The Dubai Electricity and Water Authority (DEWA) has invited pre-qualified bidders to submit proposals for Phase 3 of the Mohammed Bin Rashid Al-Maktoum Solar Park (the Solar Park Scheme). The Solar Park Scheme is central to the Emirate of Dubai’s 2030 sustainability vision, which aims in part to increase the contribution of renewable energy to power generation capacity.

Phase 1 of the Solar Park Scheme (13MW) was awarded to U.S. company First Solar under an EPC contract and became operational on 22 October 2013. First Solar was also appointed operator of Phase 1 for a limited term.

Phase 2 of the Solar Park Scheme (200MW) was awarded to the consortium of regional colossus Acwa Power and Spain’s TSK under the (externally financed) regional independent power project (IPP) model. First Solar is the solar panel provider for this phase. The consortium originally bid US cents 5.98/kWh but subsequently reduced its winning bid to US cents 5.84/ kWh. The term of the power purchase agreement for Phase 2 is 25 years from commercial operation. Debt finance of US$280M was reportedly provided by a syndicate of regional banks First Gulf Bank, National Commercial Bank and Samba Financial Group.¹ The tenor of the facility was reportedly 25 years and the debt to equity ratio 86:14.²

Phase 2 was originally tendered as a 100MW facility but Acwa submitted an alternative offer for double that capacity. A similar bid tactic was deployed by Acwa in winning the recent Phase 1 Hassyan coal-fired power (Dubai) IPP. Perhaps for this reason, bidders have been invited to submit proposals for Phase 3 under three models:

• Base proposal (mandatory for all bidders): Phase A (200MW)
• Alternative proposal 1: Phase A (200MW) + Phase B (300MW) = 500MW
• Alternative proposal 2: Phase A (200MW) + Phase B (300MW) + Phase C (300MW) = 800MW

Likely issues for developers (other than pricing from the supply chain!) Following Phase 2 of the Solar Park and the Hassyan IPP project, a ‘Dubai Precedent’ for IPPs/IPWPs can be said to have emerged. The Dubai Precedent is similar to the Abu Dhabi IPWP model, with certain limited differences. The Dubai Precedent project agreements are well developed with a clear risk allocation between the parties.

Like ADWEA and the other procurers in the Gulf Cooperation Council countries, DEWA will be extremely reluctant to accept any departures from its preferred risk allocation. Accordingly bidders must ensure that they are able to pass risks through to their EPC and O&M contractors and seek to mitigate residual risks, e.g. through insurances. As a perfect pass-through of risk is never possible, bidders will unfortunately need to live with the residual risk at the level of equity in order to compete with Acwa.

Although we have not seen the bid documents for Phase 3, based on the Dubai Precedent, the following issues (among others) will typically need to be considered by bidders and supporting banks:

• Typically the bid timetable to financial close is aggressive and absent an Excused Closing Delay Event under the PPA likely to constitute an Offtaker Failure or Offtaker Risk Event (the latter essentially a restricted particularised list of political force majeure events)), DEWA may terminate the PPA and call on the bond required from the project company (the Development Security). An extension may be available if the developer is able to bridge its financing and issue a full notice of proceed to its EPC contractor.
• The ability to model early generation revenues (useful for reducing the amount/cost of capital, subject to a negotiation with banks) may practically be capped by the date for the completion (by the offtaker) of any offtaker facilities.
• The ability to drive additional returns through a refinancing is typically diluted by the need to agree a share of such gain with DEWA (which will also take a further carry as 51% - 60% shareholder in the SPV project company itself).
• Ground risk is usually the project company’s/sponsors’ risk and the ability to achieve a full pass through of this risk to the EPC contractor is often contentious. Practically this risk may be mitigated in this case by virtue of the availability of data relating to the use of the site for the first two phases.
• Termination payments on plant buy-out and under the supporting government guarantee may be denominated in UAE Dirhams (we would expect the Energy Charge and the Deemed Energy Payment to be payable in USD). That being so, there is a risk if the Dirham is re-pegged or de-pegged and its value falls relative to the US dollar (note that this would not normally constitute a change of law and Offtaker Risk Event). This risk was addressed on at least one recent project.

Regarding the financing of the project, funding may be provided by one or more of conventional/commercial and Islamic institutions and ECAs linked to host country procurement. Sponsors in this jurisdiction will normally work with their advisors (financial and legal) to optimise the capital structure for the project and the terms on which a financing will occur. Long form financing term sheets must be submitted as part of the bid and these should be drafted by the sponsors’ lawyers.

Sponsors and their advisors will normally wish to embrace a number of techniques in order to make the bid competitive, including back-ending equity (supported by sponsor undertakings and collateral) or utilising equity bridge facilities and, if possible and as stated above, counting net EGRs towards equity funding. In addition to tenor and pricing, other key commercial terms will include the permitted debt to equity ratio for drawdowns (there are currently no thin capitalisation rules and minimal statutory share capital requirements) and cover ratios for debt sizing, distributions and defaults.

The financing offer will be expected to (essentially) amount to a full underwriting and the bidder will be responsible for 100 per cent of the requisite finance. DEWA may require that following the selection of the shortlisted bidder and prior to the signing date, it may substitute its own funding sources as it considers necessary to optimise funding for the project. If so and if this leads to lower interest rate margins, the model will be re-run and the Energy Charge revised downwards to maintain the equity IRR. In these circumstances bidders may have legitimate concerns about the creditworthiness of replacement banks and future exposure to MAC and market disruption provisions.

1. Source: MEED Middle East business intelligence
2. Ditto

Client Alert 2016-014