While there may be clear blue skies over the desert, the question of whether or not the Desertec Concept is viable is still shrouded in uncertainty. CSP Today examines if this initiative to supply clean energy to Europe using solar power from the deserts of North Africa makes financial sense.

By Toby Price

The signatories of the Memorandum of Understanding of the Desertec Industrial Initiative (DII) – the entity charged with planning the Desertec project – describe the Desertec Concept as “scientifically substantiated and economically feasible”. Clearly, the 12 founder companies would not have entered into this project if they did not feel it was going to offer up returns on their investments, but what are the economic ins-and-outs of what, at present, is still only a concept?

Despite the DII’s confidence, Desertec’s incipiency makes it very difficult to conclude on whether or not it makes financial sense. Feasibility depends on a plethora of issues such as how economies of scale will affect the cost of building solar thermal electric (STE) plants, how fossil energy prices in the European Union will evolve due to emission caps and carbon taxes, and how much public funding will be available at EU level. Angus McCrone, Chief Editor for New Energy Finance, for example, explains that “we haven’t done detailed cost projections for Desertec, since the unknown variables are too vast.”

One member of the Desertec Foundation’s (DF) supervisory board was also not prepared to release any preliminary cost estimates to CSP Today, explaining that “when the DII is formally founded, in November, the CEO DII will be the right person to be asked.” The DII is tasked to develop business plans and associated financing proposals for the project’s implementation, all within a tight timeframe of three years, and will certainly have its hands full coming up with useful economic and financial projections by this deadline.

Nevertheless, several aspects of the project can already be analysed from an economic perspective in an attempt to assess its viability. Firstly, it is quite clear that not all of the €400bn price tag will be privately funded. The DII declares that “additional funds may be raised from public sources”, probably some €10bn, while Germany’s deputy foreign minister, Guenter Gloser, has been quoted as saying that the project would initially be backed by €1bn in EU funding.

One concern is whether this amount of public support will be forthcoming considering the serious geopolitical issues involved in developing this project in North Africa. Some critics think European governments – which already accept the risk of importing energy from North African countries – would, given the choice, opt for the security of producing renewable energy within their own borders. Eberhard Rhein, Senior Analyst with the European Policy Centre in Brussels considers that “Europe will never want to import more than 25% of its electricity from North Africa before these states assure the rule of law”.

Is STE the be-all and end-all?

As technology develops, and generating decentralised solar power using photovoltaic panels atop European homes is becoming cheaper and more efficient, the question as to whether Desertec’s strong preference to centralised STE is prudent. Nevertheless, opinions are mixed. While the left-wing German daily, Die Tageszeitung, writes “solar power produced in a decentralised manner will likely always be the cheaper variety because no matter how powerful the sun in the Sahara, the costs of transporting the resulting electricity will be difficult to compensate for”, its right-wing counterpart, Die Welt, believes “power from solar thermal plants would be cheaper”. Either way, New Energy Finance considers locking out one potential option so early in planning may not derive the highest value. “An exclusive technological focus could be a mistake if it precludes a less expensive energy source in the future”.

One engineer involved in developing Solar Energy Generating Systems, the largest solar energy generating facility in the world built in California's Mojave Desert in the 1980s with a total capacity of 354 MW, which is the forbearer of much of the technology being used in current commercial STE projects, comments “I would like to see one more step in the development of parabolic trough technology” because “the current generation is not sufficiently cost competitive for this type of project”.

This may not be long in coming. Experts believe STE prices will drop and reach grid parity in just a few years, as generation costs fall from around 16c€ per kWh today to 10c€ when global capacities reach 5 GW. The DF and experts in both the US and Europe also expect costs to drop to around 5c€ by 2050, although New Energy Finance warns that “projections to 2050 should be accepted with caution”. Nevertheless, considering that electricity utility investments take several years to realise and have life spans of 30-40 years, STE represents a potentially competitive investment, especially in areas of high solar radiation.

Improved performance could offset higher transmission costs

Morocco's renewable energy agency, CDER, has estimated that STE installations in the Sahara generate up to 30% more power per area than in southern Spain. This level of performance is certainly impressive, although cash-strapped European governments could baulk at the additional costs of constructing the 20 or more efficient, HVDC cables, each costing up to $1 billion, required to transmit electricity north beneath the Mediterranean.

Various estimates of the project’s transmission assets range from €45bn to €100bn, whereby total transmission costs could account for up to 25% of the total cost of Desertec. Francesco D’Avack, an analyst at New Energy Finance, believes that “the benefit of cheaper land and higher insolation do not outweigh the extra cost for transmission, the extra political risk of building a project in Africa and the higher cost of capital in Africa”, whereby governments and indeed other companies interested in joining the DII could be more inclined to provide capital if the need for long-distance HVDC cables was lessened by relocating some or all of Desertec’s generating capacity to Europe.

Transmission losses are not so important. New HVDC technology is bringing them down, and while experts consider that the cable distances involved will challenge the industry’s technical experience and approximately 10% would be lost en route from Africa to Europe, New Energy Finance estimates that “losses will be more than offset by the fact that levels of solar radiation are about twice what they are in southern Europe”.

