Focus on the future, not the past
Jordan should not be discouraged by lower solar prices in Dubai
After three years of back-and-forth negotiations, the government of Jordan signed landmark power purchase agreements with 12 international consortia for the right to build a combined capacity of 200MW of solar PV projects. These projectsare now going through financial close and construction is expected to begin in the first half of 2015.
These deals have been applauded across the Middle East and Jordan has been widely praised for taking the lead in expanding solar PV in this sun-soaked region.
Within the political corridors of Amman, however, there are doubts surfacing. These doubts are focused on the commercial terms of the agreements signed with the developers, with an average price of $0.168 cents. The skepticism has been fueled by recent developments in Dubai.
In November 2014, Dubai’s Electricity and Water Authority (DEWA) unveiled the results of the tender it had conducted for its 100MW solar IPP project. To everyone’s surprise, the lowest offer was priced at $0.0589/kWh based on a 20-year offtake agreement, almost two thirds lower than the rates offered in Jordan. The second lowest price was just 3% higher, suggesting that a $0.06/kWh tariff is indeed sustainable.
Does this mean that Jordan got a bad deal? Not quite.
On average, the size of the solar projects in Jordan was 10MW. In the case of the DEWA project, the project size was 100MW, ten times larger. When projects are larger they attract a larger and more diversified pool of contractors, suppliers, and lenders with a strong willingness to compete for the business.
Secondly, the bids in Jordan were submitted three years ago, when the cost of solar systems were still relatively high. Since then, prices have dropped by over 30% for both the solar PV panels that are at the heart of the solar system as well as the associated equipment such as the inverters, combiner boxes and support structures.
And the prices will continue to ebb lower. Given that the DEWA project is only going to start the construction phase in 2016, the developers factored in those lower prices in their calculations before they submitted their offers. As such, the tariff in essence reflects the market prices in 2016. Therefore because of the scale of the DEWA project as well as the timing of it, they were able to achieve cost savings which would otherwise not have been possible.
What are the lessons that this has for us going forward?
For governments to be able to achieve the best pricing for solar PV power it is in their interest to go for large-scale rather than to limit the size of the project.
Since in most cases these countries are able to draw on an abundance of land, size is not a major issue. Indeed in both Jordan and Dubai there is ample space for deploying mega solar power plants.
Rather than having doubts about past deals, Jordan should look to the future and be encouraged by developments in Dubai. Round II of its IPP program will no doubt result in solar PV proposals which will be priced considerably more attractively. Indeed, the future is bright.