Financial security by solar firms helps governments award credible contracts

There is a push to award US$2.25 billion of solar projects that would power almost a quarter of a million homes throughout the Mena region this year. And Jordan plans to give out 13 per cent of that total, although some questions remain about the ability to carry out these projects.

Jordan has set a target of 10 per cent of its total energy supply to come from renewable energy over the next five years, and solar power will make up half of that, or 600 megawatts. And while 200MW is on the award block for this year with bids already announced, there may be no reason to celebrate for at least a few years.

The only other large-scale solar photovoltaic (PV) project that Jordan has awarded was for 200MW – and that took three years from its project announcement to official signings, according to Laith S’ad Basha at the Jordan Solar Industry Association.

Now with the latest tender comes the issue of the seriousness of the companies in what are the region’s second-lowest solar bids. One of the main concerns is that the Jordanian government does not require a bid bond – a financial mechanism to show that a company has the capital to finance such a large project – in the early stages of the tender.

Think of a bid bond as a down payment on a car. The more cash a customer is able to put down towards the purchase of a new car, the better the financing options may be – such as a lower interest rate on the auto loan.

It is similarly true for large-scale power projects. “On a sizeable project, a bid bond is a key factor that filters companies that aren’t serious and companies that don’t have a financial background,” said Hadi Tahboub, the vice president at the Dubai-based Middle East Solar Industry Association.

Dubai’s Mohammed Bin Rashid Al Maktoum solar park, which has one of the world’s lowest solar rates, had more than 200 companies submit an expression of interest. After the expressions, about 40 companies were pre-qualified and there was a requirement of a $2 million to $3m bid bond prior to officially awarding the contract. Only 24 companies submitted bids for the final tender.

Not requiring a bid bond increases the level of competition unnecessarily, said Mr Tahboub. “Every company from all over will come in, and it’s a danger in having bids from companies without strong financial backing,” he says.

Claudio Palmieri, the chief executive of Dubai-based CLS Energy Consultants, says: “Bid bonds are typically somewhere around 0.2 per cent of the expected project value. For public tenders this is a common practice and is by no means inhibiting small companies from bidding. Bid bonds make a lot of sense in the public sector with stringent tender procedures, but not in the private sector where tenders are more open to negotiation.

“Governments typically ask for bid bonds to ensure the bidders are serious about the project and to make the offer binding. The bid bond is typically liquidated whenever a bidder refuses to accept the order based on his own proposal price. It may sound surprising to you, but it happens more often than you may think that bidders for whatever reasons have a sudden change of heart and don’t want the order after all.”

In Jordan’s second round of its 200MW solar PV tender, which will be awarded to four companies in lots of 50MW, 24 companies submitted bids. Rather than requiring a bid bond early on, Jordan gave the top four companies until the end of the year to meet the financial obligations to carry out the projects. That financial close includes a $1m bid bond and a $6m development bond.

Although Jordanian officials could not be reached for comment, the absence of an early-stage bid bond could be a method to drum up wider interest in its solar sector.

But there is the potential for a larger problem should Jordan find that a company is unable to uphold its contractual obligations. A project that cannot meet financial closing creates delays or gets sidelined altogether. This leaves a bitter taste in the mouths of all involved.

In this case, it would be Jordan’s utility, Nepco, and other potential investors in the country’s solar programme.

The lowest bid came from a little-known Greek company, GI Karnomourakis SunRise PV Systems, at 6.13 US cents per kilowatt-hour, up slightly from Dubai’s winner of 5.98 cents.

The other top three bids were in the range of 6.49 cents to 7.67 cents. Mr Basha said that it was not that those companies were unrealistic, but the price was too low for Jordan. Most of the bids came in between 8 and 9 cents.

This will be SunRise’s first foray outside its home court advantage of Greece. The company’s website touts that it “specialises in the construction of large-scale projects”, but to date it has not completed any projects larger than 3MW, which is a stark contrast to the 50MW on offer.

The Abu Dhabi-based International Renewable Energy Agency says that bid bond requirements reduce the risks of the winning bidder not signing the contract, but do not totally guarantee a bidder’s reliability.

Most solar professionals agree that a bid bond can be a safety net of sorts. “At the end of the day if companies quote the wrong price and don’t have the financial backing to execute, that’s when the project is put in danger,” Mr Tahboub said.

But if Jordan’s first round of PV tenders under its power purchase agreement system is any indicator, we may not know if the wrong prices were quoted for another three years.

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This is the first in a series of weekly analysis articles by a rotating group of The National's beat reporters. LeAnne Graves covers the renewable-energy beat.

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