Posted by: joachim in Renewable Energy,Solar on May 9th, 2016

The 2016 solar power tender in Dubai received extraordinary bids for its 800MW third-phase of the Sheik Mohammed bin Rashid al Maktoum Solar Park The lowest bid of $29 per MWh by Masdar and Saudi-owned FRV is half the price than the winner of the latest round. The other bidders offered tariffs of $36.9 (Jinko Solar), $39.6 (ACWA and First Solar), $44.4 (Marubeni) and $44.8 (EDF Energy).

This begs the question: Is it possible, and if so, how?

Base case for the first 200MW

First, look at a base case for one 200MW block.

  • Global irradiation: 2,057kWh/m2 (from NASA and also from metenorm)
  • Simulation with PVSyst resulted in an energy yield of 1,827 kWh/kWp. This is assuming fixed tilt, ground-mounted structures. It is a performance ratio of 88%.
  • Annual degradation of module efficiency: -0.5%.
  • Capital: $2.7 mill for development and due diligence, $900 per kWp for EPC, $4mill for grid connection, $1 mil for civil work, and $1 mill for management.
  • O&M and insurance $25,000 per MWp.
  • Major maintenance in year 10 with a target of $170 per kWp.
  • Construction period: 12 months.
  • Tariff: $0.029 per kWh, with annual escalation of 1.5% (USD inflation)

Based on those values, the rate of return on investment on the 100% equity financed project would be -3.9%, i.e. negative! Despite using relatively low capital cost assumptions and realistic yield estimation, this base case is clearly not working.

Improving the base case

Let’s change all the assumptions, one by one, and compute the resulting rate of return:

EPC price

$600 (instead of 900)

IRR: -1.7%

Energy Yield

20% more

IRR: -1.2%

Grid connection costs

Half the price

IRR: -3.8% (barely moved)

Operation term

30 years instead of 25

IRR: -2.3%

O&M costs

$5,000 less per MWp

IRR: -2.3%

Sell carbon credits

At $9 per ton

IRR: -2.1%

Claim o&m margin (rather than outsourcing)


ITT: -1.6%

Annual escalation

3% instead of 1.5%

IRR: -1.0%

Whilst none of those actions can single-handedly catapult us into positive figures, if we assume all of those actions at the same time, we get a return on investment of 8%!

More levers

1. Project Stacking

This portfolio of 800MW is delivered over 4 years. So, 200MW every year, though the tariff is fixed now.If capex decreases by 10% every year at the same time that efficiency of the system increases by 2%, subsequent 200MW blocks will be more economically viable.

If the first 200MW project has an IRR of 1%, the 4th 200MW block will alread have an IRR of 4%. Hence, the blended IRR of the whole portfolio is thus 2.5%.

2. Debt Funding

Once the project rate of return is above 6%, it may be possible to add a long-term debt structure. Backed by the good credit rating of the UAE (AA) and the large balance sheet of the sponsor, favourable loan or bond terms may be achieved.


There is no doubt, this project has been aggressively priced. Any EPC margins will have been eroded. Development risks have been absorbed by the sponsor and not priced in, as even in an optimistic case, the returns on this project are unlikely to exceed 9%. An alternative interpretation would be: this is very much about market share, whilst the tariff has been set just high enough to ensure that the project doesn’t lose money. In any case, the amount of taxes paid by the project will be limited.

Posted by: joachim in Policy,Renewable Energy,Solar on January 18th, 2012

End of October 2011, the UK announced an unexpected and severe cut of its feed-in tarff for small solar installations. The department of energy and climate change (DECC) called it a consultation. However, since the date the new tariffs were valid from (12/12/11) preceded the date of the end of the consultation, it can hardly be called such thing. In fact, there has been a court challenge regarding the legality of the process. While the outcome of this ongoing legal battle may change things slightly, it will most likely not change the conclusion of this article.

The new proposals

The proposal (Comprehensive review of feed-in tariffs for solar pv) slashed feed-in tariffs for solar for under 4kW from 43p/kWh to 21p/kWh, for 4-10kW to 16.8p/kWh and for under 250kW to 12.9p/kWh. As before, anything below 5MW (and free-standing) get 8.5p/kWh. Above the 5MW threshold for microgeneration, photovoltaic installations continue to generate 2 ROCs (renewable obligation certificates) per MWh. The department also proposes "prioritising energy efficiency by linking PV tariffs to specified minimum energy efficiency requirements from 1 April 2012". We are also proposing new multi-installation tariff rates for aggregated solar PV schemes, applying to new installations with an eligibility date after 1 April 2012.

