How can Bankable Power Purchase Agreements (PPAs) play a pivotal role in advancing the renewable energy sector in Palestine?

Introduction

Palestine faces energy challenges due to heavy reliance on external sources for fuel and electricity, primarily from Israel. This dependency, rooted in political and socio-economic complexities, makes the energy sector vulnerable to external fluctuations. However, renewable energy holds great potential to transform this landscape by boosting the economy, alleviating energy poverty, and ensuring a sustainable energy supply. “Bankable Power Purchase Agreements” (PPAs) are key to this transformation, which provide financial stability, attract investments, and reduce fossil fuel dependence. In summary, backed by bankable PPAs, renewable energy offers a path to energy security, economic growth, and sustainability in Palestine.

What is PPA?

A power Purchase Agreement (PPA) is a long-term energy or electricity supply arrangement between two parties. One of the parties in the PPA is the Producer who produces energy to sell it, and another is the Consumer/off-taker who wants to purchase the electricity for consumption or resale. The agreement outlines all the essential terms of the contract, including the amount and the quantity of the electricity supplied, the prices and other vital aspects such as accounting requirements and non-compliance aspects.

Types of PPAs

PPAs can endure for five to twenty years, during which the power buyer purchases energy at a pre-arranged price. They are crucial contracts in the renewable energy sector, governing the sale and purchase of electricity generated from renewable sources. The type of PPA chosen depends on factors like project scale, location, and the specific goals of the parties involved.

• On-Site Power Purchase Agreements (On-Site PPA): These contracts are used for small-scale renewable energy projects, such as rooftop solar installations. In On-Site PPAs, the electricity is generated and consumed at the same site, providing a predictable revenue source for producers.

• Off-Site Power Purchase Agreements (Off-Site PPA): Large-scale renewable energy projects, like solar farms, often use Off-Site PPAs. The electricity generated is transmitted via the grid to the power purchaser, who consumes it elsewhere, making it a practical choice for utility-scale projects.

• Virtual Power Purchase Agreements (Virtual PPA or VPPA): VPPAs allow power purchasers to buy the renewable attributes of a project without taking physical delivery of the electricity. This is favoured by organizations aiming to meet renewable energy targets without the infrastructure to generate power themselves.

• Physical Delivery Power Purchase Agreements: Physical Delivery PPAs involve the power purchaser taking physical delivery of electricity from a renewable energy project. These are suitable for on-site projects, ensuring stability for both producers and purchasers.
• Portfolio Power Purchase Agreements (Portfolio PPA): In Portfolio PPAs, power purchasers buy electricity from a portfolio of renewable energy projects managed by a portfolio provider. This approach offers diversification and a cost-effective way to access renewable energy from multiple sources.
• Block Delivery Power Purchase Agreements (Block Delivery PPA): Block Delivery PPAs are designed for renewable projects with variable output. Power purchasers receive electricity in predetermined blocks of time, allowing flexibility in procurement and potentially reducing costs.

Important features of PPA

While the details of PPAs can vary, they typically include several key clauses fundamental to the agreement.

• Firstly, the “Terms of Contract Clause” outlines the responsibilities of the power generator. It mandates the generation and delivery of electricity per agreed-upon standards. Pricing structures are also critical, consisting of two main components: the “Availability Price” paid for capacity availability and the “Output Price” for the actual electricity supplied. These pricing elements are vital for evaluating project feasibility and risk-sharing between the public and private sectors.
• The “Sale to Third Party Clause” introduces flexibility by allowing the sale of power to third parties, bolstering financial sustainability and providing protection from demand-side uncertainties. However, it may conflict with the buyer’s desire for exclusive access to capacity.
• PPAs also include provisions for maintaining performance standards and testing to ensure consistency and efficiency. Operation and maintenance and force majeure clauses are integral for addressing unforeseen events and maintaining reliability.
• A “Change in Law Clause” is essential for dealing with legal changes that may impact project cash flows. Finally, the “Termination of Contract Clause” outlines the consequences and asset transfers in case of contract termination.

