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Power tariffs have room to improve

2 October 2023

 

Click here for MEED's 2023 GCC power developer ranking

A number of variables affect private power production costs or tariffs in the GCC region. These include capacity, power-purchase agreement (PPA) duration, capital, development and fuel costs, as well as the expected internal rate of return by investors.

Between 2015 and 2020, solar photovoltaic (PV) projects in the GCC states benefitted from the rapid decline in module prices, low interest rates and large-scale projects.

During that period, solar independent power producer (IPP) projects managed to achieve world-record low tariffs. This trend peaked in 2021, when Saudi utility developer Acwa Power offered to develop the Shuaibah 1 solar IPP project for $cents1.04 a kilowatt-hour ($c/kWh).

Covid-19-related supply chain constraints triggered record-high solar PV module costs, as well as global inflation, setting tariffs on a different course. Former Acwa Power CEO Paddy Padmanathan warned in June 2022 that solar tariffs could be heading towards $c2.0/kWh, nearly twice the world’s lowest solar tariff achieved the year before.

More recently, a team of France’s EDF, UAE-based Abu Dhabi Future Energy Company (Masdar) and local firm Nesma offered $c1.68/kWh for Saudi Arabia’s 1,100MW Hinakiyah solar scheme. This is 62 per cent higher than the Shuaibah 1 tariff and only 39 per cent lower than the offer made for the 300MW Sakaka solar PV project in 2018-19.

A senior regional executive at France’s Engie, which has not bid for a single renewable energy project in the region since 2016, sees an opportunity in the current market and is planning to resume bidding for upcoming renewable energy projects, particularly wind IPPs.

“It is more sustainable, unlike what we have seen in the past, where there was a lot of competition, very few transactions and a high likelihood of projects incurring some losses,” Francois-Xavier Boul, Engie’s managing director for renewables in the Middle East and North Africa and head of business development for Africa, Middle East and Asia, told MEED.

Gas-fired tariff

Contracts for almost 7,000MW of private gas-fired capacity in Abu Dhabi and 1,500MW in Oman will expire between 2024 and 2030.

Negotiations between the offtakers and project companies will determine whether these contracts are extended and the plants are reconfigured, or terminated and the plants are dismantled.

This presents a double-edged opportunity for developers that have a significant gas-fired fleet. The termination of existing contracts requires private developers to win large new projects to offset lost capacity if they are to maintain or improve their current rankings or market share.

Unlike a public tendering process, direct negotiations are the norm for most brownfield IPP assets, which means offtakers and developers are not obliged to disclose prices.

Tariffs that bidders proposed in 2019 for Abu Dhabi’s Fujairah F3 IPP, the last gas-fired IPP contract awarded in the GCC, could provide a reference point in terms of future trends in gas-fired IPP tariffs.

At the time, Japan’s Marubeni, which eventually won the contract, submitted the second-lowest bid of AEDfils16.812 a kilowatt hour (AEDfils/kWh). Another team led by France’s Engie submitted the lowest bid of AEDfils16.7901/kWh for the F3 contract, while a team of France’s EDF and Japan’s Jera submitted a tariff price of AEDfils17.109/kWh.

The tariffs offered by bidders for Saudi Arabia’s Qassim and Taiba IPPs, once disclosed by Saudi Power Procurement Company, will confirm future gas IPP tariff trends. 

As things stand, a further decline for solar tariffs in the GCC, particularly in Saudi Arabia, may still be on the cards, according to Abdulaziz al-Mubarak, Masdar’s managing director and country manager for Saudi Arabia. “World-record-low levelised electricity costs are a result of the input for each project. The kingdom offers robust contractual agreements, good pre-development work and a robust local EPC ecosystem that these projects can tap,” he says. 

MEED's 2023 GCC power developer ranking

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Jennifer Aguinaldo

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