Dispatchable solar revolution
The expected closing in December 2018 of the Dubai Electricity & Water Authority’s US$4.3bn, 950MW Solar CSP and Solar PV IPP has truly reset the bar as far as global solar energy procurement is concerned. Atanu Das, vice-president, Yunhe Lu, director, Haoyong Chen, senior manager, and Alan Lau, manager of ACWA Power’s acquisitions and project finance team provide an assessment of the transaction.
In December 2016, Dubai Electricity and Water Authority (DEWA), the state-owned utility of the Emirate of Dubai, UAE, as part of DEWA’s IPP procurement programme, launched a tender for the 200MW Solar Thermal IPP (classified as Phase IV of DEWA’s renewable procurement) with the stipulation that the project use the central tower technology and catered for at least eight hours of full load thermal energy storage (TES/Storage) through the issuance of a request for proposal (RFP) to pre-qualified developers, which included ACWA Power.
Additionally, the RFP allowed for submission of an alternate proposal subject to the sole criterion that the alternate solution utilised acceptable solar thermal/concentrating solar power (CSP) technologies with storage.
From DEWA’s perspective the procurement was in accordance with the Dubai Integrated Energy Strategy 2030, which was developed to ensure a sustainable energy strategy for Dubai along-with energy diversification and security. In particular, the renewable energy procurements of DEWA was predicated on the medium-term objective of ensuring that circa 30% of Dubai’s 2030 energy requirements are met through renewable clean energy sources.
In this context, DEWA had put in place a renewable energy procurement programme located at the massive Mohammed Bin Rashid Solar Park with a target procurement aggregating to 5,000MW by 2030 – with around 4,000MW being contributed by Solar PV plants and the balance of 1,000MW being contributed through dispatchable solar thermal or CSP facilities. The procurement initiated in December 2016, was the first of the envisaged CSP facilities.
In summary, the RFP released by DEWA was detailed and put in place stringent requirements in terms of technology, sustainability and operational capabilities with the express proviso that base bids had to be fully compliant with the RFP requirements. The bids for the project were submitted in June 2017 and ACWA Power submitted both a base bid and an alternate proposal in line with the RFP provisions.
Per DEWA’s accepted procurement process, the price bid for the base proposals were publicly read out and ACWA Power’s bid emerged as the frontrunner with a levellised cost of electricity (LCOE) of US$0.0945/kWh. After a comprehensive technical and financial evaluation, ACWA Power was in September 2017 declared the preferred bidder for its landmark alternate proposal of a 700MW CSP plant at a world record LCOE of US$.073cents/kWh.
At award, the project as envisaged incorporated a series of complexities and first-of-a-kind features including inter alia (i) a mix of CSP parabolic trough (PT) technology (600MW) and CSP central tower technology (100MW); (ii) the tallest CT in the world with a design height of 260m; (iii) the largest single location, single tender renewable energy project in the world spread over the equivalent of circa 37,000 soccer fields; (iv) a power purchase agreement (PPA) with a contracted tenor of 35 years; and (v) a unique dispatch profile based on designated night-time and day-time requirements (in effect designed to function as a near base load plant levering on c 15 hours of storage capacity).
Subsequent to the project award, based on specific requirements from DEWA, the project configuration was further developed with the addition of free dispatch solar PV capacity aggregating to 250Mwac, thereby increasing the overall project dispatchable capacity to 950MW and transforming the project to a true hybrid renewable energy project and the first and largest globally to factor in three separate solar technologies, viz solar PV, CSP PT and CSP CT, in a single operating site.
The project cost was resized at US$4.3bn. Additionally, through innovative dispatch profiles the PV capacity is scheduled to deliver energy to DEWA at a record tariff of US$0.024/kWh while keeping overall blended LCOE at US$0.073/kWh. The PPA was signed in October 2018.
The following sections provide further colour on various transaction characteristics, stakeholders and counterparties and associated financing challenges and structural solutions.
Characteristics and counterparties
Table 1 summarises some key project highlights. As can be seen, the project is financed through a combination of equity, senior project finance debt and a sliver of mezzanine debt.
As per the DEWA IPP procurement template, DEWA through a 100% owned affiliate committed to 51% equity ownership in the project company (company/borrower) set up for domiciling the project. The private sector is allowed a 49% equity stake in the project.
In this context, as a key project highlight, the sovereign wealth fund of China viz Silk Road Fund (SRF) came into the transaction with a significant minority stake in the private sector/developer share of the company equity.
