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Financing Solar Transactions: How the Middle East is Changing the Game


Saudi Arabia is the next big market, followed by rising stars Egypt, Jordan and Morocco. Tunisia and Algeria are more nascent markets while Turkey is actively procuring.

Dubai, September 19, 2017 In recent years, the MENA region has experienced a boom in solar projects and significant improvement in the investment climate for solar energy. Commercial banks are increasingly comfortable investing in this sector and recent years have seen the growth of innovative financing deals designed to further reduce the risk profile for commercial lenders. To what extent have the improvements in financing have been key in driving the uptake of solar energy in MENA and, equally importantly, is this favorable trend is set to continue?

Yusuf Macun, Partner and Head of Project Finance Advisory Practice at Apricum, the cleantech advisory, believes the industry has benefited from a series of factors that have combined to create the optimal conditions for investing in solar energy and led to a significant reduction in PPA tariffs awarded in recent tenders.

In 2015, the DEWA II project in the UAE and the R2 project achieved tariffs of around 6c/kWh. Just a year later, the Sweihan project in the UAE was awarded for a record-beating levelized electricity cost of just under 3c/kWh, with DEWA III coming in at a similar level. Better access to lower-cost financing have been important for financing projects in the region, but well-prepared project RFPs, ever-simpler project implementation and the sharp reduction in PV panel costs have probably been more significant in reducing the tariffs in the recent past, he argues.

While new projects are likely to achieve very competitive tariffs, “IPPs in MENA have trimmed much of the ‘fat’ from PV costs. A major tariff step-down in 2017 will not be easy,” he cautions. Bidders for new projects may struggle to achieve substantial economic upside from EPC and O&M # absent adopting innovative technical solutions – this will cause them to look much more closely at other factors to lower the PPA tariff, such as cost of financing, sharp structuring, and returns on equity.

“On the equity side, return expectations will be extremely relevant. Some procurers have proposed floors on returns, e.g. DEWA and ADWEA, having in mind the sustainability of equity returns to investors. Outside these, the market has seen increasingly aggressive bids in terms of equity return across the board,” says Mr. Macun. He highlights the role of innovative financing used in recent deals in the region. For example, the Sweihan deal was constructed as a “soft mini-perm” with a mandatory cash sweep from around the fifth year. “The soft mini-perm meant the project could tap into greater liquidity which meant they have been able to optimize pricing to levels that haven’t been observed on solar deals in the region recently,” he says.

Thanks to the innovative structure employed at Sweihan, the consortium of local and international commercial banks funded the $630m, 26-year loan at remarkably low margins of 120bp and 190bp, according to the specialized press. The growing competition from commercial backs to finance solar projects in the Gulf countries contrasts with projects in other MENA countries, where DFIs play a more major role. “While still managing to reach significantly lower tariffs compared to before, the financings in Jordan and Egypt are still led by DFIs, which are the primary sources of long-dated competitive infrastructure financing,” he says.

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