Moroccan plan for solar energy
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Moroccan plan for
solar energy
FINANCIAL INSTITUTIONS • ENERGY • INFRASTRUCTURE AND COMMODITIES • TRANSPORT • TECHNOLOGY
Briefing MASEN 500MW Phase One Solar Power
Complex at Ouarzazate
October 2010
The Kingdom of Morocco’s solar plan, which will be one of the world’s largest
solar energy projects, was introduced in November 2009 with the aim of
establishing 2,000MW of solar power by 2020 (the Solar Plan). Five sites
have been selected for the development of solar power plants, with the
500MW phase one solar power complex at Ouarzazate being the first to
be developed (the Ouarzazate Programme).
The Solar Plan and the wider North African solar initiatives will have a
significant impact upon the future of both the North African and European
energy markets.
We are very excited about the prospect of large scale deployment of
CSP and PV solar projects in North Africa and other countries within the
“sun-belt”. The US Department of Energy (DOE) estimates that the cost
of generating electricity from CSP is nearly 25% less in North Africa than
in Spain – this is due to the excellent levels of radiation and availability
of land.
We are currently advising the Australian federal government on its Solar
Flagships Program which is one of the other major solar investment
initiatives globally and Norton Rose Group is committed in our support
of the global solar industry. We aim to play a leading role in the move from
the traditional markets of Europe to new markets and utility scale projects.
We have teams who have worked on Moroccan energy projects for many
years and understand the unique sector dynamics of this market.
In this briefing we have highlighted selected issues arising out of the
RfP process for the Ouarzazate Programme and issues which bidders
and lenders may face in connection with the financing of these projects.Moroccan plan for solar energy
Ouarzazate Programme
Regulatory background and overview
Under Moroccan law, the Moroccan Agency for Solar Energy (MASEN) is
responsible for implementing the Solar Plan and has the lead role of organising
the invitations to tender for the plants at each of the five sites. On other
independent power projects (IPPs) in Morocco, Office National de l’Electricité
(ONE) has been responsible for organising the tenders. ONE has a 25%
shareholding in MASEN so it is likely that their expertise will be drawn
on in the tender stage.
The Invitation for the Pre-Qualification of Companies and Consortia issued
by MASEN on 29 July 2010 (as subsequently updated) (the Invitation for Pre-
Qualification), indicates that the Ouarzazate Programme will be structured
as an IPP with a 25 year power purchase agreement (PPA) between the
project company and MASEN. Under the double PPA structure proposed
in the Invitation for Pre-Qualification, MASEN would then enter into a PPA
with ONE (see figure 1 below).
Figure 1: The proposed “double” PPA structure:
Support
Kingdom
MASEN
of Morocco
PPA 2 (*) PPA 1
ONE Project company
Interconnection agreement
(*) Difference between ONE Tariff and SPC Tariff to be funded by MASEN
This is a slight departure from other jurisdictions in the region (eg, Abu Dhabi
and Egypt) where solar and other renewable projects have been supported
by PPAs entered into by the same entity that purchases power under PPAs
from the more traditional (eg, gas fired) power projects.
Requirements for bidders
The Invitation for Pre-Qualification requires that bidders satisfy a number of
criteria as you would expect for a project of this nature.
We have highlighted some of the key criteria below and commented on
whether these criteria are included in similar programmes such as the US
DOE Loan Guarantee Program and the Australian Solar Flagships Program.
02 Norton Rose LLP October 2010Moroccan plan for solar energy
Financial criteria
• A bidder must demonstrate that it has:
– invested in two infrastructure projects in the last 10 years with an
aggregate amount of equity and debt of at least $800m; and
– a net worth of at least $200m.
In the case of a consortium bid, the lead member must meet these criteria.
