Speculative bidding is increasing in the region's renewable energy sector, particularly in Jordan and Egypt.
The term refers to companies placing bids for projects, but jumping ship before the project is complete or even breaks ground.
There are a couple of reasons for this, according to Jenny Chase, solar insight manager at Bloomberg New Energy Finance. The most common is that the company that successfully won the tender planned to sell the project once it is commissioned and put the capital towards other projects.
It is similar to flipping homes where you purchase a fixer-upper, invest a bit of money for refurbishments and sell later to make a profit.
Sometimes the hypothetical flipper buys a home that catches the eye of a developer. Maybe the land is flat, meaning an easy build, and a prime position for a skyrise.
The developer may then put in an offer well above what the flipper paid to build a new property.
With that profit, you turn around and purchase another one or two homes and repeat the process.
Another reason for such a move could be that a company’s financial situation changes – it enters bankruptcy protection, for example – thereby hindering its ability to actually develop the project.
“Occasionally it may be because it doesn’t cost very much to bid, sign the power purchase agreement and then sell it to someone who can actually develop the project,” Ms Chase said.
Such is the case in Jordan with its latest 200-megawatt solar tender that was broken into four equal sections of 50MW.
The lowest bidder, a little-known Greek company, Sunrise PV Systems, came in at a tariff of 6.13 US cents per kilowatt hour (kWh). This was 6 per cent cheaper than the second lowest bid and 25 per cent lower than the winner of the project’s fourth section.
It came as no surprise to industry leaders that Sunrise was unable to close the deal on the contract terms that had been agreed to with the Jordanian utility, Nepco.
In fact, a few months ago companies based in the UAE had been approached by the Greek company to purchase its stake. Sunrise was unavailable for comment.
And while Sunrise remains a part of the 50MW project, it has only a small stake compared with its initial position. A major regional company has taken over development of the project to help it reach completion as per the Jordanian government’s requirements, at the same tariff of 6.13 cents.
Other companies with a great deal of regional experience are also interested in helping get these projects under way. The US solar PV manufacturer First Solar, for example, said it would approach companies to see how its technology could help them to achieve their tariff targets.
“I think the biggest challenge is can you deliver that kind of tariff during execution or someone along the way will get bankrupt,” said Ahmed Nada, First Solar’s vice president and regional executive for the Middle East.
“We do hope that none of the companies, whether the developers or engineering, procurement and construction firms, have any problems. And we’re trying to see if we can help them with our technology to give their economics that they’ve promised to the Jordanian governments and shareholders.”
Speculative bidding is happening in Egypt as it also looks to ramp up its renewable-energy sector. Mr Nada said he thought that some of the companies looking to sell their stakes had always planned to do so. “Obviously we know that there are a few from each mix that had plans to come in, develop the project and run away rather than staying as a long-term owner of the assets,” he said.
Mr Nada said that speculative bidding was expected in Egypt as a result of the lucrative feed-in tariff that the government offered at the start of the programme.
“Many people did not understand what it took to develop a project and now they realise what it takes and they’re not sure how to handle it,” he said.
This practice is not a new phenomenon. Stefan Degener, First Solar’s senior director of operations and maintenance for Europe and the Middle East, said that it was typical behaviour. “We’ve seen this in Europe and the US where you have ‘part-time’ developers who will hand over to more professional companies,” he said. But speculative bidding isn’t all bad.
Ms Chase said that a certain level of it was acceptable because it encouraged a more competitive market.
“On the other hand, it’s a bit embarrassing because it wastes everyone’s time,” she said, adding that there was a certain amount of risk involved with the process.
This practice may also push governments to change the tendering process to require more experience and a bigger down payment, known as a bid bond, to take part in the bid round.
India began requiring developers to post a bond of about US$45,000 after some of the tenders awarded in 2011 just weren’t achievable, according to Ms Chase. “It is not a massive amount of money but enough to deter companies that can’t perform.”
Requiring bidders to sign a bond of 2 per cent of the project capital expenditure, which typically runs at around $1.20 per watt, is one way to rein in speculative bidding, according to Ms Chase. This would encourage people to only bid if they are confident that they can deliver the project at the tariff at which they bid.
It is inevitable that some would bid very aggressively, maybe to the point of unrealistically thinking of a better-case scenario. But what happens when these companies can’t deliver? Will other investors have a heightened level of risk?
“Not everything tendered has to be built,” said Ms Chase. “Particularly as the market is still finding its level.”
lgraves@thenational.ae
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