In summary, ACWA Power and SRF hold 24.99% and 24.01% of the effective equity of the company. The involvement of SRF, a key vehicle and driver of the Belt & Road Initiative (BRI) of the government of China, was facilitated through the involvement of Shanghai Electric Group Company (SEGC) as the EPC contractor for the transaction.
It may be noted that SRF’s participation in this project was not the first capital investment by SRF in the Middle East, as in calendar year 2016 SRF had been an equity partner of ACWA Power in DEWA’s previous IPP procurement, viz the Hassyan 2.4GW clean coal project.
* EPC contractor – SEGC is the appointed EPC contractor under a lump-sum turnkey fixed-price date-certain contract. SEGC is part of one of the largest state-owned construction and manufacturing conglomerates in China with a global track record of successful project implementation both as an equity owner and a contractor with strong financial credentials.
As one of the few large international contractors with a high investment-grade rating from both S&P (A) and Moody’s (A2), SEGC brought robustness to the EPC contract and also provided comfort to banks and financial institutions entering the transaction.
* Technology providers – As highlighted, the project configuration involves multiple technologies in the solar energy space. A joint venture between SEGC and Brightsource Energy provided the solar field solution for the CSP CT unit. The JV draws upon Brightsource’s patented solar field algorithm and experience in implementing the control mechanisms in multiple plants across the world.
The PT units are based on the solutions provided by Abengoa, the leading exponent of CSP PT units globally. While SEGC wrapped the entire EPC contract, a robust mechanism of escrowing critical IP and associated designs was put in place to ensure transaction bankability and also provide comfort to the shareholders.
* O&M operator – As with all ACWA Power-led transactions, the O&M services provider is NOMAC, a fully owned affiliate of ACWA Power. In terms of operating capabilities, NOMAC is the leading operator of solar energy plants in the world.
In particular, NOMAC brought to the table a unique understanding of CSP plants with thermal energy storage on the back of proven operations of the 50MW Bokpoort CSP (parabolic trough) in South Africa, the 160MW Noor 1 CSP (parabolic trough) in Morocco, the 200MW Noor 2 CSP (parabolic trough) in Morocco and the 150MW CSP (central tower) in Morocco, all with operational storage capacities.
The CSP operating experience of NOMAC dovetailed with the organisation’s extensive solar PV operating experience – including the 200MW DEWA Phase II plant located at the same solar park in Dubai – and provided comfort to all stakeholders including the offtaker, the shareholders and most importantly the project finance lending group.
* Offtaker and credit support provider – As with all DEWA-procured IPPs, the project benefits from a classic PPA with DEWA. However, this project is unique in that unlike previous DEWA IPPs, the PPA tenor is for 35 years from the plant commercial operation date. In real terms, this translates to the longest contracted capacity tenor renewable energy IPP across the world.
From a bankability perspective, an offtake by DEWA is a proven framework and has been banked now on four successive DEWA procurements, with DEWA’s financial standing demonstrated through its investment grade credit ratings of Baa1 by Moody’s and BBB by S&P, utility and operating efficiencies providing strong credit underpinnings.
Notwithstanding the proven DEWA offtake and credentials, the project also benefits from credit support from the Department of Finance, Government of Dubai backstopping all termination payments payable by DEWA under the terms of the PPA. This provided further bank comfort given that the termination regime met all classical project finance norms and kept creditors whole in most circumstances.
* Advisers– The project stakeholders benefited from a number of leading institutions providing advice on various transaction aspects. The procurer, DEWA, was advised by KPMG, lead adviser, Ashurst, legal, and Mott McDonald, technical, while the sponsors were advised by Covington & Burling, English law, and Al Tamimi, local law. The lenders were advised by Allen & Overy, legal, Sargent & Lundy, technical, and INDECs, insurance. In addition, BDO acted as the model auditor for the transaction.
Structural complexity – Modular construction arrangement
The scale of the project and the multiple technologies involved coupled with the fact that at bid the sponsors had to ensure a very sharp and competitive tariff, necessitated a number of unique contractual arrangements under the PPA, most of which had a consequential impact on the EPC arrangements, the O&M contract and the financing arrangements.
As a case in point for optimal project build-out, a modular unit-based approached was deemed appropriate. In this regard, an innovative partial termination regime was built into the PPA that not only protected shareholder interests but also met the specific requirements of DEWA in terms of actual phasing of energy requirements and enabled sharpening of pricing under the EPC contract.
However, this threw up additional challenges in terms of getting lenders comfortable on the termination payouts under various scenarios. The solution to this involved a series of discussions with banks, legal advisers and the lenders’ technical advisers, and finally an objective set of formulae was derived that ensured that each stakeholder’s risks were appropriately mitigated and the risk allocation was bankable.
