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Powering Ahead

Interview with Paddy Padmanathan, CEO of ACWA power

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Paddy Padmanathan, chief executive of Saudi Arabia's ACWA Power
Paddy Padmanathan, chief executive of Saudi Arabia's ACWA Power

Paddy Padmanathan, chief executive of Saudi Arabia’s ACWA Power, reveals how he has taken the company from a start-up ten years ago to one of the Middle East’s leading developers of power and desalinated water projects.

Those who would question ACWA Power’s ability to deliver the next phase of Dubai’s solar park at a world record price for a photovoltaic project, clearly aren’t familiar with the Saudi company’s track record.

The Paddy Padmanathan-led firm has won tender after tender since its creation in 2004, without veering from the strategy that brought its breakthrough - the contract to develop Saudi Arabia’s first Independent Water and Power Project (IWPP), Shuaibah.

In 2005 the start-up went head-to-head with International Power and its partner GDF Suez (since merged) and emerged victorious with the contract to develop the 900MW oil-fired power plant linked to an 880,000 cm/d multi-stage flash desalination plant.

A decade on and ACWA Power has a portfolio worth $26bn under its belt, owning and operating 24 projects spread across 11 countries and three continents. Now the company is basking in the glow of bagging the contract to build the second phase of the Sheikh Mohammed Bin Rashid Al Maktoum Solar Park.

ACWA clinched the deal earlier this year after pledging to deliver the project for $5.85 cents per kWh, a world record for a solar PV project. The announcement stunned the solar world and was met with no little scepticism. But that’s nothing new to ACWA Power.

“Everybody says, ‘How did you get this tariff? This is crazy, unsustainable’. Well go back and look at our history,” says Padmanathan. “Every transaction we have won, without exception, regardless of location, fuel or capacity, the tariff difference between our bid and the second bid has been anything between 5% and 31%.”

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Origins
From day one ACWA Power defined itself as an owner and operator of power generation and desalination projects. The company would invest a meaningful amount of its own capital in the plants and provide desalinated water and electricity reliably and at the lowest possible price to bulk customers on long-term contracts. Keeping a tight lid on costs has been the key to the company’s success ever since.

“We are entering into 20 to 25-year contracts,” Padmanathan explains. “The reality is that the tariff we contract up front needs to remain relevant over the 20 years. In year 10 when the customer has 10 more years to pay, he needs to still be happy with that number. So it’s extremely important that we keep this down from day one. People don’t seem to understand that.

“We have a project that’s now online, a 4,000MW, gas-fired power plant by the name of Qurayyah. Eight percent of Saudi Arabia’s power comes from this plant. There was a 26% tariff difference between what we offered and the second bidder, so had we not bid the country would have paid $1bn more over the life of the 20-year contract.
That’s a lot of money we are leaving on the table. And I genuinely believe the more money we can leave on the table the more certain we can be of getting our money back.”

To deliver a project at these tariffs and still make money, ACWA Power relentlessly focuses on making sure the cost of a project is as low as possible. As a result it has won a disproportionate amount of the contracts it has bid for, typically winning 3.5 out of every five tenders.

“We convince our partners - equipment suppliers, EPC contractors, supply chain, O&M, financing partners, insurance service providers - everybody who puts even one tiny bit into the tariff – not to market-price their product but to do a proper detailed cost pricing and offer a decent margin.

“Using that approach we’ve continued to relentlessly push costs down. We said to ourselves from day one that we wanted to be a company that added value rather than made money out of collecting fees.

And because our assets have a 40 to 50-year life and we’re working to a long-term contract model, we are building a company for the long-term. We’re not looking to build up a company, list it on the stock market and run.”

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Spreading its wings
For the first five years ACWA Power stayed in Saudi Arabia and won almost every transaction it bid for, including the first six in a row, within a variety of consortiums.

Then, in 2009 the company made the strategic decision to spread its wings beyond the kingdom, believing a broader-based business would help attract the best talent as well as cement stronger relationships with key suppliers.