Technical criteria
Thermal power plant experience:
• A bidder must have successfully:
– demonstrated a development of thermal power plants with an aggregate
capacity of at least 500MW over the last 10 years, with at least 1 thermal
power plant with a minimum capacity of 100MW over the last 7 years;
and
– operated and managed thermal power plants with an aggregate capacity
of at least 500MW, with at least 1 thermal power plant with a minimum
capacity of 100MW and where at least 1 thermal power plant has been
in operation for at least 3 years.
In the case of a consortium the lead member must also satisfy these criteria.
The Solar Flagships Program and US DOE Loan Guarantee Program do not
include specific criteria relating to thermal power project experience.
Thermal solar power plant experience:
• A bidder, or in the case of a consortium, the lead member, must have
“successfully developed” at least 1 thermal solar power plant with a
minimum capacity of 45MW.
“Successfully developed” has various applications, including that the applicant
has not become liable for penalties or liquidated damages in respect of
performance or delays in excess of 5% of the relevant contract value.
This compares with the Solar Flagships requirement that the technology
must have been in operation at a scale of at least 30MW for 12 months
(by 30 June 2010) or that a replicable model has been in operation for
12 months and such model also has scale-up plans which are supported
by lenders and construction firms.
The US DOE Loan Guarantee Program is more focused on innovation and
supporting the commercialisation of new technologies.
Norton Rose LLP October 2010 03Moroccan plan for solar energy
Other criteria
Material disputes:
• A bidder (and each member of any consortium) must not have a material
dispute pending or resolved against it in the past 10 years.
“Material dispute” means a dispute where the amount in dispute is at least
half of the net worth of the relevant company or where termination of a
material agreement was sought.
This is an unusual criterion and, on the face of it, applies to disputes in any
part of a bidder’s worldwide activity.
The Moroccan PPA
MASEN has never signed a PPA and the PPA(s) for the Ouarzazate
Programme will be the first. Although there is an established PPA precedent
in Morocco, it has been developed by ONE, rather than MASEN. The hope is
that the risk allocation between the power purchaser and the developer
under the MASEN PPA will not depart significantly from the ONE PPA,
because the ONE PPA has been accepted by the market as a bankable
document.
The risk allocation under the ONE PPA is broadly consistent with risk allocations
under PPAs elsewhere in the Middle East and North African region (MENA),
and in certain ways is more lender-friendly than other MENA jurisdictions.
The bidder is responsible for designing, financing, building and operating
and maintaining the plant on a long term basis. Bidders assume financial
close risk under the Moroccan PPA, with the potential consequences of not
achieving financial close by a fixed date being the loss of the development
security and termination of the PPA. The project company may also be liable
to ONE for “direct damages” in addition to losing the development security
and the PPA.
Change in law risk is a hot topic in Western European solar circles at the
moment with reductions to the feed in tariffs being discussed in France,
Germany, Spain and Italy. On this issue alone, the ONE PPA makes Morocco
a relatively investor friendly jurisdiction. Whereas change in law is an equity,
and perhaps debt, risk in jurisdictions with feed in tariffs, under the ONE PPA
model, this risk is assumed by the power purchaser.
The ONE PPA termination provisions for project company defaults are also
relatively attractive compared to other MENA jurisdictions. If ONE exercises
its right to terminate the PPA following a project company default after
completion of construction, it is obliged to make a termination payment.
While lenders will always wish to review the calculation provisions carefully,
they should include the senior debt. Our view is that this is a key aspect and
it would be beneficial to sponsors and lenders if it is preserved by MASEN
04 Norton Rose LLP October 2010Moroccan plan for solar energy
given the technology concerns that many international commercial lenders
may need to address. It would also help mitigate any risk of the PPA terminating
as a result of radiation levels being lower than anticipated at financial close.
Perhaps unusually for the MENA region, upon the project commercial operation
date, ownership of the power plant will transfer from the project company to
ONE and ONE grants the project company a right of quiet enjoyment on the
power plant allowing the project company to operate the project. A consequence
of this is that lenders are not benefiting from physical asset security, however
this has been accepted by the market on previous Moroccan power projects.
