Over the past decade solar thermal energy has been the laggard on the renewable power scene. While wind turbines and photovoltaic power have broken into the mainstream, the installed capacity of concentrated solar power (CSP), as large-scale solar thermal energy generation is also known, still stands at less than 1GW.

That could change soon. The US Department of Energy (DoE) has started to roll out loan guarantees for developers in the sector that should see a growth spurt for CSP in the south-west US states, where the vast spaces and desert sun are ideal for this form of energy generation. Projects are also emerging in deserts elsewhere around the world.

Spain is the only country until now that has successfully hit upon a model for financing a steady flow of CSP projects. With the completion of the 50MW La Florida plant in Alvarado in July, Spain became the world’s largest producer of solar thermal energy, overtaking the US with 432MW of installed capacity – since increased to 438MW – as opposed to 422MW for the US. The country has over 1,000MW currently under construction and is scheduled to reach 2,400MW by 2013.

For those areas with sufficient direct sunlight to make it viable, CSP has the major advantage over its photovoltaic (PV) cousin that with heat storage mechanisms it can continue providing energy for hours after the sun has gone. This gives it the potential to challenge gas generation as a source of baseload power into energy grids as well as providing a dependable source of peaking supply, whereas PV and wind fail on the utility scale because of the intermittency of their power supply.

The technology is still evolving, and not all plants have the heat storage facility, but the length of storage is constantly being pushed out. The combination of a central tower with molten salt storage systems, for example, should enable Solar Reserve’s planned 100MW Crescent Dunes facility in Nevada to carry on generating power for 10 hours without solar irradiation.

The twin stumbling blocks have been the high cost of CSP compared to PV and the scale of investment needed to get the plants built. Whereas a PV module directly converts light into electricity, so can work alone or in a field alongside any number of other modules, a solar thermal panel is essentially just a highly polished mirror, and many of them are required to generate the enough steam to rotate a turbine while achieving economies of scale. However, CSP is a better substitute for gas than PV because the turbine technology is essentially the same – to the point where several hybrid plants have been built that use both gas and CSP.

“The technology itself is not at the cutting edge, it uses conventional power generation techniques,” says one CSP developer. “There’s a lot of concrete and steel, and banks understand that, so it has characteristics that should be very appealing to project finance.”

The way Spain has financed its CSP development arguably owes as much to the Spanish model of relationship banking as to the country’s famously generous feed-in tariffs. The model has been described on the US side of the Atlantic as akin to corporate structured finance, and will have limited appeal in United States, unless Spanish banks follow Spanish sponsors and take it with them, as happened before the recession when Spanish contractors started dominating overseas PPP markets. In Spain it is standard practice that CSP developers to give the banks completion guarantees. This is unlikely to happen with commercial banks in the US, and margins are likely to be higher as a result.

Big US pipeline

Despite recently being overtaken by Spain in terms of installed CSP capacity, the renewables sector in the US has had a better recession than its Spanish counterpart. Immediately before Lehman’s collapse, one of the principal laments was the lack of long-term commitment from Washington to renewable tax credits. Their extension by eight years as part of the economic stimulus bill allows time for new CSP projects to pass through the cycle of getting sited, permitted, built and running and still qualify for the credits at the end of it. Whereas Spain has come under pressure from the sovereign debt crisis, and the credibility of its feed-in tariff regime has taken a hit, US stimulus measures have helped create an enormous CSP project pipeline that dwarfs Spain’s.

Leading the charge is Brightsource, a company that grew out of Luz International, a solar thermal pioneer from Israel that went bankrupt in the 1990s. Brightsource has over 4GW of CSP under development in the southwest US states, and has PPA agreements for 2.6GW with PG&E and SoCal Edison, figures that are put into perspective when one remembers that total CSP operational capacity worldwide is still below 1GW.

Brightsource’s first project is the 400MW, three-plant Ivanpah project, in the Mojave Desert. This has secured a conditional commitment for a $1.37 billion loan guarantee from the DoE. Ivanpah is awaiting environmental clearance, being situated in pristine desert that is a natural habitat for rare species of tortoises, but the presiding member of the California Energy Commission has given a positive recommendation for the project to go ahead, deeming it to be in the public interest. The three plants are the first of 14 Brightsource plans to build by 2016.

Ivanpah was the first project to secure a conditional loan guarantee. The only other one so far is Abengoa’s 280MW Solana plant in Arizona, which was given a $1.45 billion loan guarantee by the DoE. The plant, which will use parabolic troughs similar to the ones on its Solnova plant in Spain, will sell power to Arizona Public Service Company under a long-term PPA.

The rush of developers pushing ahead with projects include Solar Millennium, which is working together with Chevron on the Blythe 968MW project and the 745MW Palen project, both in California, and without Chevron is also developing the 745MW Ridgecrest project in California and the 250MW Amargosa Farm Road project in Nevada.

