LeAnne Graves: Sun shines on quest for affordable energy

The third phase of the Dubai Electricity and Water Authority attracted a bid of as low as 2.99 cents per kilowatt hour, a world record. Antonie Robertson / The National

Power from the sun at only 3 US cents – seems impossible. Yet in the recent bids for Dubai’s third phase of the Mohammed bin Rashid Al Maktoum solar project, two companies felt as though it was possible.

At the start of the month, Dubai Electricity and Water Authority (Dewa) announced the five bids competing for the 800-megawatt project. While the lowest bid for the total third phase came in at 2.99 cents per kilowatt hour (kWh), the Dubai utility is currently only reviewing a 200MW portion, with the lowest bid submission totalling 3 cents.

Not only is this bid a world record, but if it wins it will shove the price of solar energy down below the cost of more conventional feedstock such as natural gas and coal, which power over 60 per cent of the world. This could shift the power generation paradigm, and everyone is watching.

Sure there are disbelievers, with many saying that this figure is a strategic business, perhaps even a political move, and in no way really viable.

Bloomberg New Energy Finance (BNEF) crunched the numbers to answer the question on everyone’s mind.

BNEF’s initial assumptions were based on last year’s record-breaking second phase conditions, which included upfront costs or capital expenditure (capex) at $1.25 per watt and an interest rate of 4 per cent.

Capex determines both the upfront cash stake and how much interest a company would pay on a loan, which affects the rate of return. “The more interest you pay, the more the solar plant has to be paid to cover costs,” said Jenny Chase, the Swiss-based lead solar analyst at BNEF. “Interest goes up when projects or countries are perceived as risky; solar project interest rates in Germany are around 2-3 per cent, while in India they can be 12-13 per cent.”

Other factors such as operational spending (opex) have to be considered when readying a tender. This includes the standard upkeep for the duration of a project.

Unlike conventional power plants that need feedstock like natural gas or coal which is factored into opex, solar plants do not require fuel. “However, solar panels need to be cleaned, electrical faults need to be fixed, and it is normal to pay insurance against theft or natural disaster as well as assuming ongoing management fees,” said Ms Chase.

Therefore, in the original assumptions BNEF assumed that the bid would fall to between 5.53 cents (with a 3.08 per cent inflation rate) and 6.64 cents per kWh (with no inflation) – which it did as Saudi Arabia’s Acwa Power and Spanish partner, TSK, won last year’s record bid at 5.84 cents.

Ms Chase tweaked these totals, trying to understand the new bid entry at 3 cents. Using forecast reductions in technology costs and omitting development costs (assuming that land is freely allocated), the capex portion of the bid could drop more than 30 per cent to 0.86 cents per watt peak. She also assumed tracking systems at no additional cost, which allow panels to follow the sun throughout the day. This would help to capture 25 per cent more energy which is sold to the grid, further bringing down the tariff.

Yet the biggest decrease comes from the operation side at 52 per cent. This is done by factoring in cheap labour and even robots for cleaning the panels as a result of harsh desert conditions. Adding all of this including a neutral inflation rate, BNEF pencilled out the economics behind a bid between 2.82 and 3.44 cents per kWh, all the while giving the equity stake holders a 10 per cent return.

But Ms Chase said that this could only happen if the same favourable financial terms from the second phase were available plus building and operating the projects “on a shoestring while getting excellent capacity factors”.

Daniel Zywietz, chief executive of the Dubai-based solar solution provider Enerwhere, adds the missing pieces from his own experience. “Insurance should be around $1.80 per kWp annually and inflation in the range of 2 per cent,” he said, adding that his results show an annual return for the shareholders of about 6 per cent.

“This is not what a private sector investor would expect, but it’s probably OK for a government-backed entity looking to ensure they win a major project,” Mr Zywietz said.

Using these calculations for a bid totalling 3.65 cents per kWh, rumoured to be the second lowest in the Dewa submissions, Mr Zywietz saw a double-digit return.

He also noted that the real impact on shareholder equity depended on the amount of capex that was financed by a loan, which was reportedly 86 per cent in the Acwa/TSK project. This type of leverage was common before the 2008 financial crisis, although after economic meltdown, banks typically limited loans to 70-80 per cent of the total upfront investment. He said that increasing the leverage enabled shareholders to boost their equity returns, but it also meant that they could lose more if the project were unsuccessful.

“We know that these numbers are achievable because Enerwhere is already building off-grid solar systems at that price – the only difference between us and the low bidder is the contract duration and financing costs, which are obviously much lower for long-term, government-backed projects than for private sector clients,” the company’s Mr Zywietz said.

The breakdown is complicated (and debatable), but the takeaway is that at 3 cents it is possible to generate solar energy in the UAE. Will there be another record-breaking solar project? We will know when Dewa announces the winning bid, expected next month.

LeAnne Graves covers the renewable energy beat for The National.

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