The Invitation for Pre-Qualification indicates that MASEN has already
“secured” the site.
State support
The government typically enters into a government support letter whereby
it guarantees ONE’s termination payment obligations. If it is not a feature
of the projects tendered by MASEN, then we would anticipate bidders and
their supporting lenders to undertake detailed legal and financial due
diligence on the relationship between MASEN and the government.
State shareholders
The shares in the project company on past IPPs have been owned by the
successful bidders; ONE does not participate in the equity of the project.
The Instructions for Pre-Qualification indicate that MASEN reserves the right
“to participate in the financing” of each project company, without specifying
whether it would participate in the debt or equity financing. If it participates
in the equity financing, MASEN may issue a shareholders’ agreement as part
of the request for proposals.
Financing issues
Financing requirements for the bid
Previous IPPs in Morocco have required bidders to evidence that financing
is available to fund project costs. This requirement was relaxed for the Safi
IPP bid, when bidders were required to evidence “only” US$600 million
of committed debt financing. That project was however tendered at a time
when funding was more difficult to obtain.
We expect that the request for proposals will clarify whether bids are required
to be fully funded. The Invitation for Pre-Qualification indicates that International
Financial Institutions have expressed their ‘in-principle’ interest in providing
funding at ‘preferential terms’ to any of the project(s).
Norton Rose LLP October 2010 05Moroccan plan for solar energy
The Clean Technology Fund (CTF), a fund administered by the World Bank
(whose investors include the US and Japan) has announced committed
funding of $72.5 million to the first project as part of its investment plan
for CSP in the MENA region. The CTF has prepared a very useful paper on
this investment plan which can be accessed through the following link:
http://www.climateinvestmentfunds.org/cif/sites/climateinvestmentfunds.
org/files/mna_csp_ctf_investment_plan_111009.pdf
The request for proposals (RfPs), when issued, may allow for bidders to
assume that this concessional financing in certain amounts (which would
need to be disclosed) would be made available although assumptions may
need to be made as to pricing and terms and conditions.
In the addendum issued by MASEN on 21 September 2010, the Invitation
for Pre-Qualification was clarified to reflect that the International Financial
Institutions could include the African Development Bank, the European
Investment Bank, the World Bank, the Agence Française de Développement
and KfW although bidders will wish to note that generally it is the World
Bank eligibility requirements which would need to be satisfied. It is not
clear at this stage whether these International Financial Institutions have
expressed their in-principle interest in the 500MW being developed as
phase one of the Ouarzazate Programme or the entire 2,000MW.
Many commercial banks with experience of lending to CSP projects
will have gained that experience in Spain. To date there has been some
involvement of Nexi (Japan), Hermes (Germany) and EKN (Sweden) but
limited involvement of other ECAs in the Spanish CSP financings although
a number of ECAs have supported PV projects.
Given the size of the Ouarzazate Programme, we would expect to see a
greater level of involvement of ECAs in addition to the International Financial
Institutions. The renewable exception to the OECD Consensus rules means
that financing from ECAs can be a very useful tool. It is possible to structure
ECA loans with long tenors and sculpted amortisation profiles rather than
a traditional equal semi-annual repayment instalment structure.
Construction risk
To date lenders to CSP projects have generally been well insulated from
construction risk through solid construction contracts and completion
guarantees. These guarantees have been required because many lenders
still regard CSP projects as unproven and, in particular, because many
lenders in the Spanish market are used to receiving such guarantees
even for projects with limited construction risk such as onshore wind
farms and PV projects.
06 Norton Rose LLP October 2010Moroccan plan for solar energy
We believe that it will be possible to get lenders comfortable with construction
risk for CSP projects without full completion guarantees. There are CSP projects
outside Spain currently seeking finance which are trying to avoid the need
for full sponsor support for the first 10 years of operation. To get lenders
comfortable you will need a robust EPC, accepted technology and levels
of contingency approved by the lenders’ engineer. The introduction of
completion guarantees would be a departure from the standard MENA IPP/
IWPP model.
