By Neil Halligan
The GCC region, known principally for its abundance of oil and gas reserves, will become the frontrunner in embracing the now commercially viable solar energy, according to Paddy Padmanathan, CEO of Riyadh-based ACWA Power
Paddy Padmanathan is talking up the green and there’s nothing Irish about it.
But the ‘green’ in question is in fact renewable energy, and Padmanathan, the energetic and engaging CEO of Saudi Arabia’s ACWA Power, firmly believes that the era of solar energy has finally arrived. In fact, he has a very recent case study to prove it involving Dubai Electricity and Water Authority (DEWA).
“Fast forward to 2020, if we’re going to have this discussion, I’m absolutely convinced that people will look back and say 2014-15 was the point of inflection. That’s when solar became mainstream. I think we have just turned,” Padmanathan says, with understandable excitement.
In the last two years, he has signed multi-billion-dollar deals in Morocco and contracts worth hundreds of millions of dollars in the UAE and South Africa and now has an asset portfolio with an investment value in excess of just over $27bn.
The change, he says, comes down to financial sense, citing DEWA’s $330m solar power station, which is all set to be completed in April 2017.
“This is the period during which the price levels have come to a point where it has become cost competitive. The proof of the pudding is here in Dubai. They start off with a 100-megawatt [MW] tender, saw the price, said it was a compelling case, and doubled the procurement,” he says.
“The plan was to develop 1,000MW in stages over five to eight years. But they said ‘to hell with that’ and said it’s way too competitive. The second project of 800MW — one project — is coming before the end of this year. By the end of this year, there’s a very good chance that the whole 1,000MW will be spoken for. They have started to immediately revise their targets and to think about buying more solar.”
The financial sense in the discussion comes right back to the basic measurement of how much it costs to produce electricity, in terms of cents per kilowatt hour. Five years ago, Padmanathan says the conversation would have been completely different.
“An average price for [gas] power generation would be 8 cents per kilowatt hour, as a point of reference. Up to five years ago, the average price of solar energy would have been 50 cents; even as recent as two years ago, it was 15 cents,” says Padmanathan.
“You could have alternatively generated it at 7 cents using gas two years ago. Quite frankly, from a cost competitiveness point of view, it didn’t make sense to talk about renewable energy. But today, where it [solar] has now come to 6 cents, the story is completely different.”
The solar energy provided at 6 cents provides the power during the heavier daytime use hours only, he says, because ACWA can’t supply solar energy at night using photovoltaic technology because there is no way of storing the energy.
“We can using concentrated solar power, which uses molten salt storage, another more sophisticated technology, but the cost of that is still around 14c,” Padmanathan says.
He says the big difference between solar and fossil fuel is that the biggest component of the cost of the fossil fuel electricity with comes from the fuel cost, which can fluctuate.
“With solar energy, you have built the plant and spent the money, the energy comes free and there is no price volatility, so I’m able to commit to a fixed price for 20 to 25 years,” he says.
Demand for renewable energy has been strong in the region, Padmanathan says. Dubai could end up in about 20 years with a grid of 20,000MW, with 5,000-6,000MW of that coming from renewable energy.
“Jordan has hesitantly started to step into renewables, unsure whether it will be price competitive. Now they’re seeing the projects coming through, and the speed of deployment, they can’t get it out fast enough. Egypt I fully expect will embrace more and more renewable energy, wind, CSP [concentrated solar power],” he says.
Saudi Arabia, despite significant interest in developing its solar capabilities, has been slow to put concrete plans in place. This, Padmanathan says, is down to the massive scope of what’s planned.
“It’s understandable that it’s a bit slower there because the scope and scale of what they need to do is much bigger, so they need to be a little bit more cautious. When you’re thinking of doing something like 40,000MW, you need to make sure that you don’t miss the bus and that you take advantage of that scale of deployment in order to develop a local economy around it,” he says.
The kingdom’s plans had centred around King Abdullah City for Atomic and Renewable Energy — Ka-Care — a $109bn plan to provide 40,000MW of additional power generation capacity from solar power, and another 21,000MW from geothermal and wind power by 2032.
Established by the late King Abdullah, many thought the plans had stalled when the person leading it, Dr Khalid Al Sulaiman left his post last year.
“His contract came to an end. It was a post-retirement job,” Padmanathan says. “Everyone said ‘solar is dead’. Then King Salman became king and announced a fairly major restructuring of the government, by abolishing a layer of bureaucracy called the Supreme Councils,” he explains.
The latest report has pushed the target date back by eight years to 2040, but Padmanathan believes things will move a lot faster, particularly given the current price of oil. When the numbers are run again, he says they will get a lot more for their $109bn.
