Record-low tariffs have been offered for Dubai’s 100 MW PV project, raising questions about whether such prices accurately represent the global market and the future of solar projects.
As an independent power project and the largest of its size to be planned within the Middle East, Dubai Electricity and Water Authority’s (DEWA) 100 PV power plant attracted some of the biggest names in the solar industry, with bids as low as $0.0598/kWh and $0.0612/kWh.
The unprecedented bids, made by Acwa Power and a consortium led by Fotowatio Renewables respectively, were among the 10 offers shortlisted by DEWA last November.
“Solar photovoltaics has been and remains a deflationary technology: cell efficiencies are on a steady upward trend – with module costs correspondingly moving down,” says Thierry, Leperq, founder and president of France-based Solairedirect, a world leader in the development of large PV power plants with low Levelized Cost of Electricity (LCOE).
Since balance-of-system and financing costs are expected to fall, it is quite reasonable to anticipate much lower prices in the future.
“In this context, the two lowest bids in Dubai, while certainly not representative of the market as a whole at the moment, are showing the way, just like our own best bid in the National Solar Mission in India (7.49 Rs/kWh in December 2011),” notes Leperq.
Moreover, because the DEWA bids are only 12 months ahead of the curve, in a way they are perfectly rational, according to him, even if the returns for investors will certainly be on the low side.
“If the projects – and offtaker – are considered to be very bankable, it is not illogical for investors to accept lower returns. In the present case, there is another dimension to it; it is a trophy project, so the best bidders have certainly accepted unusually lower returns to win the contract.”
Anand Upadhyay, associate fellow with the Energy and Resources Institute in New Delhi – a non-profit research organization focusing on energy and sustainable development – also believes that the two bids are realistic, saying that they are in line with the trends in the global solar market.
“As per the National Renewable Energy Laboratory data, the insolation in Dubai is a little more than twice of that in Berlin. So if one were to draw a linear comparison, on the basis of German feed-in-tariffs, which are in the range of $0.0108/kWh, the prices in Dubai would be around $0.054/kWh.”
That tariff is exactly what Acwa Power has proposed if it were allowed to build the entire 1,000 MW solar park, remarks Upadhyay.
Other experts, however, believe that the low tariffs are not indicative of international trends. “I think they are not representative of the global PV market, but they will show the path for incoming projects in GCC countries,” says Carlos Suarez, senior project director at Altermia, a Spain-based technical consultancy specializing in renewable energies.
The reason, he says, is that Dubai is unique in terms of radiation, and DEWA’s involvement will facilitate financing conditions.
Similarly, Aaron Morrow, managing partner at Global Energy Analytics, a renewable energy consultancy with offices in Washington and Abu Dhabi, sees the bids as aggressive and not a realistic reflection of the global market.
“There are a number of factors which can and might reduce the price of PV energy. Technical factors that will drive down the price include the high insolation and corresponding high-energy production of the system, which will reduce the cost of the energy produced.”
The size and scale of the project can also wring out some additional first costs, he adds, while the terrain and geography can reduce civil engineering costs. “Minimal grading and ballasted racks would significantly reduce installation costs.”
Interestingly, both the highest and lowest LCOEs offered in this tender ($0.0147/kWh and $0.0598/kWh) propose the use of fixed-tilt systems, although the higher tariff includes a manual adjusted seasonal tilt.
“It’s difficult for us to assess the technology choices of the bidders”, admits Leperq. “What is certain is that in high irradiation areas, tracking systems – preferably single axis, which is simpler and technologically more robust – bring in a significant and additional output and help reduce generation costs.
In harsher desert environments, however, it can be preferable to opt for safer, fixed-tilt systems, according to Leperq, whose company Solairedirect tended to use fixed-tilt systems in similar conditions in Rajasthan.
Of course, it is important to remember that not all LCOEs are created equally, as a wide range of variables are involved, including initial investment costs, operation and maintenance expenses, and even annual degradation – all which impact the life cycle cost and total energy production.
