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ACWA: The Saudi Powerhouse

Paddy Padmanathan, ACWA CEO, discusses his ambitious expansion plans.

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ACWA's Shuaibah III, one of the largest and most modern IWPPs in Saudi Arabia.
ACWA's Shuaibah III, one of the largest and most modern IWPPs in Saudi Arabia.
ACWA have commissioned two desalination barges near the Shuaibah III plant, desalinating 50,000 cubic meters of water per day.
ACWA have commissioned two desalination barges near the Shuaibah III plant, desalinating 50,000 cubic meters of water per day.
The Marafiq Jubail IWPP: Once commissioned, the $3.5bn project will be the world?s largest power and desalination plant, says ACWA.
The Marafiq Jubail IWPP: Once commissioned, the $3.5bn project will be the world?s largest power and desalination plant, says ACWA.

To achieve its ambitious growth targets, ACWA Power International wants to profit from the burgeoning power sector in its native Saudi Arabia, while at the same time expanding its presence in the region, says CEO Paddy Padmanathan.

Exponential growth is not something many companies dare dream off. But by aiming to grow its asset base to 30,000MW and 5 million cubic meters of desalinated water per day by 2014, from a current base of 6,500MW and 2.25 million cubic meters, ACWA Power International is doing just that.

“On the face of it sounds staggering,” admits Paddy Padmanathan, ACWA’s CEO and the man behind the ambition.

“When you set up targets you don’t want to try to overreach but at the same time you don’t want to set up very comfortable targets that you can just achieve in three years and say ‘How clever have I been?’. We think it’s a fairly reasonable target, we’re going to certainly go hard for it and we’ll get there, we hope.”

Padmanathan’s optimism is rooted in the company’s performance so far. He points to the current asset base: “We achieved that from zero within five years. It’s a hell of an achievement given the fact that plants take three to four years to build in the first place so it’s been done at an accelerated pace. It’s always difficult to start, but once you get going, the momentum is there to propel you.”

Saudi Arabia has been, and will remain, the main engine of ACWA’s growth. ACWA Power International is a Saudi Arabian company, owned in equal parts by three Saudi conglomerates, the A.K. Al Muhaidib & Sons Group, the Abdullah Abunayyan Group and the Al Rajhi Group.

The Saudi government has committed itself to private sector involvement in its power infrastructure, and is forging public private parternships (PPPs) in the shape of independent power projects (IPPs) or independent water and power projects (IWPPs).

ACWA is a 30 percent stakeholder in the countries first IWPP, the 900MW crude-fired Shuaibah plant on the coast of the Red Sea (see next article), and has several other stakes in major power projects. It is hungry for more.

The country’s power market represents 65 percent of the GCC’s total, and is growing at a rate of 10 percent per annum, says the CEO. Government plans are to increase installed capacity from the current 42,000MW to 60,000MW by 2020, and Padmanathan believes ACWA are in a strong position to capitalise from this expansion.

And it is not only new plants that offer opportunities to power companies. “Don’t forget that of the existing 42,000MW, 20,000MW need replacement. They’re all very old assets, they’re very inefficient, and today people are much more concerned about efficient utilisation of fuel. We’ve got plants here in Saudi Arabia that are running at 28 percent thermal efficiency, when we can get up to 50 percent.”

Out of Saudi Arabia
Saudi Arabia is not the only GCC country that is adding to its power generation capacity in a big way.

“Every country around us is experiencing a growth. Maybe not necessarily 10 percent, but certainly they have got anything above six to seven percent. And every country has already either got the private sector involved or is moving towards it,” says Padmanathan.

The latest country to embrace private sector participation is Kuwait, which in July passed legislation that every power project over 500MW has to be a public private partnership, opening up plenty of opportunities for private players.

ACWA is looking for opportunities such as these, and Padmanathan is certainly not shy about making grand comparisons when formulating his vision for the company: “We are a Saudi company, and our vision is to become a company operating on a global platform emulating the hundred-year established players like GDF Suez. Here is a brand that’s coming out of Saudi Arabia that’s going to do the same thing. But hopefully we won’t take a hundred years, we will do it over the next 10 to 20 years.”

So while the company will retain a strong presence in the Kingdom, it is looking to build up an asset base outside its borders. The target is to be present in a minimum of three countries other than Saudi Arabia, and in two regions other than the GCC, by 2014. The company has already penetrated the Omani market, snapping up a majority stake in the Barka I IWPP in August this year (see box).

Padmanathan would like to see half of the company assets abroad within 10 years: “Personally what I would like to see us get to a 50:50 split within the next 10 years. Beyond that, if it shifts to 30 percent Saudi, 70 percent global, why not? Time will tell.”

He is happy to list the countries he is targeting: “Outside of Saudi Arabia and the GCC, we are concentrating on Turkey, Morocco and South Africa.

We’ve picked these locations very carefully because they give us size, the growth in those places is big. In South Africa private sector participation is yet to take hold, but in the other two private sector participation in infrastructure and service delivery and utilities are extremely well established, so we are very welcome there.”

South Africa will have no choice but to turn to PPPs, he believes, because demand for power will grow as a consequence of a buoyant economy, on the back of China’s insatiable hunger for raw materials.

No time to waste
ACWA’s lofty ambitions leave little time to idle around. In the next six months, the company will be bidding for tenders totaling 6000MW of new capacity, all of which will be Greenfield projects. They include tenders for a power plant in Saudi Arabia, an IPP in Beirut and one in Egypt, the Al Zour North IWPP in Kuwait, and the Al Zur IPP in Oman.