Table 2 provides an overview of the financing participants. Post-award of the project in September 2017, with the enhanced project size and scope, ACWA Power put in place a financing strategy that involved four basic pillars, viz – senior debt liquidity sourcing; structuring and commercial terms; mezzanine financing; and equity flow optimisations through procuring equity bridge loans.
* Senior liquidity sourcing – The liquidity sourcing was predicated on targeting a set of regional and international project finance banks along with a number of Chinese financial institutions. The interface with the Chinese banks leveraged on the participations by SEGC and SRF in the project as EPC contractor and equity shareholder respectively. It may be noted that the project is positioned as a key component of the Belt & Road Initiative (BRI) by the Chinese institutions.
In this context, a consortium of senior lenders comprising Standard Chartered Bank, Natixis, Union National Bank, ICBC, Bank of China and Agricultural Bank of China was put in place by the sponsors. The entry of the Chinese banks in the transaction reaffirmed the robustness of the DEWA procurement programme, the strength of the contractual structure and in general the continued confidence of key Chinese stakeholders in the Dubai economic story of the United Arab Emirates in general and Dubai in particular.
This is especially true given that a set of banks have provided for two successive Dubai IPPs with long-term project finance debt on a clean uncovered basis. Notwithstanding the significant Chinese bank presence in the funding group, key roles were played by international and regional banks, with Standard Chartered Bank playing a coordinating role as the documentation bank, Natixis acting as the interface on technical aspects of the project as the technical bank, and Union National Bank taking on the local roles as the security agent and onshore account bank.
* Structuring and commercial terms – Given the scale and complexity of the transaction, determining the optimal financing mix threw up a raft of options – ranging from the classic long-term amortising structures to mini-perms. The final structure as put in place was a soft mini-perm with a contractual maturity of 27 years on a door-to-door basis and a refinancing trigger set at four years after commercial operation date. The evolution of the terms over the past two to three DEWA IPPs has clearly indicated the increasing comfort of the project finance market with the DEWA IPP procurement programme.
* Mezzanine financing – In order to get to optimised leverage, a sliver of mezzanine debt with a door-to-door tenor of 29 years was introduced into the financing mix. The mezzanine carried second ranking security and was contractually subordinated to the senior lenders. The mezzanine tranche was subscribed in full by a group of three banks, viz China Minsheng Bank, Commercial Bank of Dubai and Commercial Bank International, which also provided additional support as the mezzanine agent bank.
* Equity bridge loans – A series of equity bridge loans (EBLs) were procured by each sponsor pro-rated to the sponsor’s respective effective shareholding in the project. For ACWA Power, a syndicate of local UAE banks provided the ACWA Power EBL. These included Emirates NBD Bank, First Abu Dhabi Bank, Union National Bank, Commercial Bank of Dubai and Mashreqbank. Silk Road Fund procured its EBL from Bank of China while DEWA acted as its own EBL lender. For the record, the EBLs were structured with a door-to-door tenor of six years, which is one of the longest EBL tenors among recent IPP/IWPPs in the GCC region.
* Hedging– As mentioned in the previous sections, there have been material interest rate fluctuations over the past eight to nine months. In this context, the sponsors including DEWA put in place pre-financial close hedges covering circa 95% of all project debt including EBLs. Furthermore, given the quantum of hedging requirements and the stringent criteria set by the project finance banks for acceptable hedge providers, the documentation was structured to allow for “orphans”, ie non-lending banks, to provide a measurable proportion of the interest rate swaps.
In summary, the project has the following key features:
i) World record tariff for a hybrid 950MW CSP and PV IPP of US$0.073/kWh;
ii) Largest CSP project with the highest CSP tower in the world;
iii) State-of-the-art solution to dispatch base load electricity, with embedded flexibility of operation based on an optimal integration of three different renewable technologies
iv) Highly strategic project for the DEWA, Government of Dubai and China’s Silk Road Fund;
v) It covers multiple renewable energy technologies – photovoltaic, CSP central tower and CSP parabolic trough with storage, which involved extensive interaction/interface with legal, technical and insurance advisors to determine a robust bankable transaction framework;
vi) Given the multiple technologies and different technology providers involved, the project is structured on a modular basis with a unique partial termination regime, which met the requirements of all stakeholders;
vii) The largest ever clean energy financing in the world on a limited recourse project financing basis and without the involvement of any ECAs or DFIs.