Bereft of oil, reliant on expensive energy imports, yet with plentiful wind and solar resources, Morocco has embarked on a strategy to fix its power shortfall with renewable energy. Now, as the government prepares to name the preferred bidder on its flagship Ouarzazate solar project in the south of the country, and a host of wind projects take off, the dual-pronged plan is becoming a reality.

Away from renewables, the country is also about to close one of its biggest IPPs to date, at Jorf Lasfar, while a clutch of other projects is also in progress. The smooth passage of all these deals would add up to an encouraging track record in a country that was relatively unaffected by the political instability of the Arab Spring. Pent-up electricity demand makes it an attractive sector – economic growth is leading to an estimated 7% increase in electricity demand annually. Once the power sector is fixed, financing activity should swiftly move on to other areas like transport and infrastructure.

Solar selection

Masen, Morocco’s government agency for solar energy, says it wants to name its preferred bidder to design, operate, construct and maintain an initial 160MW phase of its the Ouarzazate parabolic trough concentrating solar power plant by the middle of the year. The strong bidder line-up comprises a group made up of Acwapower/Aries/TSK, which is thought to be in the lead, an Enel Green Power/ACS Cobra group and the Abengoa/Taqa/Mitsui group.

DFIs have offered bidders a stapled financing, supporting less-established CSP technology in an emerging economy on the assumption that commercial banks would struggle to get comfortable. The World Bank has approved $297 million in loans, with an additional $1.4 billion of financing coming from the African Development Bank, the European Investment Bank, Germany’s Kreditanstalt für Wiederaufbau (KfW), the French Agency for Development, AfD and Masen, which is managing Morocco’s solar programme.

The government has scaled back the project’s original plans to export Ouarzazate’s output to Europe, concentrating on domestic demand, at least in the short term. “Morocco’s proximity to Europe is a long-term plus for Ouarzazate but the rationale for exporting power to Europe, when the domestic need and demand is so great, was questionable,” said one banking source. “The real priority for the Moroccan government and Masen has always been to supply Morocco.” It’s a decision that promises to reduce the risk and shorten the timeline attached to an export project that proved fraught with challenges from an early stage.

Article 9 in the EU’s Renewable Energy Directive allows for the import into the EU of renewable energy generated in countries outside the EU. However the reality of exporting electricity from Morocco to Spain, in Ouarzazate’s case via an existing transmission cable, is still a little way off. “They couldn’t negotiate the PPA [power purchase agreement],” said a source close to the process. Locking in secure pricing is problematic, given that European utilities still tend to meet their power needs in-house or on the spot market rather than by committing to long-term contracts.

Yet any project lender would have required that offtake volumes be guaranteed over a period of 15-20 years, because upfront capital costs on solar projects can account for as much as 90% of total project costs. “Nothing between countries in Europe is straightforward,” said Paul van Son, chief executive officer of the Desertec Industrial Initiative, a private industry consortium, with Algerian and German members predominating, working to tap the energy potential of the entire North Africa region for export. “There is no reason exporting power from North Africa shouldn’t work – it’s just there is still no guarantee that it will.” Easier short-term alternatives could be found if projects like Ouarzazate stop worrying about PPAs but feed straight into Spain’s power exchange OMEL, he suggests.

For now the Moroccan government is guaranteeing Ouarzazate’s offtake contract, bridging the gap between its cost of producing power and the price that the ultimate user, Morocco’s state-owned utility ONE, pays to buy the electricity from Masen, the project’s designated offtaker. The government’s hope is that the plunge in prices of solar equipment during 2012 will start to put downward pressure on project costs and bring prices down in the medium term. “Introducing a feed-in tariff in a heavily subsidised area is not possible. Right now this is not a bad strategy and the government is willing to take the risk,” said one source.

Morocco's solar procurement framework


Source: World Bank

It’s a strategy South Africa is also following. It scrapped its plan to attract independent producers with subsidised tariffs in the face of legal and regulatory hurdles. Encouragingly, the government has just named 19 renewable energy projects in a second bidding window that saw aggressive pricing and a squeeze on the margins developers were prepared to accept.

