Jordan leads on energy tariffs

In spite of enviable solar irradiation levels and some areas with good wind resources, the Middle East has long lagged behind Europe and the United States in the development of renewable energy.

Feed-in tariffs, whereby private companies are guaranteed a universal tariff for the renewable power they produce, could help to change that.

These tariffs have been widely used outside of the Middle East. Such schemes made countries such as Germany, the US and Spain renewable energy leaders. They offer a counterpoint to the usual method of renewables development in the Middle East, whereby direct negotiations between private companies and governments lead to deals on a project-by-project basis.

Last year, Jordan decided to become the first country in the region to adopt a similar technique. It passed its renewable energy and energy efficiency legislation in April 2012, which introduced the “direct proposal submissions” scheme.

Under the model, developers from around the world can submit proposals to build wind, solar, biomass and biogas projects and are guaranteed a tariff for the power they produce. Jordan is concluding negotiations for the first phase of the project and has now set its sights on agreeing terms for the second wave.

It is no accident that Jordan is the first country in the region to move in this direction. Unlike its neighbours, it has almost no indigenous hydrocarbon resources of its own. As a result, it is heavily dependent on fuel imports. Last year, Jordan imported 96 per cent of its energy needs. This comes at a high cost. The country’s energy import bill for 2012 accounted for a fifth of GDP.

The situation was brought into stark contrast by the Arab Spring protests. Jordan imports gas from Egypt. Instability in Egypt has led to the pipeline being cut many times, forcing Jordan to use alternative fuels. Jordan spends US$7 million a day for heavy fuel oil whenever gas from Egypt is not available, said Hala Zawati, the chief executive of Edama, a Jordanian business association focused on energy and water independence.

“This has happened quite a lot. The pipeline [between Egypt and Jordan] has been hit more than 15 times in the last two years,” she said. This has forced Jordan to generate power using costly heavy fuel oil at around 24 US cents per kilowatt, and this has raised power prices to consumers.

Concerned that the Arab Spring protests would spread to Jordan, the government focused its attention on accelerating its renewable energy plans. “You had an energy crisis and a political crisis raging at the same time,” said a renewable energy developer working in Jordan. “When the gas stopped coming, [the Jordanian government] had to move very quickly on all fronts … You have to consider that the Arab Spring was in full swing at that time.”

Drawn by the prospect of competitive tariffs and promising renewable energy potential, private companies piled in. According to Suleiman Al Hiyari from the National Electric Power Company, Jordan receives solar irradiation of 5-7kWh per square metre per day and there are wind speeds of 7-11 metres per second.

Tafila wind project is the first of its kind in Jordan. The project’s sponsors signed financing agreements with its lenders on November 27. According to Masdar, the project will benefit from a tariff of 12 cents per kWh, which is in line with Jordan’s benchmark prices for wind power projects included in the first phase of its direct proposals scheme.

“The project will be selling electricity at approximately 25 per cent below current wholesale prices,” said Adam Schwartzman, the principal investment officer for International Finance Corporation (IFC).

Aspects of the Tafila project are hoped to provide a blueprint for future renewable energy projects in Jordan. “The Tafila project clears the way for the pipeline of solar and wind projects that are currently in development,” said Mr Schwartzman. “It demonstrates the financeability of the government’s direct proposal structure, and sets precedents on many issues that will be common across future deals.”

Fawaz Al Muharrami, head of project delivery at Masdar Clean Energy, is also convinced that the wind farm and incentive scheme will have a big impact: “The direct proposals agreement has attracted a lot of foreign investment into the country. Now with this project, the interest is high.”

But Jordan is not just offering incentives to large developers to produce renewable power. It has also encouraged homeowners and businesses to install photovoltaic solar panels on their rooftops. “The law allows for any building to install renewable energy systems that can fulfil their average energy consumption for the year,” said Mr Zawati, adding that 350 building owners have taken advantage of the scheme.

Jordan’s net metering programme allows small-scale solar power producers to reduce their energy bills by selling power to the grid. The produced power is deducted from their overall energy bills. Jordan is offering tariffs of 17 cents per kWh for solar power installations, 13.4 cents for hybrid systems and 12 cents for other sources of power.

Producing electricity is particularly appealing for homes and companies that consume a lot of power. Tariffs for big consumers of power were recently raised significantly.

However, not everyone is convinced that Jordanian households will want to participate in the scheme. “We are interested in [financing] rooftop projects but unfortunately it’s not easy to market these projects to people,” said Wael Bayyari, the head of Capital Bank of Jordan’s large corporate department. “[People] are scared of the technology and fluctuations in the price.”

For the large projects, local sources of funding are not always available. Tafila wind farm, for example, has been financed without a single local bank. “Local banks have not been keen to lend,” said Mr Zawati. “They think that they don’t have the experience.”

Banks in Jordan are typically unaccustomed to providing loans for the durations that are necessary for such projects. “We [provide] investment for up to 15 years, which isn’t normal in Jordan,” said Mr Bayyari. “Most banks in Jordan do only seven to eight years … We offer up to 10 million Jordanian dinars [Dh51.9m] per project for 10 years with an interest rate of 5.5 to 6.5 per cent. The usual interest rate is 8.5 to 11 per cent.”

Export credit agencies and international development banks are necessary to fill the funding gap. But Masdar’s Fawaz Al Muharrami is hopeful that this aspect will change: “Maybe in the future, with lots of projects coming online and successfully executed, there may be more lending from local banks.”

Another hurdle for renewable energy in Jordan is the transmission and distribution network. “We negotiate power-purchase agreements with the companies. Once we have a clear idea, we look at reinforcing the grid,” said Ahmed Aldohni, the head of National Electric Power Company’s contract and agreement section. The challenge is getting the power production and transmission projects to reach completion at the same time.

Nepco is developing a “green corridor” project to reinforce the electricity network ahead of new clean power projects, which it said would be ready by 2015. However, some developers are sceptical that this is a feasible timetable. “The grid is near its capacity limit. The green corridor is slated to improve the limits,” said Tareq Murad, programmes manager for Kawar Energy.

“It was originally planned to be up and running by 2015 but our sources on the ground say that it will be 2018 before it’s ready … The free capacity is [currently] only 300MW in south Jordan and 400MW in north/north-east Jordan.”

In spite of the hurdles, Jordan has shown a high level of commitment to the development of its renewable energy sector. “Now that there’s a precedent, the authorities are in a good position to replicate it in other deals,” says IFC’s Mr Schwartzman. The country’s energy challenges are proving the most effective force in accelerating a shift towards clean technology. “The government wants to launch renewable energy projects as soon as possible,” said Mr Aldohni. “We are working day and night to do it.”

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