Does 3c/kWh Solar PV Tariff Still Make An Economic Sense?

“Life is like riding a bicycle. To keep your balance, you must keep moving” — Albert Einstein

Environmentalists around the world — REJOICE! As it was recently reported by RenewEconomy — the winning bid of 2.99c/kWh beat all available fossil fuel options in Dubai. And Dubai is not alone — as we have seen 3c/kWh — 4c/kWh winning bids in Mexico, Chile and Peru. So, do we uncork a Champagne bottle? Let’s look under the hood….

Recently, I wrote about prominent bankruptcy of one of the largest solar PV developers in the world — SunEdison. Winning the bids at all costs and acquiring solar PV projects that offer the ever-dropping tariffs — didn’t work so well for SunEdison. So why would it work for other developers and Independent Power Producers (IPPs) in Dubai and/or other countries?

The only way to find out is to crunch the numbers. Assuming that projects in Dubai are not risk-free and that cost of mitigating such risks to US developer is not negligible (eg. securing political risk insurance from OPIC, MIGA and/or any other multilateral agency) — the questions I posed to myself were quite straightforward:

• What kind of levered returns would US Developer expect with such low tariffs — reflected in pre-tax Equity IRR
• When does it still make economic sense to accept such low Power Purchase Agreement (PPA ) tariffs? — considering, of course, that S&P 500 Index averages ~10% per year since inception

My assumptions reflect common project finance practices and are listed below:

• Project Size: 100MW AC/ 120MW DC — Large-scale solar PV project reflecting the economies of scale
• Module Cost as per Mercom report: “In December 2018, benchmark prices for modules in Europe ranged from $216/kW for low-cost manufacturers, to $306/kW for mainstream manufacturers products, $400/kW for high efficiency modules and to $420/kW for all black panels”
• Solar Irradiance: 1715 kWh/kWp/a — Based on GPS coordinates
• Debt to Equity (D/E) ratio: 80/20 — Frequently used Project Finance D/E ratio applicable to renewable energy infrastructure
• Debt Service Coverage Ratio (DSCR): ~1.5 (average) — But not lower than 1.0 at any given year
• Interest Rate: 3.73% — The longest fixed-rate, non-recourse debt of 18 years — available to US developers from US EXIM Bank
• Lease Cost: $0 — Assuming the land is already owned by project owner
• Insurance Cost: ~1% of CapEx — Covering political risk insurance, P&C insurance, accounts receivable insurance, etc.
• Although S&P Credit Rating of UAE is high (AA), countries rated below Investment Grade (BBB-) would have hard times passing the scrutiny of Risk Mitigation Comittees — even with a valid political risk insurance in hand.

The Result: IT DOESN’T WORK

(Unless, of course, there are additional price-adders, inflation-linked escalators and/or opaque terms and conditions to the contract — hidden beneath the surface. Otherwise, the developer needs to forget about non-recourse financing and use its own balance sheet as a collateral. In such case, it becomes credit-financing, instead.)

In order to reach 10.1% equity IRR — before tax (which is slightly higher than returns from low-cost index investing in S&P 500) — I had to drastically reduce:

1. CapEx: — to $0.64/Watt
2. Interest Rate: — from 3.73% to 0.1%
3. Transaction Fees — from 2% to 0% (unrealistic)

And my findings are further justified by Mercom’s calculations such as:

“The global weighted-average LCOE of utility-scale solar PV in 2010 was $0.371/kWh, while by 2018 this had fallen to $0.085/kWh, 77% lower than in 2010. The year-on-year decline in 2018 was 13%. Cost reductions in 2018 were supported by crystalline silicon module price declines of between 26% and 32%, between December 2017 and December 2018, after modest declines of between 1% and 7% for the 12 months from December 2016 to December 2017”

Please note, that I am not an expert on Sharia Banking and it remains to be seen if 0% interest rate would be readily available to any US Developer in Dubai.

Also, the all-in CapEx of $0.64/Watt is not yet achievable. Perhaps in few years, the cost of solar panels, inverters, rackings, cables and construction services — will reach such lows. We are not there yet.

In some cases, one can also reduce project cost by utilizing Investment Tax Credit (such as 30% ITC in US) and lower the required equity by utilizing Tax Equity instead. However, it would add additional costs over the first 6 years and use-up all the Depreciation (100%) — so tread carefully.

The Bottom Line: Outbidding fossil fuel generators and producing low-cost solar PV electricity is possible. However, it should not be done by lowering the tariffs alone. After all, levelized cost of electricity (LCOE) may also reflect additional revenues from grid operators — attributed to load balancing. With, or without storage, solar PV is a dispatchable technology that can generate significant stand-by fees from utilities — in addition to tariffs. Don’t leave home without it….

Oleg Feldgajer is President & CEO of Canada Green ESCO Inc. Oleg is positioning the company to become a leader in financing AI enhanced green energy projects and ventures. CGE’s mission is to guide DISRUPTIVE businesses in ENERGY & TRANSPORTATION toward profitable business models. Oleg is passionate about such mission, and firmly believes that without AI based innovation, we will all prematurely choke on polluted air and dirty water. CGE delivers 100% financing (levered and unlevered) to its clients — and utilizes large equity pools, and non-recourse debt. Oleg offers creative, fresh ideas to open-minded businesses — that embrace both: logic AND opportunistic intuition. CGE stands against mediocrity & its modus operandi is quite simple: If CGE is not invited to join your BOD, or Advisory Board — we failed!