Morocco Shows The Way: As Renewable Energy Becomes Major Talking Point At UN Climate Change Conference COP22 In November

As Morocco readies to host this year’s Climate Change Conference COP22, the country continues to demonstrate its highest commitment to reducing greenhouse gas emissions with major renewable energy interventions.

The African continent is one of the most severely impacted by climate change. Water scarcity, intensifying extreme weather (floods, droughts, etc), the consequences are numerous and already visible.

Africa currently represents a meager 3 % of greenhouse gas emissions and only receives 4% of global climate finance.

The 22nd Conference of the Parties to the United Nations Framework Convention on Climate Change (UNFCCC) will be held in Marrakech, Morocco from November 7-18, 2016.

The main focus of COP22 is to implement actions in order to achieve the priorities of the Paris Agreement.

The agenda will include: the development of National Adaptation Plans to lower greenhouse gas emissions; the funding, capacity building and transfer of technology to help developing countries mitigate the impact of climate change; and transparency during the implementation process.

The Moroccan Government has in this direction set an objective of installing 6,000MW from renewables (hydro, wind and solar by the year 2020.

In recent years Morocco has imported 95% of its energy as fossil fuels, providing subsidies on these fuels at a cost between US$1-4 billion per year. With a growing population, rising living standards and increasing power demand from cities and energy intensive industry, key priorities are to increase and diversify the energy supply, and manage public costs (Nabil, 2013).

The Moroccan Agency for Solar Energy (MASEN), a public-private venture has thus been established to lead the solar plan to commission a target 2,000MW of installed solar by 2020.

MASEN has made major progress in implementing its target 500MW Ouarzazate Noor I, NoorII and III projects.

MASEN is set to follow up by releasing a series of PV tenders; Masen has recently released the Noor IV PV phase of 170MW capacity across 3 sites for expected delivery in 2016.

With natural resources for wind, hydro and solar, renewables are recognized as offering the opportunity to reduce dependence on imports while generating employment and cutting greenhouse gas emission, with the potential for future green electricity exports to Europe (Dominguez, 2013). Concentrated Solar Power (CSP) is seen as a particularly important opportunity because of its ability for storage and the chance build up a local supply industry in an emerging industry (African Development Bank, 2013).

The government set a goal of reaching 42% of installed capacity (or 6,000 MW) from renewable energy (hydro, wind and solar) by 2020, whilst doubling overall capacity (Norton Rose Fulbright, 2012). Through the Morocco Solar Plan (MSP) it aims to install 2,000 MW of solar capacity by 2020, contributing around 14% of the energy mix in the country’s electricity supply. The plan calls for the construction of 5 solar complexes in requiring an estimated investment of $9 billion. (African Development Bank, 2012) .

A number of donors were already active or had indicated their interest to support a catalytic large scale renewables program in Morocco, for example through policy based lending for reforms, concessional finance to buy down incremental costs, carbon finance, advisory services and infrastructure finance (CTF, 2011), however this created a challenge of coordination, and additional complexity for private investors.

A new financing architecture was therefore needed to be developed which would blend domestic public funding with funding from international financial instruments (IFIs) whilst effectively aligning risks between the public and private sector partners.

In the longer term it is hoped that such early publicly supported projects will enable the technology to mature so that projects can be financed by investors and local banks, as has been experience with the longer established wind industry in Morocco (Nabil, 2013).

The government established The Moroccan Agency for Solar Energy (MASEN) in 2010 as the vehicle for mobilizing and blending resources and allocating risks to key players. It is a limited company which is 25% owned by the Government of Morocco, ONE, the Hassan II Fund¹ for economic and social development, and the Société d'Investissements Energétiques (SIE)² (Moroccan Agency For Solar Energy). The public investment is recorded as ‘equity capital and equipment subsidies’ in the General State Budget, while MASEN itself is an extra-budget entity. (Ministere de l'Economie et des Finances, 2013)

MASEN is responsible for feasibility assessment, design, development, and financing of solar projects in Morocco, along with contributing to expertise and research in the solar industry (Moroccan Agency For Solar Energy). Its aims are both to develop energy but also to support the development of a new industrial sector in Morocco through training, capacity building, and research and development (R&D) (Nabil, 2013) .

The first project to be developed using this model was Ouarzazate 1. Bids were invited to develop a Solar Power Company (SPC) to operate the plant on a ‘build, own, operate and transfer’ basis, supported by a 25 year fixed term Power Purchasing Agreement (PPA) between MASEN and the SPC. ONE is required to buy all energy from MASEN at grid price through a second PPA. The Moroccan government pays MASEN the difference between the two contracts. This arrangement guarantees a revenue stream for the SPC that is shielded from the volatility of energy prices. It is underpinned by a US$200 million contingency loan facility from the World Bank to the Moroccan government, which mitigates against public funding shortfall risk.

MASEN plays the role both of contract holder in the two power purchase agreements and as an equity partner in the SPC along with the winning bidders. This is governed by a shareholder agreement which includes a put option which allows MASEN to sell back its share if the private partner defaults on specified construction or performance obligations.

MASEN also acts as a consolidator of concessional loans provided by the Clean Technology Fund (CTF), African Development Bank (AfDB), the World Bank (WB), and the European Investment Bank (EIB) which reduce the cost of capital for the SPC, and lower the overall cost of energy generated. MASEN blends the terms of the IFI loans and offers a single financing package as part of the development and bidding process. (Falconer & Frisari, 2012a).

Critically this ensures adequate financing as part of the tender offer to the SPC, giving potential private investors clear information on the debt package of the project, and ensuring that the lower cost of capital is reflected in the bid price (Falconer & Frisari, 2012a).

These combined measures are designed to allocate risks across investors as shown below in order to make the deal viable, while incentivizing performance (see Figure 2).

The first project under the MSP (Ouarzazate 1) has gone from ‘idea’ to financial close between 2009-2013, which compares well with average timeframe for projects of this capacity of 6 years (Falconer & Frisari, 2012a). Multiple companies bid for the project, and a Spanish Saudi consortium won.

At US$0.184 the tariff offered by the winning bidder was 25% lower than initial cost projections, and even accounting for public capital subsidies the plant will be one of the least expensive contracted to date. This reduces the required revenue subsidy for the Moroccan Government from the forecast US$60 million to US$20 million (Falconer & Frisari 2012b).

While the private sector members of the consortium provide critical mitigation of performance and construction 85% of investment finance was provided by public investors, including both the Moroccan government and its partners in MASEN, and the IFIs.

The Moroccan governments’ investment amounts to 9 million per MW. This is a significant level of domestic public investment, and it remains to be seen if the Moroccan government has the capacity to provide the same level of support for the balance of the CSP installations planned under the MSP.

It will be important to understand if this level of public support will be able to be scaled up across the balance of the 2,000 MW foreseen under the MSP, or if over time less support will be needed due to falling costs of technology costs as a result of breakthroughs in R&D and/or more widespread deployment and uptake of CSP at a global scale.

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