Auctions for renewable energy projects have helped to drive down prices but the process runs the risk of delays from over-aggressive bidding, according to a report by the Abu Dhabi-based International Renewable Energy Agency (Irena) released today.
At least 67 countries have opted to tender renewable energy projects under such auction system at the end of last year from only six in 2005, the report said.
Maged Mahmoud, the technical director for the Cairo-based Regional Centre for Renewable Energy and Energy Efficiency, compared auctions to another system that was widely applied for renewables previously, known as a feed-in tariff.
This sort of subsidy has a government-set low price to encourage companies to invest.
“Feed-in tariff prices in the region have been done in an encouraging way to investors, but sometimes at a burden to the government,” said Mr Mahmoud.
“The auction system is the best option for the Mena region because it fits the existing legal system and brings an added value to lower prices.”
But the latest project bid trend could face several risks starting with delays or cancellations “attributed to the potential for over-aggressive bidding”, according to Irena.
As a result of this type of process, the UAE has recorded some of the lowest prices for solar power. For example, in 2015 the lowest price for Dubai’s 200 megawatt second phase of the Mohammed bin Rashid Al Maktoum solar complex was 5.84 US cents per kilowatt hour. Last year, bids submitted to Abu Dhabi’s Sweihan project were as low as 2.42 cents per kWh.
For companies to even throw their hat in the ring for an auction-type project, upfront fees spanning from feasibility studies to bid bonds may block small or new companies from participating, the report said.
Adnan Amin, Irena’s director general, said that the while sector was predominantly geared towards large businesses, there were still opportunities for smaller firms. “We’re going to see more decentralised solutions and policies come on-stream, including solar rooftop and heating, and we’ll see smaller companies that are able to participate in that,” he said.
Despite the risks that come with an auction system, it remains the best option to get a real feel for the market. Mr Amin said: “It’s a market-orientated device and the auction process has helped deliver much lower cost of projects for renewables.”
lgraves@thenational.ae
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- Jebel Akhdar is a two-hour drive from Muscat airport or a six-hour drive from Dubai. It’s impossible to visit by car unless you have a 4x4. Phone ahead to the hotel to arrange a transfer.
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.
Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.
“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.
Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.
“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.
Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.
From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.
Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.
BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.
Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.
Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.
“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.
Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.
“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.
“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”
The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”
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