Lenders eye $50bn Gulf solar energy market

A general view of the solar power plant Shams 1 in Abu Dhabi. Power-plant builders in the Middle East are seeking a share of solar-energy market risk paying higher financing charges.

Bloomberg/DubaiPower-plant builders seeking a share of the Middle East’s $50bn solar-energy market risk paying higher financing charges as the region diversifies from oil.“The interest margin would be higher” for privately built solar plants than for conventional, natural gas-fired units, Richard Keenan, an energy-finance attorney at law firm Chadbourne & Parke, said in an interview in Dubai. Projects will need to begin generating revenue before their operators try to tap bond markets because investors generally require a steady cash flow, he said.Saudi Arabia, the biggest producer in Opec, and the United Arab Emirates plan to solicit bids this year for as much as 1,000 megawatts of new solar capacity to reduce reliance on fossil fuels for domestic power production. Abu Dhabi’s renewable-energy company Masdar, along with Total SA and Abengoa SA, borrowed about $600mn from 10 banks in March 2011 to build the Persian Gulf’s first large-scale solar plant. They didn’t disclose the interest rate for the 100 megawatt facility, which started operating last March.Builders of gas-fed plants can borrow “in the range of 150-250 basis points over Libor,” or the London interbank offered rate, Ed James, the head of project-finance researcher MEED Insight, said yesterday in an e-mail. Regional lenders might “ask for a slightly higher margin” for solar units, he said. Abu Dhabi National Energy Co, the state-run utility known as Taqa, and partners agreed to pay 260 basis points more than Libor on a 2009 loan to build a gas-fired facility.The Middle East and North Africa will need more than $50bn in investments by the end of the decade to add as much as 15,000 megawatts of solar-generating capacity, the Middle East Solar Industry Association and MEED Insight said in a report. Fourteen countries in the region have a combined capacity to produce 260,000 megawatts from all energy sources, including 271 megawatts of solar, according to the report. “Funding for such projects will come from groups of international banks that offer renewable-financing experience with regional banks providing local knowledge and liquidity,” Roberto de Diego Arozamena, chief executive officer of Saudi holding company Abdul Latif Jameel Co, said in an interview. As banks become more comfortable financing solar projects in the region, borrowing costs will probably align more closely with those for conventional plants, Arozamena said. Jeddah-based Jameel last week announced a joint venture to pursue renewables business in markets including Saudi Arabia. First Solar, the largest US solar-panel manufacturer and builder of Dubai’s first sun-powered plant, paid 225 basis points more than Libor for a $450mn 5-year revolving credit line in July, according to data compiled by Bloomberg. Taqa’s venture agreed to pay its higher margin of 260 basis points four years earlier, in the midst of the global financial crisis. The venture, Ruwais Power Co, refinanced with $825mn in bonds last year.Markets such as the US that have more experience in solar and wind power contributed to last year’s record of almost $14bn in worldwide sales of bonds for renewable energy projects, double the previous peak in 2010, according to Bloomberg New Energy Finance. The so-called green bonds included $1bn in securities issued by a subsidiary of Warren Buffett-controlled Berkshire Hathaway’s Mid-American Energy Holdings Co.The issuer, MidAmerican Solar, obtained funding for 22 years at a cost of 5.375%. That compares with the 6% yield that Ruwais Power, the Taqa partnership that refinanced last year, paid for its bonds due in 2036.Jordan, Morocco and Egypt, Mena countries that aren’t members of the Organization of Petroleum Exporting Countries, also want to generate power from the sun and wind to cut their dependence on costly imported fuel.Any expansion of the Middle East’s renewables industry will depend on regional governments following through on plans they announce. Developers have been waiting since last year for Saudi Arabia’s solar tenders and still don’t have a clear idea of when in 2014 they’ll be able to bid, Jameel’s Arozamena said.The Saudi government could pay with its own funds for construction companies to build some of the planned solar facilities and then operate them itself instead of seeking private developers to build as well as run them, he said.For such private companies, getting loans will depend partly on their ability to persuade lenders that state-run utilities will pay enough for electricity to make the ventures profitable, said Laurent Longuet, Middle East managing director of SunPower Corp.