The 200-megawatt second phase of the Mohammed bin Rashid Al Maktoum solar park began producing electricity on Monday with enough capacity to power 50,000 homes in Dubai, and at the world’s cheapest rate for an operating solar plant at 5.84 US cents per kilowatt hour (kWh).
That price, under a 25-year purchase power agreement, not only covers the investment needed to build and operate the plant but also the cost of finance.
However, developers with projects in the pipeline may find it difficult to achieve similarly low prices following last week’s interest rate rise in the United States and the expectation of more to come this year.
"The recently implemented increase in the US dollar base borrowing rates will inevitably mean an increase in tariffs in absolute terms," said Paddy Padmanathan, chief executive of Acwa Power, which led the consortium that built the 200MW Dubai plant. "With construction methodologies continuing to improve, we look forward to the increasing the cost of capital hopefully at least being countered to keep the tariff levels we have seen for renewables, if not continuing the downward trajectory."
The Abu Dhabi-based International Renewable Energy Agency says that the cost of photovoltaic (PV) panels has dropped by 75 per cent in the five years to 2014 with further decreases expected.
However, the Bloomberg New Energy Finance solar analyst Jenny Chase said that falling equipment prices may not be enough to keep solar costs down.
"Even a quarter of a per cent rise could move these projects into the red – and the US interest rates do have a knock-on effect on the cost of finance in other places," she said. "If rates rise sharply, future bids for tariffs may be at slightly higher prices despite continued falls in the cost of equipment."
And if the UAE’s Central Bank raises its rates, the cost of floating debt is likely to rise, according to Mohammed Atif, the Middle East and Africa regional manager for energy consultancy, DNV GL. "This doesn’t bode well for a tariff that’s highly dependent on the cost of debt financing," he said.
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