Solar photovoltaic (PV) power generation has emerged in the past decade as the fastest-deployed source of renewable power and has seen the most rapid drop in costs. New markets for solar PV installations have emerged, while the share of global renewables of Western Europe and North America is decreasing. These emerging markets present a complex patchwork of opportunities based on wide variance in country risk, energy policy, power generation costs, solar resources and infrastructure.
In the Africa/Middle East (AME) region, low, highly-subsidized power prices have prevented renewables from taking off, but heavy reliance on fossil fuels for power generation and an expected 26% demand increase by 2017 will reverse the trend. Political determination is required to fully tap into the region’s abundant solar resources. Under IHS’s moderate growth scenario, current political unrest and lack of policy will result in 23gw of added PV capacity by 2035. If initial political ambitions, such as Saudi Arabia’s 16gw solar PV target, translate into policy, IHS believes that the AME region could reach 75gw of grid-connected capacity by 2035.
Nearly all emerging markets boast solar radiation levels well over 1,800 kwh/m2 annually (over 50% higher than Germany). At the same time, markets with extreme solar radiation of over 2,000 kwh/m2, particularly in the AME region (UAE, Saudi Arabia), are currently among the least competitive, mostly due to a lack of track records and renewable frameworks.
FERTILE GROUND FOR SOLAR PV
Several factors have spurred a 3.8gw solar PV pipeline across AME countries, including ambitions to diversify the energy mix, capture export opportunities and lessen fuel imports. To date, the region’s 1.8gw of installed renewable capacity accounts for 0.1% of the total installed capacity. Development of renewable energy remains a relatively low priority in the oil- and gas-rich region of the Middle East, and in Africa, where fossil fuel-based generation represents about 90% of installed capacity.
Despite the almost negligible contribution of renewable energy to the power mix in the AME region, it is possible to pinpoint a few markets with clear opportunities for renewables, and particularly solar PV, build-out. Countries with scant fossil fuel reserves such as Morocco and Jordan or those with declining gas exports such as Algeria and Egypt are moving to increase renewables’ share in their total power generation. Moreover, electricity market liberalization in Morocco, Jordan, Tunisia and Egypt opens the way for private greenfield development initiatives.
EMERGING SOLAR POLICY LANDSCAPE
The solar policy landscape is advancing, but remains fragmented. A mix of one-off, state-owned utility tenders, self-supply incentives and feed-in tariffs (FITs) account for most solar support. Generally, emerging markets have sought renewable power supply in the 5% to 10% range to be reached over a 10- to 20-year period, and these targets provide an initial framework that requires follow-up with more specific measures to improve the development environment.
Among the AME countries, 12 have established renewable energy targets, but only South Africa, Israel, Algeria, Morocco and the UAE have backed these with either specific government tenders or FITs. Israel remains the most advanced PV market in the region, with a FIT program that has spurred 250mw of operational PV. Saudi Arabia’s massive 41gw solar ambitions (including concentrate solar power – CSP) have yet to be backed by a regulatory framework.
Oil producing countries like Oman, Saudi Arabia and Kuwait have renewable target plans that require implementation with specific incentives due to low power price subsidies. Saudi Arabia has announced a plan to publish solar PV tenders, which once in place would make the kingdom the focal point of renewable energy deployment in the region.
With industrial power prices at well below US$100/mwh in several countries, and a generation cost above US$200/mwh, solar PV requires some form of financial support to cover this gap. Specific solar PV production incentives are particularly important to offset country risk in emerging markets to make projects bankable. The AME region has trended more toward a tender approach, enabling governments to exercise greater control over project development and remuneration, including local content requirements.
As industry growth has shown, PV’s ability to match industrial power prices is not the sole indicator of the technology’s viability; other drivers including supply diversification, reduced domestic oil consumption and job creation make the case for solar PV investment. However, these drivers are more prone to political risk.
FINANCING THE MAIN BOTTLENECK
Financing is a major hurdle for PV projects in emerging markets. Project financiers not only have to take into account country risk, but also the financing capabilities of the power off-taker or regulator warranting the incentive scheme. The AME region is no exception: regional political uncertainty, poor financial performance of power utilities in some cases, lack of a renewable track record and local manufacturing facilities and heavy reliance on cheap fossil fuel power generation in oil- and gas-rich countries translate into higher capital costs. Technology risks, credit worthiness, revenue security and market competition are also evaluated before financing is granted. Besides, investors can re-evaluate the opportunity cost and risk of committing to renewable projects in the region in the long term and developers may find it difficult to secure capital at a favorable cost.
Multilateral agencies and export credit agencies (ECA) have become a major source of global project lending as the global financial crisis and tighter requirements on banks have put commercial banks under funding pressure. These agencies play an essential role in accommodating the risk associated with infrastructure projects in emerging countries.
National and multilateral development banks (eg the World Bank) offer a wide range of financing tools for renewable energy projects, including grants, concessional loans and commercial loans; however, they prioritize economic development and poverty solutions over sustainability. In the case of Jordan, for example, where developers are targeting a debt-equity mix of 70:30 in line with regional/global trends in the current market environment, most of the debt is expected to come from multilateral agencies and inter-governmental loans, particularly from GCC members. Financing from local banks usually accounts for 10-15% of total project costs.
GRID ACCESS A BARRIER TO PV
In most emerging PV markets, including the AME region, neither the power transmission operators nor the physical grid network are prepared to handle the rapid growth of grid-connected PV capacity. Once a project is operating, the functioning of the transmission grid and its ability to accommodate intermittent power generation determine the functioning of existing plants, as well as the connection of new projects.
The intermittency of solar PV and wind power generation is a challenge for the transmission system. Because renewable power in most markets has priority access to the grid, but generation fluctuates throughout the day, the system requires balancing capacity to offset peaks and valleys in generation. During peaks in generation, such as midday for PV, production may surpass demand, which in congested grids could force the transmission operator to curtail PV plants. As an additional concern for further political support of PV, the installed PV capacity at times pushes down peak wholesale power prices (in Germany or Italy, for example), damaging the economics of other power generation sources. A well-functioning, interconnected transmission grid is essential to balancing generation from intermittent resources over wider regions.
Solar PV power generation offers a big opportunity to AME countries that are willing to diversify their power mix and take advantage of their abundant solar resources. The region has the chance to make quick progress in solar PV deployment and attract investors looking for opportunities in emerging markets. Yet binding renewable policies and consistent support for renewables build-out are necessary to get the market off the ground, along with availability of funds, which remains one of the biggest challenges to renewable energy development.
For more information on the IHS study, Emerging Solar PV Markets and Strategies: 2012–2035, or on coverage of renewable energy in the region, please contact Silvia Macri’ at [email protected]