German Jamison: Can the World Bank Group’s Scaling Solar Program Unlock Utility-Scale Projects in Emerging Markets?

A solar program from the World Bank Group will lead to over 1.2 gigawatts of competitively-priced utility-scale solar PV in Zambia, Senegal, Ethiopia and Madagascar in the coming years, according to new research.

Despite criticism from local developers, the program is a breakthrough risk mitigation and advisory mechanism that offers global solar developers a chance to secure a foothold in new markets with high growth potential and low rates of energy access.

GTM Research and Blue Horizon ECS are out with a new report on WBG's Scaling Solar Program, finding it could be a catalyst for emerging markets.

The Scaling Solar Initiative is designed to address utility-scale solar project development challenges in emerging markets through a transparent auction overseen by the International Finance Corporation, with a pre-screened project site and standardized contracts. Its aim is to support the procurement of utility-scale solar PV projects through a one-stop shop for turnkey advisory and due diligence, as well as standardized contracts that can be used by "any government and any bidder and any bank."

The program also leverages risk reduction products from WBG to allow countries with high perceived risks and limited institutional capacity to benefit from solar PV project financing (typically LIBOR + single-digit market rates for 17-19 year terms).

Scaling Solar made headlines in June 2016 when a First Solar-Neoen consortium were awarded a bid of USD $0.0602 cents per kilowatt-hour (non-indexed) for the 54 megawatt-DC West Lunga project site, less than one year after signing the initial MOU with the Zambian government.

FIGURE: Zambia’s solar PV bid prices for 25-year PPA in June 2016

Source: Evaluating the World Bank Group’s Scaling Solar Program

Addressing barriers to utility-scale solar in these markets

Development of new utility-scale projects in these markets face a number of challenges, which have made it difficult to execute bankable and competitively priced projects in the past. These challenges include non-transparent procurement, questionable offtaker credibility, non-cost reflective tariffs, exchange rate volatility, and overall lack of a stable institutional framework with strong regulatory support.

Organizations within WBG offer several support products to address some of these challenges and de-risk projects for developers, investors and governments.

Offtaker payment risk, for example, is a common challenge in markets where the state-owned utility sells electricity below the cost of supply and may have a conflict of interest to give preference to its generators rather than independent power producers if surplus supply exists. Similarly, the WBG insures against political risks such as government seizure of the project site or other contract breach.

FIGURE: Overview of pre-packaged scaling solar support products

Source: World Bank Group

Criticisms of the Scaling Solar Program

The program has come under criticism from some who say it hinders local developers in favor of vertically-integrated global players that can offer more competitive pricing and may not have otherwise had interest in projects in Scaling Solar markets.

For example, the Zambia bid set a price benchmark expectation elsewhere in Africa that may limit developers in other markets. Developers are citing difficulties with regulators expecting similar prices or holding out on approving project licenses because of an expectation that there may be an MOU with Scaling Solar announced soon.

But while Scaling Solar may delay or threaten procurement for some share of nascent local developer pipelines, the solar industry is not a zero-sum game.

There are other market development drivers in the region, such as a the recently successful NamPower tender in Namibia, which resulted in a 45.5-megawatt contract awarded to Alten Developments Africa at NAM 0.807 per kilowatt-hour (USD $0.060 per kilowatt-hour) -- slightly less than the leading Zambia bid without the risk-mitigated bidding environment Scaling Solar provides. The Scaling Solar program also does not address the distributed segments of these markets.

Also, if initial projects backed by IFC demonstrate that utility-scale projects can be procured competitively and built on time, they are likely to pave the way for more utility-scale development down the road. Future refinement of the Scaling Solar program may take some of these considerations into account along with further encouragement of a sustainable local industry in each of these markets.

Future outlook of Scaling Solar in Africa and Asia

As the program continues to progress in Zambia, Senegal, Madagascar and Ethiopia, IFC is also currently in negotiations with 12 more countries to set up Scaling Solar tenders under advisory mandates, including governments in Central and Southeast Asia and elsewhere in Africa.

The recent state of emergency declared by the government in Zambia highlights the value of the Scaling Solar program’s risk mitigation offerings in keeping these projects bankable. Neither of the projects in Zambia have reached financial close yet, despite an IFC deadline six months after projects were awarded in June 2016. While the program is off to a strong start, the jury is still out on its long-term success and replicability, as well as intended and unintended market impacts on the local industry.

Future rounds of the program will also benefit from lessons learned, including adjusting the timeline of the program to be more generous in lead times for engaged governments, more concrete requirements around land ownership and land-related environmental and social issues, and more customized prequalification criteria to prevent some private-equity-backed bidders from being structurally precluded from participating.

Scaling Solar’s transparent and standardized auction approach has demonstrated its ability to attract vertically-integrated global developers to frontier markets by targeting the correct barriers to utility-scale solar project development in these high-risk markets.

Despite out-competing nascent local pipelines in the short term, these IFC-backed procurements could prove to be a major market driver for unlocking gigawatts of capacity in new markets for years to come.

This new report from GTM Research on the World Bank Group’s Scaling Solar Program explores the program offerings, engagement process, achievements to date, opportunities for developers, and future potential. For more insight, contact sales@gtmresearch.com.