It kicked off by purchasing a 50% stake in the Barka 1 IWPP in Oman from AES International, followed in 2011 by the acquisition of CEGCO’s portfolio of assets in Jordan.

The same year it signed a joint development agreement for the Kirikkale CCGT project in Turkey and in 2012 it won the deal to develop the world’s largest concentrated solar power (CSP) plant in Morocco, Noor 1. Projects in Bulgaria, Southern Africa, and South East Asia have followed.

The 160MW Morocco CSP project is one that Padmanathan is especially pleased with, believing that it has helped revive a moribund technology. CSP currently accounts for just 4GW of generation capacity worldwide compared to 400GW of PV, but Padmanathan insists that there is a place for both in the energy mix.

“Everybody is talking about the DEWA project and that’s important, but for me what is just as noteworthy is the Morocco project. Why? Because we are using CSP technology which is dispatchable power. It’s heat that we can store and use at night.”

Handsome government feed-in tariffs (FIT) encouraged the deployment of CSP ten years ago but offered no particular incentive to reduce the cost, Padmanathan explains.

“Because it was high cost and [the cost of] PV had come right down, people forgot about CSP. Morocco was the first country that had a clear vision to put a really structured programme together. They tendered and said, ‘we’re not going to do any FIT, we’re going to go to market and get the best price but we commit to buying. Because we need the power at night, we’re going to have a minimum three hours of storage’.”

There were three bids. ACWA Power’s offer of $18.9 cents per kWh shattered the other two, which came in at around $25 cents/kWh. The plant is almost built and is due to come online before the end of this year. ACWA Power went on to win the tenders for Morocco’s second and third CSP plants, Noor 2 (200MW) and 3 (150MW) bringing the tariff down further.

“That is fantastic because we revitalised the technology. Nobody was going look at it again but now it’s got momentum. I’m proud and happy about DEWA but I’m also equally proud of what we are doing in the CSP arena because both are necessary to deliver electricity. PV is perfect to deliver electricity when the sun is shining. CSP is perfect for the next tier.

“We can see a cost path for CSP to come down to single digits in a few years if more capacity is added. It’s an exciting technology for the future and very important for this region because we are also short of water. The steam produced by a CSP plant is a wonderful ingredient for desalination, enhanced oil recovery and other industrial processes.”

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Aiming high
The Middle East has all the ingredients to quickly develop large capacities of solar power, Padmanathan says. The region has plentiful and inexpensive land, excellent solar resources, access to affordable financing and an industrial infrastructure platform that can deliver the projects at a competitive cost.

The combination of these factors with the falling cost of solar power means renewables could easily provide 30-40% of the regional energy mix on a cost competitive basis within a short space of time.

Until recently there was little sign of that happening. But that all changed when ACWA Power scooped the contract to build the first expansion phase of DEWA’s solar plant. The utility had initially tendered for 100MW but when the bids came in it quickly changed tack and set its sights much higher.

“DEWA has done the right thing,” Padmanathan says. “They were stunned by what they got so they decided while the going was good to buy 200MW instead of 100MW in the second phase. They realised that it was the cheapest way to generate those 200MW and have decided to quickly move for another 800MW.”

In fact DEWA was so impressed by what it saw that it decided to triple the target for renewables in its energy mix to 15% by 2030 and aims to install 3,000MW of solar by that date instead of the original 1,000MW. So might the utility be tempted to raise that target again in the next few years?

“I’d put money on it,” Padmanathan says. “Dubai could easily achieve 30% solar power by 2030 because they will find that it’s the most cost competitive way.”

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Breaking records
There are three main components to the overall cost of developing a solar power project. The capital cost of building the plant makes up around half the total, while financing is 30-35% and operation and maintenance (O&M) makes up the balance. Securing favourable financing terms was one of the keys to winning the contract to build DEWA’s 200MW solar plant, explains Padmanathan.

