Analysis: All about the green

Will World Bank help bring investment to Dubai’s green projects?

Sunny side up: Solar PV projects, if structured well, will attract investor interest.
Sunny side up: Solar PV projects, if structured well, will attract investor interest.

To date, green finance has been a relatively niche area that hasn’t been particularly attractive for investors, but that could change soon as public-private partnerships are rolled out.

Dubai aims to reduce energy consumption by 30% by 2020, and renewables projects are expected to play a key part in that.

However, to date analysts argue that the current environment for green investment has not been particularly inviting.

One of the biggest challenges facing the market for green investments until now has been the cost competitiveness of traditional sources in comparison to green energy.

“The higher cost of debt and higher cost of equity, leads to higher cost of capital, which leads to an overall peak in project costs within the region increasing by 30 to 40% relative to green projects in developed markets,” says Emirates NBD’s Giel-Jan Van Der Tol in the Dubai State of Energy report for 2014.

“As it stands, green energy single-handedly cannot compete against conventional sources on price alone. This fact is compounded by regional factors, including financing issues and the need for a framework that includes all parties; financiers and inter-government representatives, both at the federal and state levels, to support each other.”

In addition to being more expensive, power is significantly subsidised in the region, he explains. So much so “that consumers eventually pay only 35% of the total theoretical market price for power”.

While there have been conventional bonds that covered investments into green projects, there are very little dedicated green finance vehicles, says Martin Kohlhase, vice president – senior analyst at Moody’s Investors Service. He believes that the reason behind this is the fairly small investor base.

“There are a number of institutional investors that have a mandate to invest in green technology but by far it’s not as big of an asset class as, for example, high-yield or emerging markets would be,” he said. “And it also boils down to the capacity of institutional investors when it comes to understanding what green technology is.”

Kohlhase adds that in order to get investors more comfortable with a broad asset class, the answer lies in better promotion and education of investors, but also in a form of guarantee from the government.

“Not all green projects are economically viable. Some projects can’t survive without a sweetener or without financial support of the government,” he said.

To jumpstart the process, he explains, certain financial incentives could be offered to the investor and that could work as an element to bring more money and more funds into green projects.

By offering support, government or multinational organisations can provide a guarantee to make the investment more attractive.

“If some of these projects are delivering a return which is for the same risk profile, which is below conventional projects, then every rational investor wouldn’t touch a green project. And this is where a support element comes in.

“Can governments or multinational organisations such as the World Bank, can they step in with a guarantee, with a tax break or with a subsidy to make it more attractive that for a given risk profile the return is as good – or at least as good if not better than – the return for a conventional project?”

Richard Keenan, a Dubai-based partner at law firm Chadbourne & Parke, said that although “there hasn’t been a significant amount” of activity in energy investment outside traditional oil & gas and power plant projects, there is appetite among funders for green investment deals if they can be structured correctly.

“Most banks would like to get a piece of that action as well and there is a lot of Middle East interest in that sector. Some of the Export Credit Agencies are significantly exposed to the traditional sector so are looking for more opportunities in renewables,” he added.

A major starting point, he believes, could be the 100MW photovoltaic solar power plant proposed by DEWA, for which consultants were appointed last month.

It “is likely to generate a lot of interest across the lending community”, he added.

Moreover, the Dubai Supreme Council of Energy is now partnering with the World Bank to set up a framework that includes both financiers and government representatives.

According to Ahmed Al Muhairbi, secretary -general of the Dubai Supreme Council of Energy (DSCE), the Emirate is looking to roll out a strategy for spending AED50bn ($13.6bn) allocated for green projects.

The Council signed a memorandum of understanding last week with the World Bank (via the International Bank for Reconstruction and Development), to develop a funding framework for new green bonds and sukuks.

“We have the ability to raise huge amounts of money, but we are not targeting that. We are targeting to raise the framework and the tools to help us establish the fund,” Al Muhairbi said in an interview with CW.

“Our main strategy is partnership – we could partner with banks, we could partner with institutions. But, they will devise this framework, they will answer these questions. Telling us what we should target and with whom we should align our partnership – Pension fund? Banks? Institutions?”

He added: “The World Bank has hundreds of years of experience in different areas and definitely have a lot of experience in raising and structuring frameworks and giving the correct advice to the institutions.”

Speaking at the World Green Economy Summit earlier this month, Dubai Carbon Centre of Excellence CEO Ivano Iannelli said that it is keen to support the private sector in “engaging with key areas of the economy”, but added that the message about opportunities for funders should be kept simple.

“Dubai (has) launched a green economy for sustainable development – it doesn’t get any simpler than that,” he said.

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