The 200MW second stage of Dubai Electricity and Water Authority’s (DEWA) solar photovoltaic development at the Mohammed bin Rashid Al Maktoum solar park has caught the eye of global investors. The principle reason is the ultra-low tariff offered by sponsors Acwa Power and TSK, which will see the project create the cheapest commercial-scale solar power in the world.

The deal was also a significant one for Dubai. It is the emirate’s first independent power producer (IPP) project and, given past procurement difficulties, has helped bolster market confidence in DEWA as a grantor.

DEWA credibility

Dubai has long trailed behind most of its regional neighbours when it comes to private power developments. While Abu Dhabi, Oman, Saudi Arabia and Qatar have developed IPP programmes, Dubai has relied on state-owned generation.

A stalled, cancelled and finally relaunched tender for the 1,200MW Hassyan coal-fired power plant (via a change of fuel source) did little to impress investors. And the complicated Hassyan project is still stuck in procurement.

A solar project was always likely to be more straightforward to tender however. None of the major Gulf states had begun a major solar procurement when DEWA came to market with the second stage of Al Maktoum in April 2014 (the first stage being a 13MW pilot built by DEWA). Major power developments were scarce in the region at the time, and the market was hungry for investment opportunities.

Abundant sunshine and large tracts of empty desert makes large solar power plants eminently viable in the Middle East but most GCC states benefits from large oil and gas reserves, making intermittent renewable power less attractive. Dubai however is one of the few states without large hydrocarbon reserves.

Tiny tariff

Even given the favourable conditions, the tariff offer submitted by the Acwa and TSK consortium in November 2014 was impressive. Bidding lower than nine other groups, it offered to charge just $0.0584 per kWh, a global record low tariff for solar PV.

Not only had Acwa and TSK beat out the competition on price, but it did so with an alternative bid which saw the project double in size. DEWA had intended the project to generate 100MW, but accepted the Acwa consortium’s offer to construct a 200MW facility.

Acwa has been expanding its activities significantly in recent years, moving from a solely Saudi-based developer to a regional powerhouse. Many market observers expect the company to shortly launch an initial public offering, and it has been quickly building up its portfolio of assets. Critics suggest that it is sacrificing short-term returns in order to win deals. The counter argument is that Acwa is taking a long-view on solar power prices, and has structured the financing accordingly.

Financing

An important feature to the deal is its merchant tail. While the project benefits from a 25-year power purchase agreement, the sponsors have arranged 27-year debt. By stretching out the length of the debt, the sponsors reduced its financing costs, allowing them to bid a lower tariff. The lenders needed to feel comfortable that the project could continue to meet debt repayment beyond a period of guaranteed revenues under the PPA, but in a virtuous circle the low tariff makes finding a buyer for the power generated in years 26 and 27 more likely.

DEWA has retained a 51% stake in the project, with Acwa taking a 41.65% share and TSK owning 7.35%. DEWA’s dual role as controlling shareholder and sole offtaker gives added security to lenders that it will still want to buy power from the plant after the PPA expires.        

Not only is the tenor long, but the sponsors have managed to agree relatively low debt pricing. Sources close to the deal say the average margin over the life of the loan is 180bp, and is thought to start at around 150bp, rising to as much as 200bp.

The project has a total cost of $325 million, with debt covering around 85% of the requirement and equity covering the rest. Acwa used two relationship banks from Saudi Arabia – National Commercial Bank and Samba – and local lender First Gulf Bank for the financing. NCB took the largest ticket of $125 million, FGB provided $100 million and Samba lent $50 million.

The sponsors were given 60 days from the contract award on 15 January to reach commercial close and another 60 days to reach financial close. Acwa had originally hoped to close on the deal by the first deadline, but eventually concluded the transaction on 26 July.

Advisers

KPMG was financial adviser to DEWA while Norton Rose Fulbright and Lahmeyer International provided the grantor with legal and technical advisory, respectively. Shearman & Sterling advised the lenders.