The consortium bidding to run Ouarzazate will have checked in with commercial banks to test their appetite for the project’s credit profile, but lender enthusiasm for CSP technologies, unlike wind or PV, is still lukewarm. CSP is the problem child in the renewables family. Projects will depend on concessional finance from DFIs, and the ability of export credit agencies to mitigate risk, for a while yet, given the costly, unproven technology – technology that Ouarzazate aims to build on with a three-hour storage capacity.

Can Morocco’s neighbours steal a march?

Despite Ouarzazate’s turn inward, hope of exporting North African renewable power to Europe is still very much alive. Germany’s second-largest utility RWE, heavily reliant on coal-fired power plants, plans to build wind and solar facilities in Morocco with an eye on export markets.

Spurred on by the need to cut its carbon emissions in time for 2020, Italy’s import ambitions are focused on Tunisia. The two countries are hammering out terms by which Italy would import power from the TuNur CSP project, a joint venture between NurEnergie, a UK-based solar power developer, and a collection of Tunisian investors.

Although Italy has steadily reduced its feed-in tariffs, its government has pledged to continue supporting CSP with a slightly higher feed-in tariff, says TuNur’s CEO, Till Stenzel. “The support for CSP in Italy has actually increased; Italy has opened the door to solar imports,” he says. He believes the TuNur scheme, with all the advantages of North Africa’s solar resources, will compete with rivals on production and integration costs. Another carrot to the project is its promise of lucrative contracts for Italian manufacturers in meeting the project’s transmission and cable requirements. “We’ve looking at a financial close in 2014 with construction and operation by 2017,” says Stenzel. The AfDB has confirmed it will lead the debt side of the project, he says.

Old, and older, favourites

For now, commercial banks remain most enthusiastic about Moroccan wind. The dirham-denominated PPA for International Power and Nareva’s Tarfaya 300MW wind farm is “now finalised”, say sources familiar with the process, allowing the project’s financing, with Attijariwafa Bank and Banque Populaire, a Moroccan affiliate of Natixis, to move nearer to close. Elsewhere, ONE recently selected an EDF/Mitsui consortium as preferred bidder on the 20-year design-build-operate-maintain contract for the 150MW Taza wind project, located east of Fez.

The sector’s appeal lies in falling construction costs, strong sponsors and Morocco’s proven regulatory framework. “There is a sense amongst the banks that they need to be here,” said one commentator.

Factors to watch include liquidity – many banks have loaded up on exposure to corporate clients and will have to lighten their balance sheets before they can lend again. Like all other sectors and markets, the implementation of the Basel III capital adequacy regulations will also have unpredictable effects upon appetite. Lenders also worry that Morocco’s new government may also seek to raise taxes on private sector developers. Bank participation will also be dependent on the government indicating its support for a project first, suspects one commentator. “They may be private sector banks but they will want there to be a national consensus – to be seen to be working in the groove.”

It’s not just renewable energy that promises to add power to Morocco’s grid. The $1.6 billion debt financing of the 700MW extension of the existing 1,400MW coal-fired Jorf Lasfar in the port city of Jorf Lasfar should close in the next couple of weeks. Jorf Lasfar, described as “the most important power plant for Morocco” will ultimately supply 60% of the country’s electricity needs in a deal that expands an existing asset owned by Abu Dhabi National Energy Company (Taqa). Its appeal for commercial banks BNP Paribas, SG and Standard Chartered, also lies in it carrying a 30-year PPA with ONE, which is renowned, as one banker notes, for “its good track record when it comes to paying bills.”

Elsewhere, GDF Suez/International Power, Navera and Mitsui, co-sponsors of the 1,320MW Safi independent power project, are testing bank appetite for its $2.5 billion project financing. “The PPA is close to finalisation,” says Robin Mizrahi, a partner at Chadbourne & Parke, which is legal adviser to ONE. The $2.7 billion project involves the development of a coal-fired plant under a 30-year build-operate-transfer concession, 7km from Safi Port. The project will include a flue gas sulphurisation plant, an unloading wharf for coal and an off-site ash disposal facility. ONE, whose financial adviser is HSBC, is sole offtaker over a 30-year contract.

Multilaterals are now devoting serious attention to supporting the market. On top of the DFI staple for Ouarzazate, the European Bank for Reconstruction and Development recently opened a temporary office in Casablanca. Growing expertise means it may not be long before Morocco has covered its own energy demand and is able to show other jurisdictions how to do it.