These clauses are the foundation for PPAs, providing a framework for transparent, reliable, and mutually beneficial agreements between power generators and purchasers in the energy sector.

Renewable energy in Palestine

Renewable energy sources currently contribute to about 18% of Palestine’s total energy consumption, equivalent to 2,287 GWh in electrical energy and thermal usage. This includes both modern renewables like solar energy for water heating and significant reliance on traditional biomass, which has adverse effects on health and the environment. Within the electricity mix, renewables presently make up only 3%.

According to a World Bank study, Palestine has substantial untapped renewable energy potential, estimated ataround 4,246 MW. This potential includes approximately 4,174 MW from solar energy, complemented by wind and biomass potential of 72 MW. However, fully harnessing this renewable energy potential depends largely on the availability and accessibility of land.

Solar energy stands out as the most significant renewable energy source in Palestine, benefiting from abundant solar radiation and offering opportunities for applications like water heating, drying systems, desalination, and pumping.

Despite these potentials, large-scale renewable energy projects have been limited in Palestine. Small-scale solar PV and thermal systems have been more common, with solar water heating systems previously popular. However, challenges such as import restrictions and changing consumer preferences have impacted the adoption of these technologies.

In this context, bankable Power Purchase Agreements (PPAs) can be pivotal in Palestine’s renewable energy development. Bankable PPAs can attract investment, reduce financial risks, and enable project financing by providing a secure and predictable revenue stream for renewable energy projects. They can stimulate economic growth, enhance energy security, and help Palestine achieve its renewable energy potential, especially solar energy.

Barriers to Renewable Energy Sector Investment in Palestine

1. Dependency on External Sources: Palestine heavily relies on imported electricity, with 87% coming from Israel and smaller percentages from Egypt and Jordan. This dependence on external sources poses a fundamental challenge to building a self-sustaining energy sector.
2. Electricity Debts: Outstanding debts owed to Israel’s Electric Corporation create financial instability in the energy sector and hinder investments in renewable energy projects.
3. Power Deficit in Gaza: Gaza experiences a considerable shortage of electricity, impacting the daily lives of its residents and highlighting the need for sustainable energy alternatives.
4. High Electricity Costs: Limited access to alternative electricity sources and reliance on Israeli imports result in relatively high electricity prices, burdening households and businesses.
5. Political Barriers: Political considerations and barriers can hinder the development and integration of renewable energy solutions, particularly in the West Bank.
6. Political Will: Achieving progress in renewable energy depends on political will and advocacy at national and international levels, as political factors play a significant role in energy-related decisions.
7. Infrastructure and Investment: Building the necessary infrastructure for renewable energy, like solar farms, demands substantial investments. Effective advocacy and funding are vital to turn sustainable energy initiatives into reality.

Role of bankable PPAs in advancing the renewable energy sector in Palestine

They can play a pivotal role in advancing the renewable energy sector in Palestine in various ways:

1. Bankable PPAs offer a reliable income stream for renewable energy projects, making them appealing to local and international investors. When investors have confidence in steady returns, they are more likely to support renewable energy initiatives in Palestine.
2. Investors are often cautious about funding renewable energy projects in regions with uncertain economic and regulatory conditions. Bankable PPAs reduce this risk by ensuring project developers have a guaranteed income from selling electricity to a trustworthy buyer, easing financial uncertainties. Banks and financial institutions are more inclined to provide loans and credit to renewable energy projects backed by bankable PPAs. These agreements act as collateral, enabling project developers to secure the necessary funds for building and operating renewable energy facilities.
3.  Expanding the renewable energy sector creates job opportunities and drives economic growth in Palestine. The construction, operation, and maintenance of renewable energy projects require a workforce employing local communities.
4. Reducing reliance on imported fossil fuels through renewable energy makes Palestine less susceptible to energy supply disruptions and global fuel price fluctuations. This, in turn, bolsters energy security by ensuring a consistent domestic energy supply.
5. Bankable PPAs promoting renewable energy contribute to reducing greenhouse gas emissions, aligning with international climate commitments. Palestine can work towards its climate goals and actively participate in global efforts to combat climate change by transitioning to clean energy sources. Bankable PPAs encourage the development of a sustainable and competitive renewable energy sector within Palestine. They provide a clear path for integrating renewable energy into the national energy grid, promoting long-term growth and stability in the sector.
6. Adopting renewable energy technologies often leads to innovation and advancements in the sector. As more renewable energy projects are implemented, there’s an incentive to develop more efficient and cost-effective technologies.
7. Expanding the renewable energy sector can enhance energy access in rural and remote areas of Palestine where grid connectivity may be limited. Renewable energy projects, like solar microgrids, can deliver clean and reliable electricity to underserved communities.

