Wind and solar: Renewable energy for the UAE
Hatta in the Hajjar Mountains on the border with Oman, it seems, may be the location of Dubai's first wind power generation scheme. A 28 MW project is being proposed by the Dubai Electricity and Water Authority (DEWA) and is currently the subject of a feasibility study.
30 years ago, as the oil and engineering companies planned their strategies to rebuild Kuwait, Trowers partners met at the Hatta Fort Hotel to plan the strategy for an office in Dubai to service that business (our licence was granted 30 years ago this month in September 1991). In that year we also began our work to negotiate and develop the documentation for the Middle East region's first Independent Power Project (IPP) at Manah in Oman. Fast forward 30 years and Dubai's first foray into the wind powered IPP market is set to be built overlooking the place where we met to plan our strategy all those years ago.
In the years between 1991 and 2021 we have participated many times in the IPP market, assisting its development and growth. The initial schemes were mostly oil and gas fired with a little coal and one mine-mouth oil shale project. There has been initial nuclear activity too. Now the power generation sector is moving firmly into renewable energy resources despite the distribution service providers being well aware of the challenges to flexibility in those resources; you can turn a gas turbine on or off to meet power demand but it's a higher level of authority altogether that controls the sun and wind!
The mainstream electricity providers have demonstrated their commitment to renewables both at mega and large-scale project levels. This is very much our market and we have recently advised the electricity and water authorities of both Dubai (DEWA) and Bahrain (EWA) respectively on the Mohammed bin Rashid Solar Park V; a 900 MW solar power IPP and the Askar 100 MW solar IPP (the latter on top of a land-fill project). There is no doubt that solar power generation will be a key way forward for large-scale and mega energy projects in the Gulf region (with the next major challenge being around system management and storage).
We are also seeing a trend into small-scale renewable energy activity. We have clients developing, buying, financing, or building rooftop solar projects around the region, particularly in Saudi Arabia, Bahrain and Dubai. The documentation for these projects is more compact than the IPPs but closely related to their principles and the flow-down of risk in those project finance models.
To date the Levant and Egypt have been where we have become involved in wind power but now it will be very interesting to see how the feasibility studies stack-up for Hatta and if bidders can make this kind of smaller-scale project work.
As a lawyer looking at the documentation and developing the webs of contracts that these kinds of projects spin; the risk assessment and risk management will be somewhat similar to those applicable both to the conventional fuel IPPs (where the models were developed originally) and will certainly be close to the solar projects.
There remains no specific wind-power project legislation in Dubai. This is unlike the solar sector which has the SHAMS regulations for small-scale solar projects. Wind projects will not hit mega-project size and 28 MW seems likely to be somewhere between the sort of small-scale captive plant that might be seen in the future (supplying a customer with a "net metering" connection to the grid) and a larger-scale project for the DEWA distribution system. There is no feed-in tariff for wind power in Dubai and therefore it seems that DEWA will likely go ahead with a specific power purchase agreement (PPA) for wind; no doubt drawing on the recent solar PPAs.
Interesting significant risk issues for developers are likely to focus around the relief available for unforeseen events (e.g. force majeure, or change of law) whether time extensions are available and whether and how compensation might be factored in (perhaps adding to the PPA period rather than a cash payment); also the issue of whether any government guarantee will be available for the offtaker obligations and the effect that has on financing; and then the whole subject of whether the project will be transferred to the distribution service provider at the end of the PPA term/ lease expiry.
Feasibility data and site specific information will be specifically relevant to a wind project and is significantly more complex than solar equivalents. We acted on a wind project in Jordan which was delayed for a substantial period of time because initial studies came back indicating possible interference with a bird migratory route (highly unexpected).
Bidders for the project in Hatta will need to look at the Dubai regulations, both in respect of IPPs and corporate formation. As there is no separate legislation in Dubai (or at the UAE Federal level) governing the regulation of renewable energy, Hatta's wind project will therefore fall under the ambit of the IPP regulations in Dubai and mainly the Dubai Decree number 1/1992 (as amended) on the establishment of DEWA and the Dubai Law number 6 of 2011 regulating the Participation of the Private Sector in Electricity and Water Production in the Emirate of Dubai.
Sitting in the middle of the contract web, the developer must ensure that they pass the risks down from the PPA to the EPC and O&M contractors without leaving the project company exposed to undue risk. EPC contracts for this type of project vary in significant ways from the standard forms because the EPC contractor must share the customised construction risk applied through the PPA. Operation and maintenance contractors must also share risk and will be incentivised to maintain availability of the wind turbines. Where there are unplanned outages or inefficient performance, O&M contractors will be penalised. The commercial question that always arises in these instances is how far the O&M contractor (whose annual fee is relatively small) will indemnify the project company (and hence its lenders) for its losses.
For climatic and geographical reasons, wind is likely to remain a side-show to solar in Dubai, it nevertheless has a place and it will be very interesting to see how this initial scheme at Hatta will develop.