How are CSP-related investments perceived by banks in the Gulf Region?
CSP could play a big role in the Middle East in five years’ time, says top analyst, but financiers must be prepared to update their cost estimates on a yearly basis in order to keep pace with rapidly changing renewable energy (RE) markets.
A report commissioned by the National Bank of Abu Dhabi, titled “Financing the Future of Energy: The opportunity for the Gulf’s financial services sector” and published last month, states that US $48 trillion of investment in energy infrastructure will be required to meet the global power demand over the next 20 years. A significant proportion of this will be used to fund RE projects and storage technologies. CSP Today investigates the financing appetite for CSP in the region.
CSP costs – still not competitive enough
The paper was drafted by the University of Cambridge together with PwC and found that both PV and wind currently hold a cost advantage over fossil fuels. Indeed, it reveals that traditional fuels are not competitive with solar PV and wind and are less likely to be so in the future, “even if oil prices dropped much lower than they are now.”
But can the same be said for CSP? Professor Douglas Crawford-Brown, director of the Cambridge Centre for Climate Change Mitigation Research of the University of Cambridge, believes that “if CSP goes anywhere near the curve solar PV has gone, which is a very rapid drop over the last five years, it will be playing a more significant role than it does now.”
Indeed, the report highlights the results of Window 3.5 of South Africa’s REIPPPP, indicating that while “investment costs are in the range of US $5500/kW” they are falling rapidly, “with a recent bid in South Africa priced at US $1200/kW.” In this regard, Gus Schellekens, Middle East sustainability leader at PwC, said that the reduction in costs is a positive development that will “keep CSP in the game.”
Nonetheless, Schellekens adds that the real challenge is that “not much value is currently attributed to the storage aspect and so there is no ‘premium’ attached to CSP technology by governments or developers” in the Gulf Region. Until this happens and helps to level the cost comparison, he says “CSP is just seen as more expensive.”
Furthermore, the report claims that many grids are currently able to accommodate up to 40% of renewables penetration before causing instability, a factor which could limit the need for CSP with storage, Schellekens argues.
Track record key to ensure investor security
A key barrier facing the financing of renewable energy projects in the Gulf Region, and CSP plants in specific, is the lack of operational track record. It is no secret that a limited track record is a severe deterrent for investors. Whilst the operational capacity is limited, this is expected to change over the next five years with a number of projects to be connected to the grid:
Table 1: Existing CSP Projects in the Gulf Region
Source: CSP Today Global Tracker, April 2015.
In addition, the Oman Power and Water Procurement Company recently released a 7 Year Statement highlighting the potential for 200 MW of solar power to be rolled out before 2019.
Conversely, the fact that Shams 1 completed two years of operations last month, poses an opportunity for the industry. “People like stories and sharing more information of Shams 1 will help to raise awareness and, ultimately, acceptance of CSP as a credible alternative,” Schellekens adds.
Furthermore, the report showcases Masdar, which possesses a 60% stake in the plant, as a “hub for RE innovation in the region” and a driving force for its implementation in the region. Masdar’s portfolio of investments in RE projects overseas (including the Gemasolar CSP plant, in Spain) represents a wealth of technical and financial knowledge that could be used to support local project development in the region, it adds.
Falling oil prices and electricity production
Interestingly, the paper emphasizes the role of RE technologies in a context of falling oil prices and increasing energy demand. The region “will invest in adding value to exported fossil fuels”, it says, citing a report produced by The Economist Business Intelligence Unit. That, in turn, will increase the employment of solar for electricity production and desalination.
The report points out the suitability of CSP for cooling, heating and desalination, especially the former, which represents “between 25% and 50% of both energy demand and carbon emissions in many of the nations of the region.”
In order to diversify their economies, GCC countries will invest in solar and nuclear alternatives as well, the report states. In this regard, Crawford-Brown indicates that “financing institutions in the Middle East see solar PV and wind as market ready, but they know that they will have to move forward into either CSP or nuclear. They aren’t sure which direction they might go, but my reading is that CSP will be playing a key role. It could be within the next 5 years and I wouldn’t be surprised if it happens within that time.”
He adds that given its low prices, solar PV provides a “test bed” for banks to assess their financial and business models and that should benefit CSP in the short-term.
Government procurement programmes
The report concludes that government procurement programmes are of critical importance to move technological advances forward. However, it also highlights the many challenges the region has yet to face in this respect. “Policies that combine ambitions for energy, economy and environment are few and poorly coordinated”, it says adding that “some form of public-private sector committee is needed in the GCC region to define and assess the portfolios of policies needed to encourage these ambitions.”
Source: http://eu-gcc.kcorp.net/common/publicationfile/49.pdf
What it is clear is that these documents are a wake-up call for the financing industry in order to realise the opportunity ahead and keep up with the pace of developments. Not surprisingly, the paper suggests financing institutions should revise cost estimates for RE technologies “at least on a yearly basis,” so that they can have an up-to-date picture of this changing industry. In this regard, the cost reductions experienced by the CSP industry within the last years are an encouraging sign of what is about to come.