The world’s largest concentrated solar power (CSP) plant is currently being built in Ouarzazate, Morocco, with the aim of powering a million homes. The first three phases of development, called Noor I, II and III were all awarded to Saudi Arabian developer ACWA Power, due to its proposed tariff being 28%, 11% and 1.5% lower than that of the nearest competitor for each of the three phases. It follows a trend throughout ACWA Power’s history of developing and operating power generation and water desalination plants for unbeatably low prices.
ACWA Power CEO and President Paddy Padmanathan says this cost-focused strategy got the company to where it is today. “From day one we said to ourselves, ‘we absolutely need to provide the best value for money for the off-takers of our projects’,” he remarks.
“Every company has a mission statement, but few are as clearly defined as ours: to reliably produce desalinated water and generate electricity at the lowest possible cost, supplied in bulk on a long-term basis. We’ve achieved that mission in every project we’ve done. Our aim is simple: to ensure the tariff we contract on day 1 remains competitive over the 20 to 25 year duration; the typical time span of our contracts.”
This has certainly happened in Saudi Arabia, where ACWA Power is responsible for more than 40% of the country’s total desalinated water production and 10% of its electricity production. It began with the very first power project put to tender after Saudi Arabia privatised the industry in the early 00s. This was a very large, integrated water and power project that used an oil-fired power plant to produce electricity and generate steam, which in turn produced desalinated water. It was the first contract ACWA Power ever bid for, and it was successful.
“It was a US$2.4 billion project and we were a brand new company, so we had to recruit staff and enlist some partners who had more experience,” Paddy recalls.
“So we partnered with a consortium of three Malaysian companies, with whom we entered into the project 50:50. We won the tender and successfully built the project on time. It began to generate electricity in mid-2009 on time.”
ACWA Power continued to bid for every power project in Saudi Arabia, and won the first five in quick succession. The company grew rapidly and soon began expanding its footprint in other countries too: in the Middle East, South East Asia and North and South Africa. It built a varied portfolio of power plants based on oil, gas, coal, solar (PV and CSP), wind and waste-to-energy.
ACWA Power’s portfolio now comprises 33 assets, with an investment value in excess of US$28 billion, including projects worth an estimated $10 billion under development – all of them offering significantly lower tariffs than that offered by competitors.
“If you look at all the projects we’ve won over the last 11 years – regardless of country, technology, fuel and plant size – everything we’ve done has been competitive tenders that we’ve won with a difference of between 5% to 31% compared with the next bidder; a 4000-megawatt 20-year duration Power Purchase Agreement at 15% lower tariff than the competitor’s offer means a saving of approximately $300 million in Net Present Value,” says Paddy.
Focusing on cost leadership
The big question is, how has ACWA Power managed to consistently offer tariffs so much lower than its competitors? The answer is its business model of not market-pricing the product, electricity and desalinated water. Paddy explains:
“Because we provide bulk power and water supply on long-term contracts, we’re entering into 20-year contracts with the off-taker from day one. So in preparing our project plan, we take into account all the capital costs, financing costs, operating costs, and even the plant’s residual value if we’ll own it after the contract ends. We add up all those costs to calculate what price we need to charge for that service in order to pay off our loans and get our money back, as well as to recover a reasonable reward for our efforts, by the end of the contract.”
He adds that ACWA Power’s business philosophy is not to make lots of money quickly, but to be an enduring service provider who delivers the most competitive solution throughout an asset’s lifespan.
To reduce risk, ACWA Power tries to ensure the off-taker continues to willingly pay the tariff contracted and guaranteed upfront for the entire course of the contract, even if industry-wide prices for new capacity go down within that time. The company does all it can to ensure it not only signs contracts with off-takers who are reliable and have good credit, but also that the tariff is the lowest possible at that time, so that the gap is kept to a minimum between this tariff and any future lower tariff.
The model also depends on the infrastructure developed by ACWA Power lasting the entire course of the contract, as customers only pay when and as they receive delivery of the service (power and/or desalinated water), which is why customers can be certain a plant developed under this model of contract will be reliable.
To reduce these risks, ACWA Power needs to keep its own capital and operating costs as low as possible. To do this, the company needs to convince money lenders, suppliers and contractors to fit in with them. Paddy says this has been challenging, but not impossible.
“We have been fortunate to have developed good, transparent and trusting partnerships with the supply chain; companies that understand the philosophy we are pursuing, and so do not charge us simply at market price, but prices their offering by considering true costs and risks,” he remarks.
