Ultra-cheap Renewable Power
The Sweihan solar project in Abu Dhabi made headlines in September 2016 when, in a competitive bidding process, the lowest cost bid came in at 2.42 US cents per kWh. That set a new world record low compared to the previous 2.91 c/kWh, set in Chile in August 2016.
Despite some uncertainty over the final price (see below) it remains an example of a perfect storm of excellent natural resources, falling deployment costs and favourable policy and financial conditions. These combine to create conditions in which solar electricity can undercut the cost of conventional alternatives, making decarbonisation a no-brainer.
The Initial project proposal:
A tender for the project was released, in early 2016, by the Abu Dhabi Electricity and Water Authority (ADWEA), with a proposed project size of 350 MW (though bidders were invited to submit larger proposals if they wished). The project site is located about 120 km east of the city of Abu Dhabi and takes up an area of 7.8 square km.
Pre-qualified bidders were invited to attend a two-day site visit and conference in Abu Dhabi, with a bid deadline for the tender set for September 2016.
There were six bidders. The winner was a partnership between Jinko Solar (a Chinese PV manufacturer and solution/service provider) and Marubeni (a developer and operator of international power projects, already with four thermal power and water projects in the UAE).
It’s important to note that the winning (lowest cost) bid was reported by ADWEA using two prices. One was a “levelised electricity cost (LEC)” of 2.94 c/kWh and the other a “weighted LEC” of 2.42 c/kWh (the number widely reported). The calculation behind the “weighted” tariff was not given.
Some local sources suggested that the widely reported 2.42 c/ kWh represented an off-season tariff, with the summer tariff being higher. Without doubt, the tariff structure underpinning the bids was not “flat”, but was weighted towards production in the summer months. That was to encourage plant designers to maximises energy production at the time of peak electricity demand in Abu Dhabi.
Along with these prices, an expected IRR of 7% was stated for the winning bid.
It’s important to be aware that, at this point, the Jinko/Marubeni proposal had not, by submitting the lowest bid, been automatically contracted as the chosen project developers. A period of negotiation and final contracting followed.
At the end of February 2017, a 25-year PPA contract to sell electricity from the project was signed.
The special purpose vehicle constructing, operating and maintaining the project (and selling the electricity) is jointly owned by Marubeni (20%), JinkoSolar (20%) and the Abu Dhabi Water and Electricity Authority (ADWEA) (60%). The off-taker is ADWEC, a wholly owned entity of ADWEA.
In effect, the government of Abu Dhabi are both the purchaser of electricity and the majority shareholder of the company selling it.
It was announced that the final project size would now have a capacity of 1170 MW (on a DC basis) – making it the world’s largest single utility-scale solar PV plant.
The final price within the PPA was not published. Some reports suggested it may have dropped further, to as low as 2.30 c/kWh, however others stated that it remained as per the price(s) announced in the bid results (i.e. LEC: 2.94, weighted LEC: 2.42).
The financing package was confirmed, consisting of $222m raised in equity (from ADWEA) and $650m of project finance (debt) from local and international commercial banks. The Bank of Tokyo Mitsubishi was announced as the leading arranger of the loan, committing at least $100m. Other Japanese lenders included Sumitomo Mitsui Banking Corporation, Mitsubishi UFJ Trust and Norinchukin Bank. France’s BNP Paribas Credit Agricole, Natixis and the First Abu Dhabi Bank completed the list of lenders.
The loan has a 25-year tenor, but is structured in a way that will allow refinancing after five years.
From the financing package, the total cost of the project is estimated at USD 872m. That means a cost per WDC of just $0.75.
Mumbai-based engineering firm Sterling and Wilson won both the EPC and O&M contracts for Sweihan. Construction, which has already started, is announced to have a timeline of just 23 months.
This rapid construction is driven by the requirements set out within the RFP. They stated that the earliest the plant be connected to the grid will be the fourth quarter of 2018, with a latest operational date of March 2019. The total timeline shows how quickly large-scale solar PV projects can be completed, when policy, market, planning, industry and financial objectives all align.
Expected commercial operation date (COD)
The Policy Context:
Contributing to the low cost is undoubtedly the fact that the UAE provides some appealing business environment attributes, including: efficient and transparent procurement, projects big enough to deliver economies of scale and a commitment to a strong ongoing pipeline of projects.
The latter is underpinned by the fact that power demand is growing by 3-5% per year and by the UAEs 2050 Energy plan targets. These state that energy sources for local consumption by 2050 should be 44% renewable, 38% gas, 12% clean fossil fuels and 6% nuclear.
Currently, more than 90% of the country’s energy needs are met by natural gas. It has no plans for coal (perhaps not surprisingly, since these prices for PV are around half that for coal plants in the region). 5.6GW of nuclear is currently under construction in four phases, in the western UAE at Barakah. The first phase is expected online during 2017, with full completion by 2020.
Solar PV is seen as important because of the economics of saving expensive gas at times of peak demand. It’s worth noting that Abu Dhabi has no current plans for concentrated solar power (CSP) plants, unlike other countries in the sunny MENA region.
Prices this low: how?
Other than its excellent solar resource and low policy risk, there have been a variety of reasons suggested as to why we see such exceptionally low prices for PV in the UAE.
Note that, since the project contracts are non-public, some are points that have been speculated upon as being likely, rather than being known for sure. They are presented in no specific order:
- Forward pricing of PV panels (i.e. an assumption that they will be lower at time of construction than time of bid)
- Potential contract clauses to allow further expansion of the project
- Low cost of materials and labour
- Low project development and land costs (site pre-developed and provided for free?)
- Construction period is short and low-risk
- Cost of grid inter-connection may not be borne by the bidder
- Low cost of capital (also helped, as above, by low policy risk)
- Attractive financing terms (e.g. debt at rates around 4%)
- Low IRR expectations for investors (including suggestions that ADWEA may even accept no returns for an initial period, such as ten years)
- Jinko, as a PV vendor, may have strategic reasons to invest (get a reputation, show that solar is cheaper than fossil fuels etc.)
- Tariff escalation with inflation
- Tax advantages: low corporate tax, no income tax and withholding tax.
- The very long PPA length (compared to 10-15 years in many countries)
- Other unseen government concessions
Other Notes: PPP
This project is a good example of a public private partnership (PPP). PPPs differ from traditional procurement because the private sector provides a service rather than delivering a built asset (and then stepping away). So the private sector designs, constructs, operates, maintains and finances the project. It earns its return by being paid for the future electricity it generates.
First published: April 2017
Last updated: October 2017