Global law firm Eversheds has recently hosted the latest roundtable debate looking at renewable energy projects in the Middle East.
The Middle East is currently an attractive market for global renewable energy funders and developers. The recent programme outlined by the Kingdom of Saudi Arabia (KSA), for example, is a 54GW renewable energy opportunity, one of the largest the world has ever seen.
The immense opportunity that the Middle East presents also throws up a whole host of challenges for the development of projects in the region, securing of capital and the development of renewable energy projects in Europe.
Hosted by Michelle T. Davies, Head of Clean Energy at Eversheds, and joined by Vahid Fotuhi, President of the Emirates Solar Industry Association, this roundtable dinner addressed the impact that the Middle East renewable energy boom will have on developers, investors and wider markets.
A summary of the discussion themes follows.
A need for renewable
The Middle East is known for its reserves of fossil fuels – oil and natural gas are rich across the region and many states , however it also has the potential to become a significant market in the renewable energy sector. So what is driving the demand for renewable energy?
The Kingdom of Saudi Arabia has an increasing population and a steadily increasing demand for energy as consumption increases by 7-10% each year. 80% of the Kingdom’s GDP is dependent on oil revenues. Although rich in oil, Saudi faces a real problem of supplies for export running out as it continues to cater to high internal demands.
In order to cope with the demands, the King Abdullah City for Atomic and Renewable Energy (KACARE) has been tasked with developing plans to deploy nuclear power and renewable energy in the Kingdom. KACARE recently proposed plans to develop 54 GW of renewable energy by 2032, potentially the biggest solar programme of its kind.
Jordan, on the other hand is lacking in sufficient domestic fossil resources needed to secure its own energy independence – it is currently heavily reliant on imports through the Arab Gas Pipeline. Jordan’s renewable energy strategy will therefore not only help to reduce reliance on other jurisdictions, but also to progress its own domestic renewable energy industry with demand for domestic workforce and expertise which will ensue.
Despite holding the seventh largest oil and gas reserve in the world, the United Arab Emirates relies on imported gas for the production of its electricity and has a rising energy consumption of up to 10% each year. This mix of drivers still provides the motivation to change the domestic energy mix. The two main emirates of Abu Dhabi and Dubai each have their own energy strategy and their own renewable energy schemes,.
Development of projects
The Middle East renewable sector has made most of the world stand up and take notice. European and US utility companies and developers and Japanese banks have great interest in the burgeoning market.
European developers are looking to the East for new markets as projects in the West are held up by cost controls impacting support levels. The Middle East and its ambitious plans to develop large scale projects in the short term, provides a world of opportunities for developers.
For example, the Saudi regime enables developers to source their own sites and development assets for projects. Sourcing own sites presents a new challenge for developers as these will have to be bankable.
Furthermore, a key focus of the Saudi plan is to develop local expertise and a local supply chain in renewable energy which will create employment opportunities for its young and growing population. A target of 80% local content is set to be satisfied by 2030. There are understandable concerns about the bankability of this approach.
As recycling debt and equity frees up investors from the West to look at other markets, the Middle East renewable energy sector becomes a very attractive option, but financing projects in the Middle East differs greatly to the way in which it is done in the West.
For example, traditionally, the Saudi Government has taken a 50% stake in infrastructure projects. While the majority of the Saudi renewable developments will be debt financed in the usual way, investors may find that Saudi banks may be unwilling to invest on viable terms if the Saudi government doesn’t take a stake.
Development assets must be secured in such a way that they are bankable on a non-recourse basis. Even if financing is initially provided on balance sheet, if the developer wishes to secure a marketable exit at a future stage, assets should still be secured as such. Exit options can be severely restricted if assets underpinning the project have not been secured to a bankable degree. Leveraged purchasers may otherwise find financing a challenge, as has been shown through experience in other jurisdictions.
Sukuk financing, perhaps one of the most commonly associated instruments to Islamic Finance, has yet to be used in relation to renewable projects in the Middle East. As the projects currently stand, all materials which will be imported will be traditionally financed but as local content increases, sukuk financing is more likely to be used. This form of financing is likely to be used much further down the line.
Projects like the 54GW plan proposed by KACARE in Saudi, the EPC Ma’an Wind project in Jordan and the Masdar project in Abu Dhabi, present a wealth of opportunities that developers, investors and funders, local and international, large and small, can take advantage of.
Any interested party ideally needs to have a local presence in order to win competitive tenders. Relationships are key when doing business in the Middle East and forming a consortium or a joint venture with local partners can give companies a competitive edge, especially in jurisdictions like Saudi and Jordan where it is encouraged as part of the procurement process. Some may even argue that the strength of the consortium, finding the right partner, advisers and financers, is the key factor in the success of any company looking to get involved in these projects.
The Eversheds Clean Energy and Sustainability team has released a new publication, in collaboration with Ernst & Young. Developing Renewable Energy Projects: A guide to achieving success in the Middle East is a guide which examines the development potential in the key jurisdictions in the region.
Tuesday, January 28- 2014 @ 5:40 UAE local time (GMT+4) Replication or redistribution in whole or in part is expressly prohibited without the prior written consent of Mediaquest FZ LLC.