Solar Millenium’s projects will use parabolic trough technology, the technology that has most commonly been used for CSP plants, while Ivanpah uses power towers, a more efficient but less proven method of capturing solar energy – though it has been successfully used on several comparatively small projects. Less common is the stirling-dish system that Tessera Solar is hoping to employ on two projects in California, the 709MW Imperial Valley project and the 850MW Calico Solar project.

These projects and others, such as the Crescent Dune project, which has a 25-year PPA with NV Energy in Nevada, are on a fast-track process for their environmental permitting so they can break ground before the end of 2010, which would qualify them for federal grants for one third of their cost. The measure, which was passed in 2009 as part of the further stimulus efforts, expires at the end of the year, but lobbying efforts are underway to get it extended by two years to compensate for the depressed state of the tax equity market during the recession.

One of the main difficulties for CSP is the strong competition for PPAs from the PV sector, which has fallen far more significantly in cost. While solar thermal is more suitable for utility scale use given its less intermittent nature, the heat storage technology is key to capitalising on that advantage. While these technologies remain untested the DoE’s loan guarantee scheme will be critical in getting CSP off the ground.

Given the size of the pipeline, however, the commercial bank market will have a role to play in providing debt sooner or later. This is likeliest when developers move onto financing their second and third projects. The imperative for this is especially strong as the process of getting loan guarantees is quite slow.

Spain still strong

While its ascendancy over the US is likely to be short lived, rumours of Spain’s demise as a renewable energy market are somewhat exaggerated. The greatest threat to its expansion is saturation, given that it has considerably less solar resources than the US and MENA.

Much controversy has centred on the prospect of retrospectively decreasing the feed-in tariffs paid to PV developers, which has shaken confidence in the industry. In the event, though retrospective cuts weren’t made, tariffs for ground-based PV panels were cut by 45% as the government sought to cut back its spending. But the tariff cuts announced for solar thermal and wind energy were smaller than expected. Higher barriers to entry shielded solar thermal energy from the gold rush that affected PV during the boom times, so the need to pare back was less strong.

Although the tariff announcement was good news for the industry, the legislation has yet to be passed, and no one is quite sure when it will be, though there are rumours it will happen in October. This has left several projects frozen that have term sheets in place and are ready to close but are waiting for the tariffs to be confirmed.

Spanish developers have benefited from the regime, but the frequent tariff changes have caused of grumbles about the lack of stability. “Everything is on hold, with people waiting,” says one project finance banker. “What the sector needs is legislative stability and a normalisation of prices.”

Nevertheless, any negative sentiments haven’t prevented the Spanish CSP market, which took off in 2008, financing a steady flow of projects this year. Since Acciona closed a 150MW portfolio of projects in January, a financing that was delayed for a year by the financial crisis, the country has financed a further 300MW of CSP capacity in six projects – Badajoz, Helioenergy 1 & 2, Seville and Solacor 1 & 2 – each 50MW (standard in Spain for mostly regulatory reasons).

The last of these to close, Abengoa’s Solacor 1 & 2, which closed in August with a total investment of Eu500 million, including Eu350 million of senior project debt with a 20-year tenor, attracted investment from the Japanese group JGC Corp, the first Japanese involvement in developing a CSP project. NEXI, Japan’s ECA, covered the loan, which was provided by BNP Paribas, HSBC, Mizuhu and SMBC – a deal that is eyebrow raising for the absence of any of the Spanish banks that regularly feature on most of the country’s solar thermal financings.

JGC Corp’s purpose for investing in Solacor, which Abengoa will operate and retain a 74% in, is to acquire the technological transfers to use for further investment in the CSP sector, and to that end it is following where other companies have gone before. Abu Dhabi’s sovereign wealth fund Mubadala, which through Masdar is pursuing its ambition to make the emirate a global leader in renewable energy, is also acquiring solar thermal power experience in Spain, teaming up with Sener to form Torresol, through which it financed the Valle 1 & 2 projects in 2009 and Gemasolar, a 17MW tower based project. Technology transfers has been an explicit goal of renewable energy investment by Mubadala.

The appeal to banks of forming a relationship with Mubadala enabled Torresol to get better terms for Valle 1 & 2 when it closed last year than Extresol and Acciona’s portfolio of plants, which were both deals in the market at around the same time. Whereas those two projects financed with mini-perms, Torresol got a 20-year Eu540 million loan with a flat margin of 325bp over Euribor from Santander, La Caixa, BBVA, ICO, Caja Madrid, Banco Popular Espanol and Banesto.