On the water side, the company is equally keen to get involved, and sees potential especially in Saudi Arabia.

“The six-odd million cubic metres of desalination capacity in Saudi Arabia needs to be increased to 10 million in the same timeframe. Of the six million, at least one million and half needs to be replaced or refurbished, so there is the opportunity for the public sector to co-invest on the existing assets,” says the CEO.

An increasing amount of ACWA’s asset base will come from acquisitions. In the current portfolio, only the Barka I plant has been bought, with all other projects having been built from the ground up.

“Going forward I would imagine it doesn’t make sense to be thinking about having a hell of a lot of a greenfields under construction at the same time. We want to keep the risk balanced,” says Padmanathan.

“Of the 30,000MW, I would imagine we would acquire through acquisitions about 40 percent.”

One of the markets that lends itself to acquisitions is Turkey, where the government is due to privatise 14,000MW of generation capacity. The company will be looking to buy up some of those assets, confirms the CEO.

New Renewables targets?
Renewables energy are a hot topic in the industry, and the ACWA has not shut its eyes to this emerging trend. The company is aiming to generate a minimum of 5 percent of its energy from renewables, which would equate to 1,500MW by 2014 if the asset growth strategy goes according to plan.

Padmanathan is free to admit that the company’s ambition in growing its portfolio is not matched by its efforts to go green.

“This is one target where we have not necessarily been very imaginative or very stretching, so we should be reviewing it, I think the potential is much higher. But let’s get a couple of projects under our belt and then we’ll reconsider.”

The company is already working on several renewables projects. The most noteworthy is a 75MW concentrated solar power (CSP) plant in South Africa. The government has already implemented a feed-in tariff, which will make expensive solar power production feasible for private providers.

With the CSP project, ACWA is positioning itself for a procurement programme, which is to be launched in around four months time, say Padmanathan. Under this programme, the government will enter purchase agreements with suppliers who have projects in the advanced stages of development.

“There’s a very clear definition of readiness, and we’ve got to do a lot of work to do, but we are fairly advanced with one project, so when they open the race we’ll be one of the first at the goal post.”

ACWA is also in the prequalifying stages for a CSP plant in Morocco, and has taken the initiative in Saudi Arabia, where it last year submitted two unsolicited proposals for renewables projects.

“We’ve got very competitive tariffs on the table, and we’re pushing those forward. No procurement tender that has been announced yet, but there will be one going forward and we will be there.”

Loosening purse strings
One key aspect of expansion is ready access to the requisite funding. To ensure that financing is forthcoming, environmental concerns cannot be ignored by power generation companies.

Most banks have signed up to the Equator Principles, a voluntary code that requires borrowers to conform to the World Bank Operational Directive Number 1 standards. Thus, power plants are regularly assessed.

Should they fail to meet the required standards during the course the repayment period, the financiers have the option of recalling their loans, leading to a default of the project’s holding company.

During the financial crisis, power companies experienced some difficulties in raising capital, although PPPs in the power sector still enjoyed a high standing amongst lenders.

Furthermore, export credit agencies such as South Korea’s KEXIM or Germany’s Hermes have stepped up to the plate and provided a large part of the funding, as was the case with Shuaibah III.

As is common with large power projects, ACWA’s plants have been funded by limited recourse financing, in which the lender only has access to the asset in question in case of default.

Lenders usually provide 80 percent of the costs, with the power companies providing 20 percent equity, model that often includes a bridge loan facility for the equity portion.

It was one of ACWA’s projects that signaled a renewed optimism in the finance community, removing any constraints the company might have felt before.

“The Rabigh IPP project which we financially closed in July 2009, was the first limited recourse financial transaction that was closed in the world post-Lehman’s collapse, it was a $2.5 billion transaction.

The equity there was put in cash because it was tough period and the banks were only coming back online for new products,” says Padmanathan.

The CEO is also happy to talk about the plans for an initial public offering at the Tadawul, the Saudi Stock Exchange.

“We will IPO when we’ve got a stable platform of cash flows, which we have now, we’ll be starting to work on an IPO in the first quarter of next year. The IPO will be by the end of next year, or early in the year after, it will take 12 months to prepare for and implement.” The listing will make a significant proportion of the company publically traded.

“It will need to be a meaningful proportion. As it will be the first offering it cannot be big and it cannot be small, it should strike the right balance, so 30 percent is probable.”

If ACWA’s expansion plans come to fruition, there should be no shortage of takers.

Barka I- Moving beyond Saudi
Omani acquisition first power project outside Saudi Arabia. ACWA in August announced its purchase of a majority stake of the Barka I independent water and power project (IWPP) in Oman had been given regulatory approval.

ACWA bought a 58 percent share from the AES Corporation, the IDB Infrastructure Fund and their subsidiaries. The remaining stake in Barka I is owned by Multitech LLC at 7 percent, while the other 35 percent is floated on the Muscat stock exchange.

It is the first power plant that ACWA own outside its native Saudi Arabia, and the first asset added to the portfolio through acquisition. The deal had been agreed to last December, and had been awaiting regulatory approval.

The Barka 1 IWPP has a capacity of 456MW and 91,000 cubic meters per day of desalinated water. Located 60 kilometres northwest of Muscat, the plant feeds into the North Oman grid. The sole off-taker of both power and water is the Oman Power & Water Procurement Company (OPWPC).

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