The Middle East and North Africa region is on the cusp of a new energy revolution. US$50 billion has been set aside for investment in solar power projects by 2020, as MENA governments seek to maximise the long term value of their hydrocarbon resources by utilising solar energy to meet growing domestic consumption. Whilst these ambitious targets present a significant opportunity for potential sponsors of solar power projects in the region, there are a number of key considerations which sponsors may wish to bear in mind in establishing a framework for their investments.
3 Legal Considerations for Solar Development
- Ownership and Structure: Middle East solar power projects typically adopt the Independent Power Project (IPP) model, in which a project company is formed for the sole purpose of managing the development, financing, construction, operation and maintenance of the project and holds all of the project’s associated assets. The project sponsors hold their interests through one or more immediate holding companies which protect the sponsors from liability to the project company’s contractual counterparties. In turn, the project company will be subject to a multifaceted contractual framework entered into with its senior lenders and project counterparties.
- Risk Allocation: Sponsors should seek to insulate the project company from as many risks as possible, principally by passing those risks through to the project company’s various subcontractors. To achieve this, the project company will enter into a number of project documents through which risks of, for example, construction/completion, operations, feedstock supply and market/offtake, will be passed to contractual counterparties such as EPC contractors or O&M services providers. Such risk allocation determines the risk profile presented for financing.
- Financing: Once the risk profile for the project has been finalised, sponsors will seek to structure the financing arrangements in such a way so as to achieve the most competitive levelised cost of electricity (LCOE) and maximize their own equity rate of return. Sources of financing in the MENA region include:
- Syndicated loan markets: Traditionally, commercial banks have been the preferred source of financing for solar projects as they are willing to lend to project companies during the construction phase of the project and are prepared to assume some of the risk of that construction.
- Capital markets: Typically, bond investors have been unwilling to take on construction risk and, as a result, have been primarily used to refinance loan facilities after a project has achieved operational status and developed a substantial financial track record. At this stage, capital markets can be an extremely attractive option offering more competitive pricing than loan facilities and longer tenors.
- Public sector lenders: Export credit agencies, development banks and similar institutions may offer more competitive pricing and longer tenors than commercial banks in certain circumstances. In addition, many such institutions offer other products such as political or commercial risk insurance or guarantees.
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