Going green in developing countries pays off in the future … Ask ACWA Power
https://arab.news/2aw5s
ACWA Power is a well-known Saudi energy company. It’s more known outside of Saudi Arabia than inside with projects stretching from South Africa to Indonesia and with a diverse portfolio ranging from coal-fired plants to green hydrogen.
When ACWA Power started many years ago, it was not that special as its first assets were oil-fired in Shuqaiq, south of Saudi Arabia. The plant was one of the top independent power projects at the time. Back then IPPs were considered a big thing as by constructing power projects, they reduced or shared governments’ burden in the power sector. Through this public-private partnership, the Saudi private sector learned a great deal on how to grow and become international as ACWA did.
Despite its international footprint and past achievements, what attracts me to ACWA Power is its plans. To my knowledge, it is the first Saudi listed-company to have set a clear target on ending its relationship with fossil fuel and becoming carbon neutral by 2050.
That’s not going to be without a cost but ACWA sees its future in renewable and green energy more than anything else.
In an interview last week, Paddy Padamanthan, the CEO of the company, told Arab News: “The market is there. Coming out of COP26 is extremely clear. The market is even much more certain in terms of the energy transition and the opportunities that are rising out of the energy transition for what we do.”
Turning green is “absolutely the right thing for us” and he wants to make sure that ACWA remains a “leader of the energy transition,” while also focusing “and keep improving ourselves on environmental stewardship, social responsibility, governance, and ESG.”
ACWA has already started paying the cost of its transition, which contributed to its net loss in the third quarter this year, its first-ever quarterly results after it went public last month. The loss resulted from “accelerated depreciation charges pertaining to two oil-fired assets in Saudi Arabia, recognition of share-based payments expense related to the IPO, and an increase in Zakat and tax charge,” it said in a filing.
On the issue of oil-fired assets, ACWA’s CEO said in the same interview: “So we do have some legacy assets, oil-fired, that we need to manage… We are working with our off-taker on what the plans are because the kingdom itself has made a very clear commitment about shutting down the old oil-fired assets over the next nine years.”
He added: “So one of the first things we have done is that on two of these assets, two out of the four, we have brought the asset life that we had on our books to match the contract term. So, we basically impaired some of the technical life that we were carrying on our books.”
With ACWA supplying power in many developing countries on commercial basis, it will play an inherent role in the Saudi energy diplomacy, in line with the Kingdom's role as a supplier of energy to the global market. The low-cost energy that these countries are enjoying, will help promote their economic development. The only private company that does that in Saudi Arabia is ACWA.
Wael Mahdi
For sure the benefit of going green will outweigh the cost with the world’s energy needs growing, mainly in developing economies where ACWA is already established.
In its recent projections, the International Energy Agency forecast across all scenarios in its world energy outlook, that the share of variable renewables in electricity generation will reach 40-70 percent by 2050, compared with an average of just under 10 percent today. By 2030, the world may see 500 GW of renewable energy capacity additions, it added.
This year and the next year are going to be busy times for ACWA. Saudi Arabia, its home market, plans to add something close to 50 GW by 2030. ACWA is already in a strong position to win many of these projects as its cost of generation today is among the lowest worldwide. The company was just awarded a 1.5 GW solar PV plant in the Sudair region.
It started construction on a solar project for The Red Sea Development Co. and early next year it will start work on its green hydrogen project in NEOM.
In Dubai, it started operation at the first increment of the 900 MW of DEWA fifth phase at the Mohammed bin Rashid Solar Park. In Egypt, the company got the Cabinet’s approval for a 1.1 GW wind project.
The company is also busy with projects in central Asia in Uzbekistan and Kazakhstan.
Amid all these projects, ACWA is sometimes criticized for operating in political or economic high-risk countries and environments. Padmanathan’s answer to this was really convincing.
“First of all, we kind of make sure the countries that we invest in have a reasonable track record of honoring contracts, a reasonable track record of honoring investors. All of them (the countries), go through the list, look at the list, they have reasonable records,” he added.
The second thing is that ACWA’s generation cost is too low compared to all other producers that makes it hard for any country to default on. He cited real numbers to his competitors such as 14 to 22 cents per kilowatt per hour, whereas ACWA’s charges are as low as two cents in some cases.
“We supply at two and a half and 3 cents per kilowatt hour. What do you think is going to happen?” he added.
The third reason is that cheap energy is such an enabler for economic development and social prosperity that countries don’t want to default on paying for them.
“They will never default because they know if they don’t pay that bill power is going to go off. But in the other case of 22 cents, because they just don’t have the money here, they will at least go and beg and borrow for $200,000 (referring to the low cost of his bill). So it is a very different risk profile,” he said.
What critics also don’t realize is that many of these countries will serve as future regional hubs for ACWA’s operation to expand into their respective regions. For example, it will use African countries as bases for the operations and expansion to all neighboring countries, a strategy that to me serves the long-term presence it wants to establish.
Another important factor is geopolitical. With ACWA supplying power in many developing countries on commercial basis, it will play an inherent role in the Saudi energy diplomacy, in line with the Kingdom's role as a supplier of energy to the global market. The low-cost energy that these countries are enjoying, will help promote their economic development. The only private company that does that in Saudi Arabia is ACWA.
In addition, even though it operates independently, its global energy outreach, will enhance the relationship of the Public Investment Fund of Saudi Arabia with other developing nations, since the sovereign fund, known as PIF, owns 44-percent stake in ACWA.
Now, whatever ACWA is planning to do abroad and what risk it might be exposed to, its base in Saudi Arabia will always compensate for any losses abroad, as the Kingdom is providing more opportunities for ACWA. The other thing, with the low and clean energy it provides to many nations, it’s very logical that these countries can use that energy to improve the economy and living standards, which will add to the stability and progress of these countries.
At the end, ACWA is now listed so it means that it will be more prudent in its future operations and expansion. Since I’m not an investor, I care more about seeing ACWA contributing to a cleaner and better world, and that is for sure something they are doing.
• Wael Mahdi is senior business editor at Arab News and co-author of “OPEC in a shale oil world: where to next?”
Twitter: @waelmahdi
