The high upfront cost of distributed solar energy has long dampened its prospects in the GCC, despite the region’s high solar irradiance. But the clouds may have finally cleared with an innovative business model that is brightening the prospects of solar energy.
Technology breakthroughs have already lowered the cost of utility scale solar photovoltaics (PVs), which has tumbled about 75% since 2009, thus furthering uptake across the Middle East and North Africa. Industry projections now point to a similar trajectory in uptake for distributed energy as the solar leasing model gains wider acceptance within the commercial and industrial segment of the energy sector.
“When I look forward five years, I see a sea of solar panels. I see huge awareness of the economic benefits and the environmental benefits for businesses to make a change,” says Jeremy Crane, CEO of UAE-headquartered Yellow Door Energy.
“The distributed energy industry is going to continue to grow as rapidly as it has for the last five years. Looking forward, we see the potential for several billion dollars’ worth of investments in the region’s distributed energy sub-sector.
“In the next five years, we see the energy market evolving significantly. It is now possible that as the need for energy increases, the new demand can be satisfied locally for those businesses without the need for great growth or great expansion. Distributed energy will be able to complement grid infrastructure through storage, demand management, or through dispatch commands.”
For Crane, an energy enthusiast with more than 20 years of global experience within the utility industry, there is even more reason to be optimistic about the future of distributed energy. Yellow Door Energy, the company he co-founded with Adenium Energy Capital in 2015 to fill existing energy gaps in the Middle Eastern solar market, is headed for greater expansion after securing $65mn funding from global investors early this year.
In an interview with Utilities Middle East last month, Crane says that this is one of the largest raises in record for a Middle Eastern solar company, and the second largest venture funding in the region in 2019.
The investors include the International Finance Corporation (IFC), Arab Petroleum Investments Corporation (APICORP), Japanese investment and trading firm Mitsui, Norway’s corporate venture fund Equinor Energy Ventures, and Adenium Energy Capital - a Dubai-based investment company focused on renewable energy.
While the company itself is upbeat about its own business expansion, the new round of funding is a vote of confidence for a sub-sector that has until recently attracted impervious responses from financial institutions.
Since its formation four years ago, Yellow Door Energy has succeeded in bridging the huge divide that existed between mega-utility solar projects and commercial-scale solar projects through its solar leases, also known as solar power purchase agreements (PPAs). With a solar lease, commercial and industrial companies can improve the efficiencies of their businesses and reduce their carbon emissions, all without any capital expense.
With 56 megawatts (MW) installed and under construction, and an additional 40 MW signed, Yellow Door Energy has already positioned itself as the leader in the solar equipment market in the United Arab Emirates (UAE) and Jordan.
The company is now actively pursuing opportunities for distributed solar energy across the region from Pakistan, through the Middle East to Egypt.
“This equity is going to provide the growth capital that we need to expand our operations in the Middle East, Africa, and South Asia,” says Crane, adding that Yellow Door Energy aims to build 300 MW of solar in the next two years.
“The most attractive new markets for us right now are Pakistan and Egypt. The two countries have faced different economic challenges recently. In Pakistan, there is a strong need for growth in energy supply, they have limited conventional resources since they are a large importer of oil and gas.
“By providing clean energy to businesses in Pakistan, we are able to make them more competitive, we are able to reduce the government’s reliance on foreign imports of conventional fuels, both very positive for the economy of the country.”
Crane says that the sheer size of the Pakistani market is a massive growth opportunity for Yellow Door Energy. But while he is excited, he is also cognisant of the existing challenges in the country since solar PPAs for commercial and industrial establishments is a relatively new concept.
With the cost of power in Egypt going up by about 20% every year along with the rising cost of fuel, the motivation for solar has increased. Businesses are realising the need to lower their increasing overheads from the rising costs of energy.
“Egypt is a very dynamic market right now, I think they have come through some big changes and certainly from a macroeconomic perspective, things are stabilising. We are launching in Egypt and are working with several customers to build our first projects,” says Crane.
Currently, renewable energy meets only 3% of Egypt’s energy needs, but the North African country targets to cover 20% of its energy needs from renewables by 2022 and up to 40% by 2035. In 2014, the country announced a target of developing 4.3 GW of solar and wind projects, but contract disputes led several investors to pull out.
Last year, Yellow Door Energy successfully commissioned a 3.96 MW build-own-operate-transfer (BOOT) solar wheeling project in Jordan, which will provide Specialty Hospital and Istiklal Mall with clean renewable energy.
In May, Yellow Door Energy signed a 17 MW BOOT solar wheeling agreement with Majid Al Futtaim to provide Carrefour stores located in Jordan’s Amman, Zarqa, Madaba and Al-Salt with 29 gigawatt-hours of clean energy in the first year of operation, meeting 100% of the retailer’s electricity needs in those areas.
The solar developer is looking to invest over $70mn this year in Jordan, where renewable energy is expected to contribute more than 20% of the Kingdom’s total energy mix in 2020.
In the UAE, Yellow Door Energy is providing solar leases for Al Nabooda Automobiles and for Nestlé Middle East, among many others. The firm also has several projects that will be started in the near future.
“We are committed to investing in the UAE and expect to invest $20 million in 2019,” says Crane.
In Dubai, the company installs solar systems under the Shams Dubai initiative introduced by DEWA in 2015, which allows participants to sell any excess power generated through solar panels back to the grid.
Within the GCC, Yellow Door Energy will be looking at expanding in the next six months to one year, with Bahrain, Oman, and Saudi Arabia all identified as potential markets that will be economically viable for the company’s business model.
“Our ideal customer is somebody who has a long-term growth strategy to be here, and we want to support their businesses to grow in a more economic and sustainable manner,” says Crane.