Palestine’s Potential for Renewable Energy

Palestine boasts substantial potential for renewable energy sources, and the Palestinian Energy and Natural Resources Authority (PENRA) recognizes their importance in meeting the country’s energy demands. However, the ongoing political instability has acted as a barrier, hindering the development of renewable energy initiatives and discouraging private investments in large-scale renewable projects.

Financial risk mitigators

In some countries that are still developing, specific risks are tied to the country itself. Investors often hesitate because they worry that the buyer of the power may not pay reliably, the laws and taxes might change unexpectedly, or a new government might decide to alter the payment terms and tariffs, among other concerns. Therein comes the role of risk-mitigating factors such as:

1. Letters of Comfort: The Ministry of Finance can issue documents known as “letters of comfort” and “letters of support.” These documents assure project stakeholders, although they may not have the same legal strength as guarantees. Some of these documents contain strong commitments that can be enforced by law, while others are less specific.
2. Preferred Creditor Status (PCS): Multilateral financial institutions like the World Bank and the African Development Bank have a special status called “preferred creditor status” (PCS). This means that member countries have formally committed to helping the institution if it faces losses caused by a government’s actions. There’s often an agreement between the institution and the government, and the government is informed when the institution makes new commitments. This helps ensure that projects align with national priorities and provides evidence of government support.
3. Put and Call Option Agreement (PCOA): For Power Purchase Agreements (PPAs), some countries use PCOAs instead of traditional termination clauses. In a PCOA, if the off-taker or government fails to meet its obligations, the power producer (IPP) can sell the entire project to a defined buyer at a set price. This avoids placing debt on the government and treats it as a commercial transaction, reducing perceived risk for the IPP.
4. Bilateral Treaties: Bilateral treaties are agreements between two governments. They promise that transactions involving a company from one country won’t be affected by political risks caused by the other government. Unlike PCS, these treaties cover all transactions without notifying the government. Export credit agencies (ECAs) often use these treaties in the investor’s home country, especially when that country has strong influence and good relations with the host government.
5. The Overseas Private Investment Corporation (OPIC) offers various services to investors looking to invest in emerging economies and developing nations. These services include insurance against specific risks such as political violence, currency issues, and expropriation, which is a government taking over private assets.OPIC also runs programs in the Middle East to promote stability in the region. For instance, they provided $48 million in insurance to support the operation of a power plant in the Gaza Strip owned by a U.S. construction company. This plant generated electricity sold to the Palestinian Energy Authority.
6. The World Bank, through its Multilateral Investment Guarantee Agency (MIGA), offers insurance against political risks for private investments in the West Bank and Gaza (WB/G). This support is available to investors from MIGA member countries and Palestinian residents of WB/G, provided the investment comes from outside this region. MIGA can guarantee investments of up to $5 million per project.

Conclusion 

Moreover, Palestine’s complex territorial landscape, characterized by fragmentation and administrative intricacies, presents significant hurdles to extensively adopting renewables and energy storage solutions. This situation complicates the planning and execution of renewable energy ventures and the establishment of storage infrastructure. While Palestine holds promise in harnessing renewable energy, factors like political instability and territorial challenges have impeded progress in this vital sector.