“We tell them we want them to make a profit – because we want them to work with us again – but not an exorbitant profit. Over time we’re persuaded our partners to accept that, and this is a big part of what allows us to deliver consistently competitive tariffs.”
Development in Morocco
ACWA Power’s low-cost tariffs benefit not just the bulk capacity off-takers, but the ultimate consumers, industry, commerce and households. In Morocco, ACWA Power is involved in several Concentrated Solar Power (CSP) projects that are contributing to bringing the cost of this technology to comparatively competitive levels with fossil fuel alternatives. CSP technology, while more expensive than photovoltaic (PV) technology, has the advantage of delivering solar energy at night because the heat of the sun’s rays collected by this technology can be cost-competitively stored in salts for use at night to generate electricity.
By delivering a tariff that was 28% lower than the second bidder on the first of a series of three projects, ACWA Power gave a new lease of life to CSP technology and is helping to make solar power affordable to the Kingdom of Morocco, which relies on importing fossil fuels.
ACWA Power completed the first 160-megawatt phase of the project, Noor 1, in 2015. The company is now building the second and third phases, Noor II and Noor III, which will have a combined capacity of 350 megawatts. These phases will be commissioned together in 2018. They will be followed by Noor IV, which will use photovoltaic (PV) technology instead of CSP. ACWA Power has signalled its intention to participate even in this fourth phase of the project by submitting a prequalification when the process was launched in the last quarter of 2015.
Because ACWA Power’s business model requires significant capital investment, which it then recovers over decades by selling electricity, the company is equally concerned with ensuring the growth and development of the host country.
Paddy says: “We recognise that it is the people of Morocco who ultimately will pay for and consume the electricity that will allow ACWA Power in turn to get paid.” ACWA Power is thus doing all it can to support the development of local industrial and commercial capacity and maximise local procurement, thereby maximising local employment generation by actively hiring and training local people.
“When we begin investing in a country, the health, wealth and happiness of the people in that country becomes absolutely critical for us,” Paddy remarks.
“We are building this plant in a remote location, where the local people tend to be relatively economically disadvantaged. We are going to be there for the next 30 to 40 years. Our real success is when the communities that we are intertwined with grow with us. We get involved in community development from day one, bringing them up alongside us, and contributing to the growth and development of their local economy and social stability. We are very clear – we consider ourselves successful only when our relevant local communities develop.”
Working alongside ACWA on the Noor project is a consortium made up of TSK, Acciona and SENER, which Paddy holds in great regard.
“The consortium of TSK, Acciona and SENER has turned a challenging project into reality, all the while working with us to maximise local procurement, human capacity development and local manufacture of components,” he comments.
“These factors will have an enduring impact on the economy of Morocco that goes beyond green electricity, which itself is a valuable game changer in limiting climate change.”
Regarding the contractors ACWA used on the Noor 1 project, Paddy adds: “Two civil contractors, GTR and STAIP, were in charge of earth movements, levelling and compacting of the platforms for the solar field. Longometal for steel supply. AIC Metallurgie supplied galvanized steel structures. DLM [Delattre Levivier Maroc] was awarded the contract for design, engineering and erection of the two molten salts tanks – their total capacity is 45,000 tons. Made Industrielle Maroc and Delta Holding provided most the torque tubes used to build the solar field. AGTT was in charge of heavy equipment transport.”
The Noor project is a great example, but ACWA Power uses this same philosophy of contributing to the socioeconomic development of the countries and communities in all its operations. And there are many.
In addition to a portfolio of assets that can deliver 18,000 megawatts and 2.5 million cubic metres of desalinated water per day, nearly another 50% more capacity is in construction across numerous projects, including a 200-megawatt solar PV plant and a 1,200-megawatt coal-fired plant in Dubai; a 950-megawatt gas-fired plant in Turkey; a 100-megawatt CSP tower plant and 300-megawatt coal-fired plant in South Africa; a 300-megawatt coal-fired plant in Mozambique; and a 1,200-megawatt coal-fired plant in Vietnam.
Beyond the current operating geography, the company is looking to grow into Egypt, Botswana, Namibia, Kuwait, Bahrain and Indonesia. Although ACWA Power remains fuel agnostic and technology neutral, serving the customer’s preference for fuel, Paddy says he is keen to do more work in renewable energy.
“We see the compelling value proposition of renewable energy, and see the role it can play in delivering a significant component of daily power demand in the countries we work in,” he says.
“We get a lot of sunlight, which is a blessing when it comes to renewable energy. So we are happy to go out of our way to promote renewable energy, and the best way we can do that is through our business philosophy – to continue delivering the lowest possible tariffs.”
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