Sharjah: The Emirate that can become solar front runner

Thu, 15/12/2016 - 15:50


Rosa M. Tarrago

SUN & WIND ENERGY
http://www.sunwindenergy.com/

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Until now, no target policies for the deployment of solar energy in Sharjah exist. Power generation activities are dominated by gas turbines, which represent 83.2 % (3.9 TWh/p.a.; 2015). The Sharjah Electricity and Water Authority (SEWA) operates six fossil-fuelled power plants at Layyah, Wasit, Hamriyah, Khorfakkan, Kalba, and Abu Mussa, with a capacity of 2,384 MW (March 2016). In July and August, peak power demand reaches 2,500 MW per day (2015). The Emirate imports about 700 MW a day from Abu Dhabi and consumption is rising by about 10 % a year.

Solar photovoltaic power is a solution that SEWA might be willing to exploit soon. First of all, the sun will allow Sharjah to overcome the current challenges: doubled population, tariff deficit, increasing marginal costs of natural gas production, low oil prices and high needs for desalination.

Sharjah’s population has exploded from 890,669 inhabitants in 2012 to more than double that figure in 2016. And the low electricity bill contributes, like in other members of the UAE, to increase the tariff deficit. (See table 1).

Table 1: Power Bill  
Residential consumers 30 fils/kWh (€0.08/kWh*)
Industrial consumers (regardless of consumption) 40 fils/kWh (€0.11/kWh*)
Commercial consumers (below 10,000 kWh per month) 30 fils/kWh (€0.08/kWh*)
Commercial consumers (below 10,000 kWh per month) 35 fils/kWh (€0.10/kWh*)
*rates per August 2016  

At the same time, the marginal cost of natural gas production has increased from less than USD 2 per million British Thermal Units (MBTU) in 2010 to USD 8/MBTU in 2015 because of new sulphur-rich fields. Likewise, Liquefied Natural Gas (LNG) import requirements continue to grow at a cost of USD 14.4/MBTU according to IRENA, 2015. As a result, Sharjah’s government spending increased from 1 % to 12.5 % in just one year (2013) and this trend remains.

The impact of low oil prices

Low oil prices have a twofold impact. Pressure increases on energy subsidies. USD 220 billion (7 % of OPEC’s output) has been spent on energy subsidies in the MENA region. Now more productive ventures are being sought for these funds (subsidies). For instance: PV projects. Secondly, domestic consumption of oil will be reduced by up to 8.5 % if PV installations are implemented with a consumption target of 10 %. A deployment of PV power for domestic consumption can increase volumes of oil available for export.

SEWA offers water services through two underground well fields and seven desalination plants, with a capacity of 113.06 MGPD (million gallons per day). Wells show signs of stress and salination, indicating that in the future they will need to switch to desalination as well. Desalination plants produce water with a combined-cycle cogeneration thermal plant. A partial decoupling of the water generation from the thermal plants can occur through reverse osmosis (RO). Solar energy marries very well with RO.

Though PV can contribute to solve Sharjah’s challenges, it has been only deployed in street lightning. The main reasons for this may be a lack of awareness of the advantageous comparative energy costs, concerns about the need to provide baseload power, concerns about desalination, which is traditionally linked to power generation; and subsidised fossil fuel pricing, which slows down consumer-driven distributed generation.

Secondly, the energy from the sun can allow Sharjah to seize the opportunities available: high Gross Domestic Product (GDP), well-stablished industry, financial attractiveness (from SEWA, from low interest rates and from Shurooq), sufficiently-developed transmission and distribution (T&D) systems and referential institutional capacity.

GDP growth of 4.4 % (higher than in the rest of the Gulf Cooperation Council countries) is expected, though the oil and gas sectors are relatively small in Sharjah (13 % of the total GDP). GDP increase needs to go on hand of security of power supply.

The industrial backbone of the UAE

Sharjah is the industrial backbone of the UAE. 40 % of the total industry in the UAE is based in the Emirate. To avoid this turns into a disadvantage, two actions are expected. First, industrial products need to reflect the real costs of power rather than subsidised tariffs. Second, the negative energy balance (considering Abu Dhabi also exports to Dubai) needs to be neutralized with new capacity and energy efficiency measures (the last, already implemented by SEWA).

SEWA can rely on strong support from local banks, having secured a USD 500 million credit line from the Gulf International Bank, ABC Islamic Bank, Sharjah Islamic Bank and Barwa Bank to fund its expansion plans. SEWA’s lenders have appetite for green assets and PV is a low-risk technology.

Favourable conditions for PV

Banks enjoy of low interest rates. Although the Emirates Interbank Offered Rate (Eibor), used to price loans, increased on 24 May 2016, it is still low at 1.11 %. On the equity side, low oil prices have reduced the Expected Return on Capital Employed (ROCE) of energy-related companies such as Gulf Petrochem Group to 12 %. A 12 % ROCE is achievable in a PV project considering lenders’ low costs, low capex and abundant solar irradiation.

Irradiation is abundant: Sharjah receives over 10 hours of daily sunlight and this, 350 days per year. And it enables PV to supply baseload power. A horizontal global irradiation of 2,155 kWh per kWp is calculated for a typical cSi PV plant. Its performance ratio is of 81.7 %.

Sharjah’s transmission system comprises 69 transformers with a total capacity of 8,340 MVA, 583.35 km of overhead lines and 920.15 km of underground cables.

USD 100 billion of investment in alternative and sustainable energy projects by 2020

Finally, Sharjah counts with efficient institutions that have made the Emirate a reference for the UAE. It has an innovative fee structure for waste-to-energy projects. Synergies can be generated for the rest of the renewable energies and the regulatory framework that needs to be stablished. Shurooq, the Sharjah Investment and Development Authority, is the driving force behind the transformation of Sharjah. Shurooq aims to boost investment in clean energy technology over the next four years and to attract 367 billion Dirhams (USD 100 billion) of investment in alternative and sustainable energy projects by 2020.

In March 2015, Sharjah placed the first sovereign-risk UAE Islamic bond (Sukuk) with successful oversubscription (see the box above). Further placements followed, meaning that the government, through Sharjah Sukuk Limited, a trustee incorporated in the Cayman Islands, wholly owned by the Emirate of Sharjah (A/Stable/A-1), currently has an order book of USD 7.85 billion from around 250 different investors. On average the profit rate is as high as 3.764 %.

Conclusion

It is indisputable that solar resources, more than any other renewable energy source, are available in the region. What has been missing up until now is the government’s awareness of the competitive advantage of PV over gas and import costs. The 2.99 USD cents/kWh bid price of the Mohammed bin Rashid Al Maktoum Solar Park in Dubai might encourage the UAE to speed up PV deployment.

SEWA has been confronted with outages since 2009, an exploitation on the tariff deficit, high water desalination requirements and an increasing industrial sector. SEWA Vision 2020 aims to increase overall revenue by 2 % per annum, focusing on cost management.

Cost reduction alone won’t be enough to move SEWA back into the black numbers, especially if oil prices remain low. It will need to be accompanied by power generation using technologies with marginal costs of close to zero, a reduction in energy imports and baseload power. The deployment of solar seems to be the technical solution.

The financial solution with low oil prices that have reduced ROCE expectations can be solar. Low ROCE targets together with low interest rates and SEWA’s proven ability to obtain funding from capital markets provides the required financing for utility scale PV plants.