“They [Saudi Arabia] are completely convinced of the renewable energy story and that it has a part to play in the fuel mix. That’s not a debate that needs to be initiated. The only questions now: how much, how fast and how do we do it, and extract as much value out of it,” he says.
ACWA Power, headquartered in Riyadh, began life in 2004 with a paid-up capital of approximately $1.4bn. Owned by eight Saudi conglomerates, including Sanabil Direct Investments Company (in turn owned by the Public Investment Fund) and the Saudi Public Pensions Agency, as well as International Finance Corporation, a member of the World Bank Group, ACWA was formed when Saudi Arabia turned to the private sector to share the responsibility for generating electricity and producing desalinated water by using public-private partnerships.
Naturally, the company’s initial foray into power generation was through fossil fuels. “We have invested significantly in fossil fuel-based assets, because it was the platform that the country was using. Today we deliver 17 percent of Saudi Arabia’s electricity using plants that we own and operate,” Padmanathan explains, adding that it also delivers 40 percent of Saudi Arabia’s desalinated water.
It took until 2010 before the company expanded beyond the borders of Saudi Arabia, but it now has operations in 11 countries, including Turkey, Botswana, Namibia, Mozambique, South Africa, Vietnam, Jordan, Oman and the UAE.
Tenders are the lifeblood of the company. It won the first six that it bid for during its early years.
“There aren’t that many companies that can say the first six tenders [bid for] competitively, transparent and each of them multi-billion-dollar, they won,” Padmanathan says.
The CEO says rather than identify where there might be a need for electricity or desalination, ACWA bids for tenders as they arise.
“We respond to customer needs. Our model is to deliver bulk capacity on long-term contracts, where we can very competitively deliver their energy,” he says.
“By definition, we are investing in assets that have a technical or natural life of 20 to 40 years. We invest and deliver, and get our money back over 20 to 30 years. As we sell electricity, we start collecting the money back. We use that money to run the plants and to pay back the loans, and to pay ourselves a little bit.”
He expects Saudi Arabia will start issuing its solar power tenders towards the end of this year and expects to be very much in the mix when it comes to winning some of those on offer.
“As they deploy their solar programme, we definitely will be there to participate. We are doing renewable energy elsewhere and learnt the business, so why wouldn’t we do it. We expect deployment to start in the latter part of this year. We think the initial steps, the early procurement of a few thousand megawatts will commence this year,” he says.
“We would like to win them all — but we would very comfortable if we capture 20 to 30 percent of it.
We’re a significant player, so why shouldn’t we?” Padmanathan adds.
With a firm base now in the GCC, through its Dubai office, the company hopes to build on its recent contract with DEWA with more from around the region.
“We will be following tenders as they come up in Kuwait, we will be following in Qatar. We have lost tenders in Bahrain, but we have a big waste-to-energy tender there right now under evaluation,” he says.
The projects, once secured, tend to be equity and debt financed.
“Typically 15 to 20 percent of the investment is covered by equity commitment — that means we’re the last to leave. We take the most risk. When everything goes wrong, it’s our money that goes first. The rest of it is limited recourse debt, based on the project,” he says.
The company has definite plans for an IPO, which will further its expansion plans, with Saudi Fransi Capital advising the company.
“In pursuit of its growth strategy, ACWA Power will undertake an IPO in due course and broaden its shareholder base,” he says.
It comes at an opportune time as the results have been good of late, with its 2014 results delivering a double-digit percentage profit growth in comparison to the previous year.
As a developer, investor, co-owner and operator of a portfolio of power generation and desalinated water production plants, ACWA Power’s assets have grown significantly in its short lifespan as a company. Padmanathan predicts that in half that time, they will double in size.
“We as a company have grown from zero. We control a $27.5bn asset platform after 11 years.
"I can easily see us doing another $25bn in five years,” he says.
While the company’s equity in these projects is 20 percent, he says: “We are the controlling investor in everything we do. We typically have 30 to 40 percent shares, but we are the operator.”
Looking to the year ahead, Padmanathan says Morocco will play a significant part in ACWA Power’s plans.
“Energy demand in the region we operate in is growing at the rate of about 7 percent. They embrace the private sector as a service provider everywhere. Every country has got transactions coming up to tender. We’ll be participating in all of the tenders.
“In 2015 we expect to see a big amount of activity in Morocco, where we have got two fairly large solar plants going into construction and our first CSP plant coming into operation. And a huge wind tender — the largest wind tender in the world, 850MW. So Morocco is going to be a very big focus for us.
“Saudi Arabia has new projects coming up. We are utterly convinced of Egypt as a market. We have signed up to delivering significant capacity there. We have submitted offers that are under evaluation,” he says.
Padmanathan says the company is where it is today because its initial plans, and plants, were big. After 11 years, that message appears to remain the same for ACWA Power and its green-thinking CEO.