“DEWA have released details about the technical specification of the proposals, showing that bidders adopted a wide variety of equipment specifications,” says Keith Bullen, senior associate in the project development and finance group of Baker Botts, where he advises sponsors and lenders on secured corporate and project financing.
However, he adds that IPP procurers, like DEWA, are always faced with the dilemma of how much freedom they give their developers – “too much freedom makes it difficult to compare the technical and commercial merits of the proposals. Too little freedom can stifle bidder innovation”.
When it comes to commercial factors, forward pricing of PV panels can also contribute to the lower cost of a Power Purchase Agreement (PPA).
“Since the installation of the system (in the DEWA project) is expected to take place over the next 2-3 years, bidders may be using aggressive forward price assumptions for panels in 2016 and 2017,” Morrow elaborates.
In addition, a decrease in volume of other markets may be pushing panel suppliers to aggressively price panels in an effort to guarantee some minimum level of production utilization.
Another consideration is that bidders may have some assumptions or expectations about the “tail” of the project. “PV projects are increasingly expected to last 30 years. If the bidders are assuming some residual value at the end of the PPA term based on a 30-year life, they may be factoring this into the PPA price,” explains Morrow.
LCOE vs. PPA
LCOEs are often reported as lifetime cost for electricity from an IPP, but they are generally adjusted on annual basis for inflation and other factors. Therefore, it would be highly unusual for DEWA’s actual cost per kWh to be the LCOE.
“The price of the PPA does not equal the LCOE,” Morrow clarifies. “That is, the LCOE of the project is not $0.0598/kWh or $0.0612/kWh. While the PPA price is directly tied to and proportional to the LCOE, they are not the same. Many of the terms likely affected the pricing of the PPA.”
There’s also the more complex question of whether bidders can assume for LCOE purposes that certain components will need to be replaced in 10 years’ time and their replacements will be a certain percentage more efficient that the initially installed component – this assumption could vary a bidder’s LCOE substantially.
“An LCOE typically captures expenditure in the financial environment of the bid submission date,” highlights Bullen.
“Bidders will provide an explanation of any assumptions that affect variable components of their financial models. One of DEWA’s tasks will be to consider whether such bidder assumptions are reasonable.”
Whilst there are no solar incentives in the UAE such as those available in the U.S. and India, the project is far from being unsubsidized, given that the government, represented by DEWA, is partner in the contract, providing the land and managing the financing.
“These (factors) will reduce the LCOE of the project and are not commensurate with what you would see in other utility scale projects around the world,” Morrow stresses.
Land costs for large projects can be significant and solar projects cannot pay competitive market lease rates for land, particularly in markets where real estate costs are high and customers or offtakers do not usually provide bank guarantees nor help structure the financing of projects.
Similarly, elements that could improve the economics if applied and that are not standard elsewhere include free interconnection costs and low-cost debt or return requirements for owners – all which are yet to be confirmed in the case of DEWA’s project.
What may also be playing part is the price that the UAE may have to pay for imported natural gas. “As the UAE continues to grow and demand for energy grows with it, the country is expected to import more LNG. This cost will likely be borne by DEWA and the UAE government, and not passed on to the consumers,” suggests Morrow.
If DEWA subsidizes its PV project through financing schemes and low return ownership requirements, this would be a cheaper alternative than providing power with expensive LNG imports.
“IPP procurers generally require bidders to guarantee a certain equity rate of return in exchange for their shareholding in the project company,” notes Bullen. “A low equity rate of return for DEWA would help bidders deliver a low LCOE.”
Thus, the contract’s terms are, in essence, back-door subsidies that can have a material impact on the project’s economics.
“At the end of the day, I don’t believe that this project is completely unsubsidized,” concludes Morrow. “A combination of aggressive forecasting by the bidders and non-standard structuring/ownership are producing an artificially reduced PPA price.”
“While I am encouraged that the prices continue to move downward, I do not believe that this price of energy is the new norm for large-scale PV plants.”