Resource risk
Banks will be requiring resource studies which evaluate radiation levels.
This may be one of the most significant departures from the traditional
power model in the MENA, as under the traditional model banks are
protected from failure to supply fuel through liquidated damages under
the fuel supply agreement and/or deemed availability payments under
the PPA. Banks have however become comfortable with analysing this risk
in other jurisdictions and a robust report from their technical adviser should
provide them comfort on radiation levels in Morocco taking into account
the excellent resource and the level of data which is available.
Scale-up risk
One of key concerns with scaling-up of CSP projects is the engineering
challenge to pump and regulate the flow of heat transfer fluid around the
project. We understand that this issue is relevant for parabolic trough and
linear fresnel technologies but not solar towers. Solar towers are seen to
have their own issues in relation to increasing the solar collection field
and the move to molten salt storage.
The Ouorzazate Program contemplates the requirement for thermal storage
for the first phase project(s) although MASEN has stated that it does not
intend to be prescriptive as to the number of hours of thermal storage
capacity. Many countries are proposing that storage solutions should be
introduced for CSP projects. This introduces a further level of innovation
and scale-up risk from the storage systems which are currently deployed.
We expect lenders will want to assess the implications under the PPA if the
thermal storage fails to perform at the anticipated levels.
We believe that solar thermal as a technology is now over the “hump” of
moving from prototype to proven. While there may be teething issues with
the scale-up from a standard 50MW project in Spain to 125MW we believe
lenders can take some comfort from the scale of the projects already in
construction and development in the US and Australia.
Norton Rose LLP October 2010 07Moroccan plan for solar energy
Contacts
Please do not hesitate to contact your normal Norton Rose Group contact or
any of the contacts listed below if you would like any further information:
Europe Paris
Anne Lapierre
London Partner
Simon Currie Norton Rose LLP
Partner Tel +33 (0)1 53 89 56 16
Norton Rose LLP anne.lapierre@nortonrose.com
Tel +44 (0)20 7444 3402
simon.currie@nortonrose.com Alain Malek
Partner
Nicholas Pincott Norton Rose LLP
Partner Tel +33 (0)1 56 59 5300
Norton Rose LLP alain.malek@nortonrose.com
Tel +44 (0)20 7283 6000
nicholas.pincott@nortonrose.com
Arnaud Belisaire
Of Counsel
Charles Whitney
Norton Rose LLP
Partner
Tel +33 (0)1 56 59 5217
Norton Rose LLP
arnaud.belisaire@nortonrose.com
Tel +44 (0)20 744 3171
charles.whitney@nortonrose.com
Prague
Pavel Kvíčala
Amsterdam Norton Rose v.o.s., advokátní kancelář
Weero Koster
Tel +420 2 5719 9016
Norton Rose LLP
pavel.kvicala@nortonrose.com
Tel +31 (0)20 462 9359
weero.koster@nortonrose.com
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Frankfurt Partner
Jochen Terpitz
Norton Rose Studio Legale
Norton Rose LLP
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08 Norton Rose LLP October 2010Moroccan plan for solar energy
Asia Middle East
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Somboon Kitiyansub Jonathan Brufal
Norton Rose LLP Partner
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jonathan.brufal@nortonrose.com
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Norton Rose LLP Dominic Harvey
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tom.luckock@nortonrose.com Norton Rose (Middle East) LLP
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Chris Redden
Norton Rose Hong Kong Dubai
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Norton Rose (Middle East) LLP
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Ross Ramsay martin.preston@nortonrose.com
Norton Rose Australia
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FINANCIAL INSTITUTIONS • ENERGY • INFRASTRUCTURE AND COMMODITIES • TRANSPORT • TECHNOLOGY
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