Solar power in the United Arab Emirates

The United Arab Emirates (UAE) has one of the highest solar exposure rates in the world, making it eminently suitable for producing solar energy.

In 2017, the UAE launched its Energy Strategy 2050 (the Strategy), the first unified energy strategy in the UAE to balance supply and demand. The Strategy aims to increase the contribution of clean energy in the total energy mix and invest AED 600 billion worth of projects to meet this goal. In 2018, an implementation plan for the Strategy commenced, a significant part of which relates to solar power.

We provide a snapshot of some statutory provisions that foreign investors should be made aware of that have led to the development of solar power:

Foreign Direct Investment Law (FDI)

In 2018, the UAE relaxed the rules relating to restrictions on foreign ownership of companies, with the introduction of the FDI (Federal Law No.19 of 2018). The new law provides a framework for foreign shareholders to own up to 100% of companies in certain designated sectors.

In June 2019, the UAE Cabinet announced a list of 13 sectors that welcomed up to 100% foreign ownership. The list includes renewable energy, now eligible for 100% ownership, offering foreign investors opportunities to explore the UAE market (particularly for projects involving production of solar panels, hybrid power plants and green technology).

Independent Power Producer (IPP) model

An IPP model is a private entity which owns and operate facilities to generate power before selling it back to a utility company and/or end consumers.

The introduction and regulation of IPPs in the UAE has been instrumental in meeting rapidly rising electricity demand. Today, they represent the majority of new capacity and continue to replace government power plants.

Several Emirates have enacted their own local regulations in support of solar power, such as Abu Dhabi and Dubai, which remain at the forefront of promoting solar energy.

Abu Dhabi

The Abu Dhabi Water and Electricity Authority (ADWEA) was established pursuant to Law No. 2/1998.ADWEA determines all matters relating to the formulation, development and implementation of all water and electricity policies. Pursuant to Article 10 of Law No. 2, ADWEA is responsible for promoting research to develop the electricity sector, as well as the conservation and efficient use of electricity resources. ADWEA has adopted the IPP model by virtue of Article 10 of Law No. 2, which empowers ADWEA to:

Enter into binding commitments with private sector entities to fund public sector participation
Lease, or procure the lease of, government land and all rights related to the use of such land to implement such projects and
Provide assistance in the procurement of consents and permits required for the implementation of power projects.

The Abu Dhabi IPP model is widely considered the go-to model for new greenfield investments.

Dubai

In Dubai, the Dubai Electricity and Water Authority (DEWA), the public service infrastructure company, is also increasing its reliance on IPPs since the enactment of Dubai Law No. 6 of 2011, regulating the participation of the private sector in the electricity and water production.

Although DEWA and ADWEA allow for IPPs, the two state utilities participate as major equity shareholders in all projects. IPPs are offered Power Purchase Agreements (PPA) for a period between 15 to 25 years, during which the government agrees to purchase the electricity at an agreed price for the duration of the contract.

The IPP model has become the go-to model for the production of solar power in Dubai, given that it allows foreign and experienced contractors that own the technology to participate in the production and distribution of clean energy to end consumers.

Financial leasing law

Federal Law No. 8 of 2018 regulates many aspects of lease financing in the UAE. The principle behind financial lease is that the manufacturer or supplier of the equipment sells the product to a financier, who then leases the equipment to the buyer in return for rental payments, usually for the life of the equipment. Law No. 8 facilitates the financing by manufacturers and suppliers of solar equipment, which encourages competition and decreases market prices, thus allowing the sector to flourish.

Pursuant to Article 2 of Law No. 8, the finance lease activity may only be exercised after a license is obtained from the UAE Central Bank. The need for a licence is likely to impact UAE suppliers that lease equipment with a buy option included, such as C&I solar equipment, thus hindering their business until complying with the licensing requirement. However, it may also provide new opportunities, such as leasing instead of acquiring all relevant solar panels and other equipment in IPP solar transactions.

Comment

The construction or contracting of new capacity is now mostly performed through the utilisation of private sector funds (whether foreign or domestic), whether for the purpose of designing, building, financing, owning or operating the production facility. More than 90% of power generation in the UAE is now provided by IPPs, requiring contractors/investors to have the required experience and expertise in constructing and operating solar facilities. Where coverage includes a specific output, insurers should be particularly vigilant when insuring contractors’ performance guarantees, especially when it comes to solar power where capacity output is subject to many variables, including weather, humidity, location and contractor’s experience in the field. Whilst the UAE market with its recent regulations and business model may be selective in allowing certain investors to set up shop in the Emirates, the fast paced developments in the solar sector is promising, making the UAE a strategic player in the production of solar capacity.

Read others items in Construction and Engineering Brief - March 2020