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) |
30% |
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.

## Conclusion

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.