Margins for Spanish CSP deals have since remained in the 290-350bp range – Abengoa got a lower price on Solacor on account of the ECA cover – with upfront fees of around 250bp. These figures are deemed unlikely to shift down before the end of the year. Interestingly, one banker that lent on Torresol says his bank is not interested in Mubadala’s Shams 1 project in Abu Dhabi because the sponsor is seeking margins below 300bp.

MENA potential

The US is just one, albeit the most significant, part of a general mushrooming of planned CSP projects. Outside the top two of Spain and the US, the biggest build up of CSP capacity is expected in MENA.

In Israel – a country that along with the United States was a pioneer in solar thermal energy before being eclipsed by Spain – Brightsource, Abengoa and Siemens have lined up bidding groups for Israel’s two 25-year BOT concessions at Ashalim in the Negev desert, each with a capacity between 80MW and 125MW and a capex between $700 million and $1 billion. The bid deadline for the projects is September for Plot A and November for Plot B, with financial close scheduled for early 2012. The concession will feature government support in the form of taking on the currency risk on the capex spending, possibly some of the interest rate risk, and some guarantees on the 25-year PPA with Israel Electricity Company.

Abu Dhabi’s 100MW Shams 1 plant forms part of the emirate’s plan to derive 7% of primary energy production from renewable sources by 2020. Mubadala, through its subsidiary Masdar, owns 60% of the project, which will have a capex of around $600 million. Total and Abengoa each hold 20% stakes. The plant has a long-term PPA in place with Abu Dhabi Water and Electricity Company. Shams 1 is the first of several 100MW projects anticipated on the site.

The model owes something to the Spanish experience, but is based on the Gulf’s successful IWPP/IPP model, and it is this model that looks like spreading across North Africa. Morocco is using the IPP model for the Ouarzazate programme to build 500MW of capacity over several projects, each with at least 125MW. The pre-qualification deadline for the first of these projects is 4 October. The World Bank, EIB, African Development Bank, Agence Francaise de Developement and Germany’s KfW are all involved in the project.

There are high hopes for the Sahara region realising the dream of harnessing its enormous solar and wind resources to power Europe; the Desertec Industrial Initiative is mobilising a loose grouping of European companies and organisations around the goal of getting Europe to import 17% from solar and wind installations in MENA by 2050. Such a grand vision could come up against political reality given the scale of the investment and coordination across countries that it would require, but it is attracting enough interest to ensure efforts to convert the North African desert into a major renewable energy generator should gain some momentum. CSP developers have been quick to hitch their projects in the region to the Desertec initiative.

Morocco, the only country in North Africa with no oil and gas resources, has unsurprisingly been the most enthusiastic embracer. The Ouarzazate site will be one of five planned renewable power plants that it hopes will account for 38% of the country’s installed capacity by 2020. Another location is at Ain Bni Mathar, where Abengoa is the contractor currently building 20MW of CSP capacity on an integrated solar thermal combined cycle plant that also includes 452MW of gas fired capacity. The Eu400 million project, which closed in 2008, received finance from the World Bank, African Development Bank and Spain’s ICO.

The region has a couple more ISCC projects under construction. Abengoa is also an EPC contractor on the 155MW Hassi R’Mel project in Algeria, which integrates 130MW of gas generation with 25MW of CSP, while Solar Millennium and Ferrostaal are building the 150MW Kuraymat project in Egypt, which includes 20MW of generation from parabolic troughs.

While the projects to come in the region owe much to the GCC’s established IPP/IWPP model, this model enters unchartered terrain on the matter of solar coverage risk. A question that needs to be resolved is whether the payments laid out in the PPAs will be availability or capacity based. If there is a shortfall in energy output due to insufficient solar coverage, will the offtaker get a refund? Under the Spanish model, sponsors and banks have managed this solar risk, but that has meant a payment mechanism that provides them with plenty of upside.

Without the inclination or financial wherewithal it may be that energy companies in North Africa prefer to make fixed payments. But if European countries extend generous feed-in tariffs to power generated in North Africa, and the transmission infrastructure is put in place, the condition could be ripe for an explosion in Saharan CSP.

Multilateral lending agencies will have a key role to play in mitigating the technology and other risks. The World Bank is stepping up, announcing last year that it plans to invest $5.5 billion in North African solar power projects.

Slow and steady wins the race?

Developers like Spain’s Abengoa and Germany’s Solar Millenium are already reaping the benefits from the head start their respective countries’ benign renewable energy policies have given them. As companies from abroad invest in Spain to acquire technological know how, Abengoa is actively developing CSP projects in the US, across MENA and in India, another country that has set the ambitious target of developing 20GW of solar power by solar capacity by 2022.

As a whole, the industry has not got off to such a fast start, suffering from competition from cheaper and easier solar PV power purchase agreements and equity capital. But as capacity is added and costs come down while the technology continues to improve, CSP might prove in the long run the more dependable form of energy generation, providing a more robust challenge to carbon burning power stations than either wind or PV.