Dr. Hermann Scheer, president of the European Association for Renewable Energy (Eurosolar) and general chairman of the World Council for Renewable Energy, however, has been widely quoted as saying that Desertec’s proponents have highly overestimated the cost savings offered by HVDC transmission lines.

Alfons Benziger, a spokesman for DII member Siemens, also says this matter is still not clear cut. “We know that because of the conditions in the desert you can produce solar electricity cheaply there, but we also have to transport it to consumers in Europe. Once we figure out the kWh cost, then we can address the financing.”

Meanwhile, Christian von Tschirschky, Head of Utilities MENA at A.T. Kearney, is concerned that increasing demand for STE plants and transmission grids could raise costs as long as production capacities are not sufficiently in place. The massive roll-out of STE and HDVC technology contemplated in the Desertec Concept could exacerbate such a situation.

Finally, the chairman of the STE division of a leading renewable energy industry association, who prefers to remain anonymous to protect the interests of its members, says “no-one says anything, but considering the huge cost of constructing transmission lines and the fact that it is already difficult enough to get STE plants built in Europe, everybody thinks developing this project in North Africa is unwise. However, nobody wants to say it out loud in case they lose out on a contract”.

Issues beyond Desertec’s control

Desertec’s financial health also depends on how rising fossil energy prices bring down the cost differentials between conventional and renewable energy supplies, especially if the Copenhagen climate deal imposes severe carbon emission caps and carbon taxation. Eberhard Rhein believes that “the profitability of CSP will depend very much on the rigour with which the EU throttles back its fossil energy supply”.

The DF itself is concerned with how government policies and regional stability will affect future investments, and is waiting for policy changes that will create a “favourable commercial environment” for the project. It also recognises, however, that such changes are hard to achieve, especially when it involves cooperation between 27 EU member states and several politically unstable nations in the MENA region. Locating part or all of Desertec’s capacity in Europe could help not only to reduce project costs, but also remove the geopolitical uncertainty that could hinder the project’s potential.

Nevertheless, the solution could lie within Desertec’s very own foundations. Serious consideration should be given to whether the issues of long-distance transportation of electricity and undoubtedly huge bureaucratic difficulties could stymie Desertec before it has the chance to evolve into something more than just a concept, and whether they could be avoided by looking closer to home where several DII members already have established operations.

Relocation to Europe may also attract more backing from European governments, not least because it would ensure jobs and wealth remained within the EU’s borders. Most member states are turning to “home-grown” clean technologies to help lift them from the current global recession and a change in tack by the DF could help drum up further political support, especially to resolve sticky issues such as a common agreement on feed-in tariffs, which will undoubtedly improve Desertec’s financial feasibility. As Francesco D’Avack says “If the EU is going to source electricity from abroad, it will be expected to pay for that electricity. But governments rarely implement feed-in tariffs to get green electricity alone, the creation of jobs and a local industry tend to be major factors that influence this type of decision. I find it difficult at the current time to imagine European governments subidising construction jobs in the Sahara.”

Equally, the European Renewable Energy Directive (RED) and other EU policies focusing on creating a competitive and clean internal energy market could offer Desertec further financial leverage. The RED, for example, will enable countries within the EU to import and export renewable energy and develop projects jointly in order to meet 2020 targets, while member states which apply feed-in tariffs for renewable energy will see budgetary pressures relieved by other states importing energy through feed-in tariff schemes.

Timeframe dependent

In spite of the financial uncertainties surrounding Desertec, A.T. Kearney has estimated that if the project is implemented successfully, it will translate into a healthy investment/payback ratio of 1:5. New Energy Finance also believes the project is financially viable within the 2050 timeframe, although it recognises that the “the devil is in the detail”.

Meanwhile, Eberhard Rhein warns that “it will be vital to demonstrate the technical and financial viability of CSP on the northern shores of the Mediterranean, before embarking on transmission lines from the Sahara to Europe. Turkey, Spain, Italy or Greece should be ideal candidates for building say 50 10 MW power solar power stations with fossil power as back up”, adding, “The consortium behind Desertec has well understood that there is no point in rushing. They will have no option but to proceed incrementally.”

While it appears possible to profitably generate some solar thermal electricity in North Africa for supplying demand in urban coastal areas around the Mediterranean no later than 2020, lead times for the Desertec Concept are long and may not only affect its financial health but also its ability to combat climate change within an effective timeframe. Initially establishing operations within Europe could contribute to shortening the time it takes to bring Desertec to fruition.

Furthermore, such a move would also help dissipate geopolitical concerns surrounding the project; reducing the need to set up operations in politically complex areas and increasing political leverage within Europe through formidable political allies such as the Mediterranean Solar Plan (MSP). Backed by the European Commission, the MSP encourages the development of a “Euro-Mediterranean green electricity market” and should help address internal energy demand in participating countries. It has considerable political weight behind it and would provide Desertec with much needed geopolitical support in taking its concept from paper to plug by promoting the development of a stable legislative and regulatory framework in the Euro-Mediterranean area.

At present, clouds of doubt still surround Desertec’s ability to deliver its objectives, all be they financially viable, on a timely basis. Gaining additional support from within the EU could offer Desertec the opportunity to improve its lead times and, in turn, the return on investment.