The government of Dubai has unveiled an ambitious program which will see 25 percent of its power generation come from solar energy by 2030. The wide-ranging Dubai Clean Energy Strategy 2050 program is expected to result in USD13.6 billion worth of new solar (mainly photovoltaic (PV)) investments. The surge in investments comes from 2 sources: on the one side, Dubai Energy and Water Authority (DEWA) has signalled its strong commitment to these targets and moved towards their implementation plan securing extension of the Mohammed Bin Rashid Al Maktoum Solar Park, which has now a planned capacity of 3 GW by 2030. On the other side, the Shams Dubai initiative was launched in March 2015 allowing customers to install PV panels at their premises and connect to DEWA’s grid under a net metering scheme. Considering that there are some 115,000 buildings in Dubai this is expected to result in some 2,000MW of solar rooftop capacity. The total value of these rooftop solar systems is USD2 billion. To help building owners cushion the burden of the high upfront costs of these rooftop systems the government announced the USD27 billion Dubai Green Fund to provide low-cost loans for investors in the solar rooftop sector. But how can the government raise financing for the Fund?
How to gain financing for the Dubai Green Fund
The Fund, a holding company (HoldingCo), will present to investors and lenders a portfolio of projects rather than arrange financing for each of the small PV plants. A rooftop plant has typically a size between 5 kWp and 5,000 KWp. The HoldingCo shall own each small projects of the portfolio and in such a way reach a large size (for instance, 2 Gigawatt; around USD2 billion). The large size shall allow the fund to obtain debt on a nonrecourse basis. Transaction costs and time consumption are too high on small PV projects and lenders tend to avoid such transactions. On the contrary, a portfolio of homolog projects fulfilling certain finance covenants, catches the attention of the origination teams of commercial banks. Funding requirements not covered with debt, need to be achieved by equity-like structures. For equity providers, a sizeable transaction is a must have. Once the funds are raised, the HoldingCo will transfer the required monies to each of the single projects (e.g. building owners). In turn, the HoldingCo will have full access to the ownership on the assets and manage all cash-inflows.
Main advantages of a fund financing are: (1) the possibility to leverage: the comparatively small size of rooftop projects makes difficult to raise none-recourse financing at a competitive cost. On a portfolio basis, lenders’ interest to provide financing increases. And, (2) it is possible to integrate none-renewable assets (e.g. real estate) to the fund. An example of successful mixed funds raised in Europe is the Margaritte Fund.
“In order to minimize the regulatory changes to set a renewable energy fund, a structure similar to the one used in a real estate financing in Dubai shall be considered”
In addition to certain financing covenants to be fulfilled, one of the structural requirements of such a fund are cash-pooling mechanisms. That is, all cash-inflows (e.g. sell of electricity to DEWA or energy savings or rental payments for the use of the PV modules or claims) shall be automatically transferred to the bank accounts of the fund. The fund, in turn, will attend his debt service obligations and distribute dividends on the net of cash-outflows to the investors. (See the following graph for flow of funds).
In order to minimize the regulatory changes to set a renewable energy fund, a structure similar to the one used in a real estate financing in Dubai shall be considered. The risk profile of the investor will determine the term of the investment in the fund, the expected dividend and the range on the pledges. Investor-needs tend to differ from each another. In order to raise the highest fund liquidity in the shortest time possible, flexible sub-structures customised to each investor can be considered. Details on the structuring of the equity side will be provided in a posterior article.
“Solar capacity expansion needs to be financed”
Finally, a fund to finance rooftop PV projects allows to consider a wide range of single assets providing a variety of returns on investment (from negative returns to highly positive). Certain social projects would have never been realized without such fund structures. Relevant is to achieve the target returns on an average basis. In case the number of low-performance projects is high, the lender might require certain risk-coverage (e.g., a backup guarantee from the fund owner(s) or insurer with an investment grade, or a liquidity reserve or a liability contractual clause).
Solar capacity expansion needs to be financed. Specially challenging is the financing of small rooftop projects. The Dubai government has announced the Dubai Green Fund providing soft-loans to PV owners. This article presents the structure to be used by a fund to attract monies. A large size, a proper pledge structure, cash-pooling mechanisms combined with cross-collateralization rules and debt-comfortable structures that match with the profile of several types of investors, might be deployed by the Dubai government and by local financial institutions. If the first fund succeeds, a similar proliferation of finance boutiques specialized in financing renewables will appear in Dubai as it has happened in the European capital cities of London and Frankfurt.
Global Capital Finance GmbH & Co. Europe KG