“We see ourselves as a partner for our customers’ growth, supplying one of the fundamental needs of any business, energy. By providing energy in a less expensive, more environmentally sound way, we are able to help our customers realize economic benefits and demonstrate sustainability leadership to their employees, customers, investors and other stakeholders.”
While net metering schemes such as Shams Dubai and Oman’s Sahim1 and Sahim2 are beginning to register success with the residential market, Yellow Door Energy will maintain its focus on the commercial and industrial segment.
“Residential deployment of solar would not be economically viable for our business at this point.” says Crane. “Typically, residences pay less for power than commercial businesses, so there is less motivation to change.”
Crane says that many residential households also have a shorter term vision due to the transient nature of most of the expatriate population in the UAE. With the new long-term visa options, this may change.
“This is obviously different when it comes to the citizens, and as you probably know, there is a strong push for Emiratis to put solar panels on the rooftop and we fully support that. We don’t see the lease model working for that again because they are small projects which the citizens will likely prefer to fund themselves.” says Crane.
Crane is immensely proud of his team and what his company has accomplished within a very short period. He attributes the company’s success to its unique value proposition in a market that is already saturated with nearly a dozen competitors.
“Our value proposition to customers is that they can save 30-40% or even 50% on their power bills with no capital investment while generating clean renewable energy,” says Crane.
“We install the right solution for them where we provide the capital and then we get compensated over a long-term lease. The lease payments for the customer are less than what they would pay for grid-connected power or whatever the alternatives might be. It’s a win-win solution for all parties.
“In this market segment there are people who also just build the projects, there are people who just sell the equipment. Yellow Door Energy is the solution provider that brings everything together. We have the capital, and we have the best equipment and the best contractors to build, execute and deliver.
“I think of one of the differentiating factors for Yellow Door Energy is that we stand behind what we install for the term of the contract…ten, fifteen, twenty years,…we are guaranteeing the amount of energy that will be produced. We are guaranteeing to replace anything that breaks. We are also guaranteeing that the customer is getting the best product today and that we will continue to improve the system if there are options to do so in the future.”
In the UAE, Yellow Door Energy generally leases its equipment for 15 to 20 years. In Jordan, the leasing periods are typically a little bit shorter, with the duration of the leases driven normally by the customer.
People looking for the largest immediate savings go for the longest term. But those that are more concerned about owning the assets and taking over the equipment at the end of the lease will be looking for a shorter term and will pay more on their annual lease payments. All contracts by the company include maintenance, spare parts, and at the end of the lease term, customers have fully functioning systems.
However, not every start-up in this line of business has been able to take off at the same pace as Yellow Door Energy has, due to structural bottlenecks that stifle growth for the region’s distributed energy market.
While market awareness is gradually improving, hurdles still exist in securing funding. Industry players often accuse financial institutions in the region for their indifference towards the distributed energy sub-sector, and for not showing a keen interest to try and understand the market. This has made access to finance, especially for start-ups, almost impossible.
“Funding challenges in distributed energy absolutely exist today. In certain regional markets where there is more experience, I would point to Jordan, where banks are familiar and comfortable with lending towards distributed generation,” says Crane.
“But in most of the rest this region, lending is limited. And it is driven by two reasons, one is simply a lack of opportunity and experience from the banks but also a legitimate recognition that there are new commercial risks in the sector.”
“One of the challenges that banks see day-to-day is that it can be a lot of work to understand this new product line that they are looking to service, and to justify that work, there needs to be scale,” Crane points out. “The typical feedback we have from banks is that they are not interested in looking at 1MW or 2MW projects. And frankly, far from our perspective, the costs of securing a $1mn or $2mn loan with the bank is too high.
“A second challenge is duration of the leases. Developers like ourselves are contracting 15 to 20-year contracts with commercial entities. When you compare that to most loans in the commercial space, those are much longer and the banks have to rely on us to do the proper credit processes and the proper diligence in contracting to put the right structure in place.
“Many developers who are new to the space might not understand credit processes and bankable PPA type of contracts. So, I understand and I sympathise with many lenders that they don’t have the experience and they do see challenges in some development portfolios.
“The best advice I would give to anybody who is seeking funding from banks on the other side is to talk about portfolios. They should look at aggregating multiple projects together in bundles of 20MW or 50MW, and on that scale, it starts making sense to do long term project financing.”
Yellow Door Energy’s top executive says that his firm has been fortunate to work with more advanced banks, with lenders in Jordan and is now looking at UAE.
Crane also shares his immense pride for the Yellow Door Energy team and emphasizes their contribution to the company’s rapid success. “Our team members are an international group of experts who work together as a family with a vision for building a better world. We strive day in day out to provide a very modern working environment for our team. We have been fortunate to attract the top talent and I think that’s part of the benefit of being in Dubai. To-date, we have been able to welcome 20 different nationalities to our company, and this has been achieved mostly through local recruiting. We do believe that there is a lot of talent here in this market and that’s why we are excited to be headquartered here and servicing the region from here,” says Crane.
As Yellow Door Energy embarks on a long path for growth, it keeps abreast of technological advances such as energy storage, hybrid systems, and improving thin-film solar technology.
Still, with all said and done, a mindset shift is needed to further boost the uptake of distributed solar energy in the Middle East. Technology, awareness programmes and a regulatory framework are already in place, and these will have a big influence on future access to credit.
For the 42-year-old CEO of Yellow Door Energy, this is just the beginning. From a little known start-up four years ago, to a leading distributed energy player in the Middle East, Crane feels more energised now to prevail over any challenges and open more doors for Yellow Door Energy.