

It also noted that low oil prices could encourage more transport-related projects to seek project financing both in the Middle East and globally. Low fuel prices are likely to encourage more travel by air, road and rail, meaning that the potential revenue streams from transport projects could become more attractive, according to the report.

Yet, bank appetite to lend to projects in the region could be affected by lower liquidity levels, Nassif said.

“Banks are feeling the pinch in terms of liquidity,” he said, adding that the cost of loans for borrowers could rise.

Capital market fund-raising could be an alternative for the region’s project developers.

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