“Renewable energy projects are capital intensive so finance costs tends to be very high. Typically projects are financed using 20% equity to 80% debt. But because of Dubai’s very stable policy environment and strong track record in delivering on their commitments, as well as our own track record in delivering, we were able to convince lenders to give us more than they would normally lend to projects like this.”

Not only were lenders willing to finance 86% of the project but they also agreed to an unusually long tenor of 27 years and an interest rate below 4%, all of which contributed to keeping the capital cost of the project down.

On the construction side too, ACWA was able to secure very competitive terms with its experienced EPC partner, TSK of Spain. Another major factor was its partnership with First Solar for the PV modules, which make up around 40% of the cost of building the plant, or 20% of the entire cost of the project.

“We are working with First Solar panels. They make enormous investments in R&D so their panels are always sitting on the leading edge of efficiency,” says Padmanathan.

ACWA Power is also able to optimise on the O&M cost of the plant by using its subsidiary, NOMAC. All of these elements combined to keep the cost down and allowed the company to deliver a winning bid. And with a further 800MW up for grabs in the third quarter of this year, there is every intention of repeating the success. “We bid to win,” Padmanathan says.

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The sleeping giant
While Dubai is leading the way with the development of utility scale as well as rooftop solar power, the question on many lips is when the region’s biggest economy will follow suit.

Saudi Arabia has announced plans to develop tens of gigawatts of solar power, both CSP and PV, but those plans seem to be on ice for now having been delayed earlier this year. Might what Dubai is doing inspire some movement in the neighbouring kingdom?

“Absolutely. It has,” says Padmanathan. “They’ve seen how quickly the costs have come down. The economics and the equations are exactly the same there. The fact of the matter is, if we are able to deliver PV at this price here we can do it there for the same or lower.

“The difference with Saudi is that it’s a much bigger economy. The scale of the solar programme that will eventually be rolled out will be bigger. It is therefore very important that they take the time to structure the programme in such a way that they capture full value. Deciding to build 500MW is very different to buying 5,000 or 50,000MW.

“Saudi has a history of taking its time and being very careful about making these decisions. But I’m very confident that before the end of this year you will see the start of procurement on a reasonable level. And it would be very timely if they got their procurement out before the Paris climate negotiations in December because it would send an important signal that a leading oil producer is now on board and embracing renewables.”

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The future is green
People that have only recently become familiar with ACWA Power might be forgiven for thinking that the company is a solar specialist, given that it has projects in Bulgaria and South Africa as well as Morocco and Dubai. While Padmanathan insists that it will continue to compete for power projects of all types, he acknowledges that the share of renewables in its project portfolio is only likely to grow.

“We are technology neutral, fuel agnostic,” says Padmanathan. “My job is to deliver reliable power and water as competitively as possible. I’m not going to tell the customers what they should do. If they want us to burn woodchips we will.

“But in the first 10 years of our lives we’ve built up a portfolio of over $25bn of assets. Of that platform renewables is around $2bn or less. At the moment we are working on around $15bn worth of new projects at different stages and half of that is renewables.

“So the market is moving. As renewables become more cost competitive people recognise the value. For new capacity deployment they are selecting renewables over fossil fuels. And that is a trend you see across the world.”

Paddy Padmanathan has overseen the rise of ACWA Power from a Saudi-based start-up in 2004 to a regional powerhouse in the space of just 10 years. As it embarks on a second decade in business, its charismatic CEO appears to have the company perfectly positioned to take advantage of the impending shift towards renewable energy.

Facts:
- 900MW The capacity of Shuaibah, the first ever IWPP in the Kingdom of Saudi Arabia
- Barka 1 ACWA Power’s first plant outside of Saudi Arabia
- 86% Debt financing secured for DEWA solar project
- 30% of Dubai’s energy that solar could provide
- $7.5bn The value of new renewable energy projects that ACWA is working on

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