Solar energy became more of a household name this year as prices dropped to levels that were, in places including the UAE, lower than electricity generated from natural gas and coal. But those low rates may be in jeopardy next year.
Several factors play a role in solar-energy pricing. It is similar to shopping for a new home.
Potential home buyers analyse the neighbourhood, including the quality of schools and access to shopping centres. Once the decision has been made, the buyer goes to the bank for a loan.
Companies vying for large-scale solar projects do much the same by taking into account the available infrastructure, land prices, complexity of installation and technology costs. Investors use these, including the credit rating of a country or entity, to determine the bankability of a project.
So it should not have been such a surprise when a new pricing benchmark was set for large-scale solar photovoltaic (PV) projects this year. It started with the second phase of Dubai’s Mohammed bin Rashid Al Maktoum solar park, totalling 200 megawatts. Saudi Arabia’s Acwa Power, along with its partner TSK of Spain, came in with the winning bid at 5.84 US cents per kilowatt hour – more than 30 per cent lower than the lowest tariffs previously seen, in India.
But something has changed recently as a result of the United States’ central banking system. The Federal Reserve on December 16 raised its benchmark interest rate from near zero by a quarter of one per cent – the first such move in nearly a decade.
How does this affect borrowing costs for commercial projects such as the upcoming projects in Abu Dhabi and Dubai?
The Acwa chief executive, Paddy Padmanathan, said the increase should not affect tariffs in the short term. “So long as the base rates don’t go significantly higher, we can expect the same kind of tariff levels.”
However, that could change if the Fed was to increase its key rate by one percentage point by the end of next year. “If the base rate goes up, it pushes up tariffs,” Mr Padmanathan said.
The Saudi company said that with a 1 per cent increase in base rates, a tariff will increase by 6 per cent. This would mean that the previous tariff of 5.84 cents would increase to more than 6 cents.
Couple that minimal increase with regional bank liquidity and the day of record-breaking prices may end.
Hadi Tahboub, the vice president of the Middle East Solar Industry Association (Mesia), said that solar energy investment was relatively low-risk with interbank lending still low. “If the rate increases over a longer period of time, then that’s a different story but for now, the rate change is essentially low and developers will expect to get finance on favourable terms,” he said.
One local financier said that future prices will be shaped by two factors.
Higher funding costs will drive up the tariff, but continuing competition and increased scale will tend to push it lower.
“The recent challenges to regional bank liquidity will play a much bigger role in driving up funding costs than the Fed rate change, which has been anticipated for a long time,” said the financier.
Mr Padmanathan noted that governments have less spending capital, due to cuts in oil revenues.
“This is the reality because we’re out there in the market financing billions of dollars, and anyone will tell you that funding is diminishing,” he said.
“It’s not just a case of banks passing on the interbank borrowing rates, but [the financiers] will be looking to charge more because of the tariff and liquidity issue.”
With oil prices not expected to rebound in the near term, oil revenues for GCC countries may no longer outweigh rises in government spending, according to the Brookings Institution, a US think tank.
Oil and gas revenue make up, on average, about 75 per cent of government revenue in the Arabian Gulf region, according to the IMF.
Still, in the near term, the upcoming solar projects in Abu Dhabi and Dubai still have a chance to break more records this year.
Dubai is getting ready to add on to its Mohammed bin Rashid solar park with another 800MW of capacity. Next door, the Abu Dhabi Water and Electricity Authority (Adwea) is tendering its first solar PV project, totalling 350MW. And everyone will be watching.
“We can expect to see the same kind of tariff levels,” said Mr Padmanathan, adding that Acwa was going after both projects.
But that may not be the case in a couple of years.
“I think we will end up seeing slightly higher tariffs over the course of the next few years,” he said. “Not significantly higher, but higher.”
LeAnne Graves covers the renewables beat for The National.
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