Why is the government doing this?

Plain and simple, it boils down to money. The UK treasury has set a limit for the overall feed-in tariff program. Thanks to the combination of high tariff and decreasing panel prices, the up-take of solar has been phenomenal and much higher than the government expected. And hence, the FiT for solar had to be cut in order to have some money left for other technologies. The rationale for making solar tariffs subject to energy efficiency measures (e.g. wall insulation, double glazed windows) being in place is logical too: Energy efficiency measures are more cost effective measures to reduce carbon emissions.

What’s the issue?

A cut in the feed-in tariff is not contentious. We have long argued that the tariffs in the UK were too high and therefore vulnerable to sudden and harsh cuts due to political pressure (see article). However, there are three issues:

  • Exposing political risk: The way in they were cut exposes a high political risk in the UK for renewables.
  • Breaking promises: In June 2011, the government published their "Action Plan for Microgeneration", claiming "we want to help people who are enthusiastic to generate their own energy matched by an industry with the desire, creativity and tenacity to grow in a sustainable and responsible way". A roof-top solar system is exactly that microgeneration technology they were talking about.
  • Misjudging consumer behaviour: We doubt very much that the link to energy efficiency measures will trigger investment in energy efficiency. We believe people have a deep-seated psychological preference for revenues (as generated by solar panels) over savings (as in energy efficiency measures). For that reason, as an entry-level investment in home energy, a solar system looks more attractive. Once established, the second investment may well be in a new boiler or a wall insulation, but less likely the other way round. Plus, many people can not afford both investments in energy efficiency and solar.

What’s the effect on the UK solar industry?

Some of the feed-in tariff cuts will have to be borne by module manufacturers. This is already evident in lower prices for systems. Solar will remain viable for the most sunny parts of the country if wholly financed by the homeowner. The many "free solar" offers where a third party finances the purchase will most likely disappear, because there isn’t enough tariff to pay for the financing. However, most damaging will probably be the linking to energy efficiency measures.

In the end, the fledgling UK solar industry will be smaller – there are 30,000 jobs at stake, and it will favour big players that can offer both solar and energy efficiency. Independent installers will find it very tough.

Does it matter to the wider UK renewables market?

The political risk in the UK that has been exposed by this action may well deter investors from putting money into other renewables. It will therefore no doubt increase the cost of capital for all renewable projects in the UK, ultimately making it more expensive for the UK to achieve its climate change or renewables targets.

The UK government will have to work hard to prove that it is serious about being the "greenest government ever".

Posted by: joachim in Renewable Energy,Solar on September 13th, 2011

A consolidation of the solar photovoltaic (pv) industry has long been predicted. However, unlike other industries like the pc industry or the telecommunications industry before, the consolidation in the pv industry appears to happen thru shutdowns and bankrupties rather than mergers. Three thin-film based U.S. module manufacturers became insolvent in 2011: Evergreen Solar, Spectra Watt and Solyndra, while Solon ceased manufacturing in Arizona. In Germany, Conergy has suspended cell production and been taken over by its creditors. In fact, the failure of Solyndra is perhaps the most spectacular venture captial- backed bankruptcy of all times with $1bn VC investment and also a $535m loan from the U.S. government. On the other hand, we haven’t seen any spectacular mergers of the likes of HP-Compaq or Vodafone-Mannesmann in other industries.

The reason for this is: There is no real driver for mergers in pv manufacturing. Firstly, mergers are very expensive and can only be justified if there are synergies. In pv, this can be difficult, as technologies of two manufacturers are likely to be so different that these synergies would be marginal. Secondly, as the demand curve for modules is so super-elastic, manufacturers need to maintain over-capacity so that they can adjust supply quickly. Hence, no mergers where value would come from the rationalisation of production facilities.

On the other hand, that massive over-capacity is creating an industry that is increasingly competing on price alone, forcing companies to shut down production that have no cost advantage.

In the end, we will see fewer technologies and a move to low-cost regions for manufacturing.

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