n recent years, the MENA region has experienced a boom in solar projects and significant improvement in the investment climate for solar energy. Commercial banks are increasingly comfortable investing in this sector and recent years have seen the growth of innovative financing deals designed to further reduce the risk profile for commercial lenders. To what extent have the improvements in financing have been key in driving the uptake of solar energy in MENA and, equally importantly, is this favorable trend is set to continue?
Yusuf Macun, Partner and Head of Project Finance Advisory Practice at Apricum, the cleantech advisory, believes the industry has benefited from a series of factors that have combined to create the optimal conditions for investing in solar energy and led to a significant reduction in PPA tariffs awarded in recent tenders.
In 2015, the DEWA II project in the UAE and the R2 project achieved tariffs of around 6c/kWh. Just a year later, the Sweihan project in the UAE was awarded for a record-beating levelized electricity cost of just under 3c/kWh, with DEWA III coming in at a similar level. Better access to lower-cost financing have been important for financing projects in the region, but well-prepared project RFPs, ever-simpler project implementation and the sharp reduction in PV panel costs have probably been more significant in reducing the tariffs in the recent past, he argues.
While new projects are likely to achieve very competitive tariffs, "IPPs in MENA have trimmed much of the 'fat' from PV costs. A major tariff step-down in 2017 will not be easy," he cautions. Bidders for new projects may struggle to achieve substantial economic upside from EPC and O&M # absent adopting innovative technical solutions - this will cause them to look much more closely at other factors to lower the PPA tariff, such as cost of financing, sharp structuring, and returns on equity.
"On the equity side, return expectations will be extremely relevant. Some procurers have proposed floors on returns, e.g. DEWA and ADWEA, having in mind the sustainability of equity returns to investors. Outside these, the market has seen increasingly aggressive bids in terms of equity return across the board," says Mr. Macun. He highlights the role of innovative financing used in recent deals in the region. For example, the Sweihan deal was constructed as a "soft mini-perm" with a mandatory cash sweep from around the fifth year. "The soft mini-perm meant the project could tap into greater liquidity which meant they have been able to optimize pricing to levels that haven't been observed on solar deals in the region recently," he says.
Thanks to the innovative structure employed at Sweihan, the consortium of local and international commercial banks funded the $630m, 26-year loan at remarkably low margins of 120bp and 190bp, according to the specialized press. The growing competition from commercial backs to finance solar projects in the Gulf countries contrasts with projects in other MENA countries, where DFIs play a more major role. "While still managing to reach significantly lower tariffs compared to before, the financings in Jordan and Egypt are still led by DFIs, which are the primary sources of long-dated competitive infrastructure financing," he says.
"In the UAE projects, the cost of debt is decreased materially but they involve a soft mini-perm structure, which arguable shifts refinancing risk for the borrower," he says. Whereas DFIs have been comfortable with long term amortizing structures.
Successful refinancing of recent projects will be critical to ensuring the continued enthusiasm of commercial banks for solar infrastructure projects. This could be as early as 2018 or 2019 for some projects in the region, Mr Macun hopes. "One of the core issues for commercial banks under regulatory pressure is proving that project finance, which is by construct a long-dated illiquid product, is actually not that long-dated, so demonstrating internally that they can churn their balance sheet quickly and efficiently is paramount to their ability to being able to lend more."
The importance of local banks in financing solar deals varies considerably across the region, and Mr. Macun would like them to play a bigger role. "It would be extremely positive for all players if the local bank market became more vibrant. That would give comfort to more banks lending alongside local ones. Where credit is very strong, such as in Abu Dhabi, they appear to have struggled to keep pace on pricing, possibly given their higher cost of funding in dollars. In other contexts, like the case of Dubai, they have been relevant." He says.
So which will be the next countries to join the MENA solar energy boom and how will these projects be financed? Saudi Arabia is clearly the next big market, according to Mr. Macun, while Egypt, Jordan and Morocco will continue to provide regular deal flow. Tunisia and Algeria are more nascent markets while Turkey is quite actively procuring. And the rest of the GCC is showing early signs of activity. "I think organized procurement and tenders, given their success in the Middle East and sub-Saharan Africa through Scaling Solar and elsewhere, are probably the way to go. That means that FIT projects will be scarcer -the way forward is more likely to involve tenders."
Conference Session: Financing Solar Transactions: "How the Middle East is Changing the Game" at Intersolar Middle East Conference 2017, Tuesday, September 26, 2017 |05:30 pm - 07:00 pm | Conrad Hotel, Dubai with
— Frank Beckers, Head of Project Finance & Advisory, First Abu Dhabi Bank, UAE
— Daisuke Fukuoka, IPP Business Development, Marubeni Middle-East & Africa Power Ltd, UAE
— Yusuf Macun, Partner, Apricum - The Cleantech Advisory, Germany
— Ranjan Moulik, Managing Director – Head of Power & Renewables, Natixis Corporate & Investment Bank, France
— Charlie Seymour, Financial Advisor, Abu Dhabi Water & Electricity Authority (ADWEA), UAE
— Thierry Tardy, Executive Director – Acquisitions and Project Finance, ACWA Power, Saudi Arabia (invited)
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