The solar energy market is steadily moving towards maturity worldwide; photovoltaic panel installation is almost commonplace in certain European and North American regions and concentrated solar power (CSP), or large solar thermal energy generation, is also beginning to make some progress, though installed capacity is under 1GW globally.

The Gulf Cooperation Council (GCC) countries are rich in the resources needed for this kind of energy production: sun and heat. There is also little doubt that the member states recognise the political and economic potential that renewable energy projects offer.

However, the challenges have so far proven greater than the benefits. Aside from inexperience, little in the way of governmental subsidies and no tax incentives, the Abu Dhabi-based International Renewable Energy Agency (IRENA) lists the obstacles to developing solar as: protracted permitting time, import tariffs, technical challenges in installation and construction, raising financing for renewable energy projects in the region and lack of knowledge about how to develop projects.

According to one lender, familiar with both the region and the sector, these challenges not only mean that debt must come at a premium, but also that banks are less than eager to lend. “There might be plenty of sunshine,” he continues, “but the region is also blessed with other resources, such as oil and gas. The availability and relative low cost of these types of fuel make solar seem even less economical.” Bankers and law firms have grown wealthy from oil and gas and independent water and power projects. The incentives to move into new sectors are weak.

Though the challenges to developing renewable projects in the region may be considerable, the benefits of, and requirement for, alternative energy sources are becoming increasingly apparent. According to research by the International Energy Agency (IEA), global demand for oil is expected to rise from 80 million barrels per day (bpd) to 120 million bpd by 2030 and the Gulf countries’ rate of demand is the highest worldwide, increasing at 4.5% annually. Governments and intergovernmental agencies in the region, working in part through IRENA, have indicated that they want to redistribute some of their oil and gas resources, presently used in meeting the region’s power generation needs, for other uses such as feedstock for the petrochemicals industry and a greater amount for export (the region uses between 17% and 20% of the oil and gas it produces).

Other recognised benefits are mainly environmental and political. Increased activity in the renewable sector would help the region to reduce its carbon footprint and allow the region, even while a major hydrocarbons producer, to meet the same emissions reductions targets as its customers. Abu Dhabi has also set itself the goal of making Masdar (the city, not the sponsor) the world’s first carbon neutral city, despite the emirates significant oil industry, and aims to get 7% of its electricity from renewable sources by 2020.

Shams 1: Blazing a trail

Masdar, with Total and Abengoa as its partners (each holding a 20% stake), is in the process of raising roughly $650 million in 20-year bank debt for its build-own-operate 109MW solar project, Shams 1. The RFP seeks debt with a 20- to 25-year maturity and an additional $35 million standby facility. The financing is expected to close early next year.

The site for the CSP plant is in the city of Madinat Zayad, about 75km south of Abu Dhabi. The two-year-long construction and installation will include a MAN turbo steam turbine and 768 parabolic mirrors in a 2.5km2 area, which will make it the largest parabolic trough power station in the world and the first in the region, though larger CSP projects are in the early stages of development in Germany and Jordan, and there are rumours of similar projects in Oman, Kuwait and Bahrain. Further, similar-sized plants are planned for the site and Masdar already operates a 10MW photovoltaic facility in Abu Dhabi.

Masdar has secured an exclusive power purchase agreement with Abu Dhabi’s Water and Electricity Company, ADWEC, and the government has agreed to subsidise the project by paying the offtaker the difference in cost between the solar energy and its existing electricity sources.

Though the forthcoming project has been hailed as a precedent for the region in terms of environmental progress and international relations, some lenders and advisers familiar with the region believe that the benefits have been exaggerated and that some fundamental problems with the technology are being ignored. While the criticisms may seem rather antiquated to some European renewables bankers, they provide an indication of the institutional barriers to greater renewables development.

False economies

“These projects are not self-economic,” says one adviser, “even with the small government subsidies to the offtaker. Look at Spain. Those projects are only successful because the government subsidises between 50% and 60% of the capital costs. And Spanish solar energy is not competing with a wealth of other, more conventional, indigenous natural resources.”

Even within the GCC region, lenders are dubious about CSP as an appealing investment. “Firstly, conventional power projects tend to cost $1 million per 100MW or so. Solar projects cost about five times that,” notes one banker “and actually producing the energy after the plant is operative can be up to ten times the cost of conventional means.”

He continues, “There are two industries developing in the area; the CSP projects, like Shams, and the frankly more popular concept of manufacturing photovoltaic panels for sale. Whether either is a good candidate for project finance is questionable; I personally believe we shouldn’t be lending to them. But the former is certainly the more challenging of the two.”

CSP’s advantage over photovoltaic (PV) generation is that, despite the greater cost or installation, it has heat storage that allows the projects to produce power after sun down, with the aid of gas and steam turbines. CSP, say its supporters, is particularly suited to areas that have patchy insolation. This is certainly not a problem for the Gulf nations, note its detractors.

“This type of CSP project is not really cost effective for the sponsor either,” says an adviser. “They don’t manufacture the parabolic troughs, so they have to be paid for, and that cost alone can be prohibitive. Also, even though it is hot all day and some of the heat can be stored, the technology depends on gas turbines, which somewhat undermines the environmental gain to make the project viable when the sun goes down.”

However, the heat storage properties of the CSP technology mean that it is more consistent than PV and other renewable energy sources such as wind, and therefore CSP is a more realistic competitor to conventional gas energy generation. The technology has not yet been standardised, another gripe for lenders, though this means that the length of time that CSP facilities can store heat keeps being extended.

Is government-driven development right?

Solar projects in Europe and North America have benefited significantly from government subsidies and the ability of developers to source components from different countries or at least regions. The GCC lacks this ability to exploit comparative advantage. Although the GCC is working towards symbiotic relationships between its member states, such as an interconnection project linking the energy grids of a number of countries in the region, there are as yet few common approaches or guidelines for developing projects.

“There is no commonality,” explains one lender. “No common currency, discrete transportation systems, and no blanket policies for renewable subsidies, tax incentives or even project procurement. All of these factors increase the cost of projects.” While a conventional developer might appreciate the benefits of dealing with one well-rated offtaker, renewables developers often lack the resources to adapt to a series of jurisdictions with little to show to date for their interest in new generation technology.

Organisations such as IRENA go some way to addressing these concerns, with carbon emission reduction at the forefront of its energy agenda. The organisation was established to promote the development of the renewable energy industry, and has a budget of $23.9 million 2011 funded by private contributions and official investment from the UAE, Germany and Austria.

According to the World Resources Institute, Qatar, the United Arab Emirates, Kuwait and Bahrain are ranked first, second, third and fifth respectively in its list of carbon dioxide emitters per capita. All of these nations’ economies depend on oil export and so it is perhaps unsurprising that they are all IRENA signatories.

Though cynics will argue that the region’s compliance with carbon emission-reducing protocols is little more than lip-service to international pressure, projects like Shams 1 prove that there some oil-rich nations are making positive steps towards renewable energy resource development despite the substantial challenges and the expense of these projects. Lenders might also question whether building up large national champions like Masdar makes sense in renewables, even if it did in conventional power with sponsors like TAQA.

The financing structure of the Shams deal is likely to shed more light on how effectively and how willingly lenders are prepared to devote time and resources to this nascent sector and whether project financing is cost-effective for investors and sponsors. But developers, even the government-linked ones, will need to work hard to change market attitudes.