UAE leading the world in renewable energy PPPs

Sustainable Business - Perspective

Abu Dhabi, 05 December 2016

COP 22 emphasised the need to accelerate the pace of change in the energy sector, transitioning to a low carbon future. By setting a positive example for the world to follow, the UAE has shown how to do this in renewable energy via Public Private Partnerships (PPP).

The recently concluded COP 22 in Marrakech provided the first opportunity to review the impact of the international community’s commitments to a lower carbon future. Progress has been inconsistent and many governments have been slow to translate their pledges into action. The UAE is one of the exceptions and has developed its approach to delivering large scale renewable energy projects that sets the standard for others to follow.

Last year’s COP 21 in Paris saw close to 200 governments sign an historic agreement aimed at combating climate change. The agreement anticipates the global energy mix transitioning from an overwhelming dependency on fossil fuels to a future where clean energy sources become far more prominent. Here in the UAE, the government has committed to an ambitious target of 27% of total power generation sourced from low carbon technologies by 2021.

Even though 2015 was something of a breakthrough year for renewable energy, global progress has not been uniform. A loud and recurring theme at this year’s COP 22 in Marrakech was the need for governments to accelerate the execution of their strategic plans.

Slow pace towards Cop 21 commitments
In 2015, we saw more investment channelled into renewable energy than all other sources of power generation added together and for the first time, investment in clean energy was greater in the developing world than in the 35 member states of the OECD. However, overall growth in the global renewable energy sector has not kept pace with the commitments made in Paris.

There are two major explanations for this. First is the sheer scale of investment required to deliver the transition in energy sources. The cost of delivering the Paris pledges within five years may be around USD 13.5 billion. Longer term, the global demand for energy infrastructure across the next two decades is estimated at USD 48 trillion. The situation is more pressing in the Middle East and North Africa where energy demand is growing at three times the international average. Spending on this scale is simply beyond the means of most governments.

Second is the drive for value in terms of securing a competitive cost for clean energy, usually expressed as USD cents per kilowatt hour. Last week I was privileged to participate in a panel discussion sponsored by Masdar at COP 22 in Marrakech where delegates heard how the UAE has shown commendable leadership in developing project structures that deliver renewable energy at scale and with the lowest costs per kilowatt hour seen anywhere in the world. It has done this through mobilising private sector expertise and international capital in long term partnerships between the public and private sectors, or PPPs. In so doing, it has set the standards for others to follow and provides a significant precedent of how to convert policy into projects.

PPPs for better cost effectiveness
PPPs differ from traditional procurement by asking the private sector to provide a service rather than deliver built assets. In a PPP arrangement, the private sector leads the design, construction, operation, maintenance and financing of the project and is remunerated on the basis of the future power it generates. PPPs in renewable energy projects allow the private sector to import international expertise, best practice and innovation to optimise the technical and commercial approach for the business of generating clean energy.

The last three utility scale renewable PPP projects tendered in the UAE are based on photovoltaic solar technology. Each one set a new world record low in terms of the cost of power. The lowest cost bidder for the most recent solar project at Sweihan in Abu Dhabi submitted an offer in the region of 2.42 cents per kilowatt hour and in fact the three most competitive bids were all below the previous world record. To put this into context, power generated by the winning bid for the latest solar project is close to half the cost of some regional coal plants. Competition creates this value. Projects that are attractive to international developers deliver favourable outcomes.

UAE projects at the forefront
The UAE solar projects have driven highly competitive PPP procurements through a number of appealing features: well structured risk allocation between public and private sectors; highly efficient and transparent procurement processes; the use of mature technology; projects sized to deliver economies of scale; and a pipeline of future opportunities in line with the UAE’s own commitments to a low carbon future.

The economic and political stability of the UAE further underpins the success of its solar PPP projects. These features also allow international and local debt providers to accurately quantify risk and provide competitive dollar denominated financing terms with long tenors.
Simultaneously, the UAE’s achievements in renewable projects are gaining recognition in the international business community. For example, Masdar is delivering solar and wind projects across a range of different geographies. Abu Dhabi Fund for Development has teamed up with IRENA to provide finance for renewable energy projects in developing countries. This year, NBAD was proud to be the first UAE bank invited to the International Bar Association’s annual conference in Washington DC and presented the UAE’s renewable energy PPP model at an event attended by over 6,000 lawyers.

The UAE’s version of the PPP model will not suit all renewable energy projects. The terms of the PPP arrangement will require flexing for less mature renewable technologies or smaller scale projects. Countries with weaker sovereign credit ratings may need to vary their approach to financing. Not every country will be able to match the UAE’s low cost of renewable energy. Nevertheless, the UAE’s PPP model has been at the forefront of unlocking private sector capital in the early stages of the transition to a more sustainable global economy and provides a blueprint for others to tailor to their own circumstances.

COP 22 emphasised the need to accelerate the pace of change in the energy sector, transitioning to a low carbon future. By setting a positive example for the world to follow, the UAE has shown how to do this in renewable energy whilst delivering exceptional value for governments, the environment and, ultimately, consumers.

This article was also published in Gulf News on 05 December 2016.

Nathan Weatherstone

Head of Sustainable Business at NBAD
Chairman of the Middle East Branch of the International Project Finance Association

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