www.IFC.org/ThoughtLeadership Note 18 | September 2016 SEVEN SISTERS: ACCELERATING SOLAR POWER INVESTMENTS In the face of high and volatile fossil fuel prices the government of Jordan launched an aggressive national strategy to increase production of privately financed, commercial scale renewable energy. This pivot was initially met with skepticism from developers and financiers. Yet by aggregating seven small, individual solar power projects into a single, standardized financing structure—the Seven Sisters—the country was able spread costs, shorten timelines, and ultimately attract the necessary financing and developers to make the effort a reality. The Hashemite Republic of Jordan, dependent on fossil-fuel The 117 megawatt Tafilah wind farm became the first project imports to meet its energy needs, faced severe energy shortages under this new regime as well as the first privately financed, and rising costs due to disturbances related to the Egyptian commercial scale renewables project ever implemented in Jordan. political transition that began in 2011. This led to the long-term As such, Tafilah served as a model to further refine and optimize disruption of Jordan’s natural gas supply from Egypt, which had the new proposal process and regulatory regime. IFC served in provided cheap fuel for 80 percent of the country’s power multiple roles for the project, and through this process IFC and generation. The increased costs of expensive diesel substitutes led NEPCO strengthened their relationship, allowing them to engage to significant losses for the national distributor and single buyer, constructively to implement the regulatory and legal reforms NEPCO, as costs were not proportionally passed-through to end- necessary to ensure best practices and the overall bankability of user tariffs. the structure. Looking to reduce its dependence on imports, the government Following Tafilah, the government launched the wider renewable reinvigorated its renewable energy program to promote Jordan’s program, focusing first on solar photovoltaics. Such projects enormous solar and wind potential, ease budgetary pressure, and employ relatively simple technology and fast construction times help meet the expected 8 percent annual growth in energy and thus were fast-tracked in the first round and offered a fixed consumption. feed-in tariff basis set at an attractive 16.9 US cents per kilowatt hour to encourage participation. Twelve direct proposals totaling In the early 2000s the Jordanian government twice attempted to 201MW were eventually approved. Together, this amounted to pre-package and tender wind farm sites. Its well-regarded the largest solar photovoltaic initiative in the region at the time. independent power plant tender model, however, proved overly rigid and slow, and in 2010 the government shifted to a direct Many Small Projects proposal scheme. This allowed it to outline goals and basic From the outset, due to the projects’ many shared similarities and structure, while giving developers the freedom to choose sites, the complexity of negotiating so many proposals simultaneously, technology, and certain specifications. IFC encouraged the developers to act in unison through a local industry association. That way IFC could provide consistent, free The shift to direct proposals increased flexibility in identifying advice to all participants during the formative negotiations that and developing better suited sites using the most advanced eventually defined the final power purchase agreement and other technology. In turn, this reduced the government’s burden, supporting agreements with the government. allowing it to process projects more quickly. Freed to their own initiative, developers began to submit proposals for multiple wind In the context of project finance, the twelve projects were small, and solar projects across the country. generally ranging from 10 to 20MW installations. As a result, each would have struggled to bear the high transaction costs and For IFC to act as the coordinator and intermediary between the long timelines involved in finalizing such complex deals. five developers and the government and financiers, a high level of Financing would have been hard to attract and overly expensive, trust among the developers was necessary. That entailed common as lenders are typically less interested in such small ticket sizes. project documents, no-frills financing with each party receiving the same terms, and rapid timelines with a single window for Furthermore, the project sponsor groups represented various negotiations with financiers. Yet by adopting a one-size-fits-all, consortiums of local companies with firms from around the world fast-tracked structure, the Seven Sisters developers addressed that were either new to the industry or region, or otherwise lacked their most pressing challenge—reducing prohibitively high international project finance experience. This inexperience was individual transaction costs exacerbated by long timelines. It compounded by financier skepticism of the government’s allowed them to share costs and resources such as administrative commitment to renewables generally and to the twelve small overhead, legal fees, sector experts, and even site security. As a projects specifically, which together represented a small result, project costs were ultimately more proportionate to project proportion of Jordan’s generating capacity. size. Initially, project development proceeded haltingly as each By acting collectively, the group was also able to better negotiate developer dealt with these challenges. However, through its terms with external partners. IFC played an intermediary role relationships with all relevant parties—the government, NEPCO, between the developers and NEPCO, helping to standardize the the developers, and regional and international financiers —IFC language on common issues such as the construction of a new sub- developed a proposal to unify as many of the twelve similar station for the grouping of five plants in Ma’an and ensuring that projects that were willing under the umbrella of a common the power purchase agreements allowed for bankable projects and financing program, with IFC acting as the common mandated lead future syndication. arranger to simplify the process. Soliciting financing as a group secured more competitive terms The logic was straightforward even if the details were not: than any individual project could have achieved. Furthermore, if Aggregating the individual projects into one simplified, twelve projects had competed for funds, lenders could have standardized financing structure made the projects more attractive “cherry picked” the best and largest, while taking more time so in syndication, shared their common costs, leveraged efficiencies that all projects would have incurred higher costs. of scale, and strengthened their negotiating position. This innovative structure was well received, as seven of the twelve Easing Lenders’ Concerns projects developers agreed to buy in to the standardized structure, Lenders were also able to price for larger volumes and spread with each project getting equal terms and benefits. internal costs across a larger portfolio of assets. IFC’s imprimatur eased lenders’ concerns about the developers’ inexperience and The IFC proposal—affectionately dubbed the Seven Sisters— their lack of previous working relationships. In addition to financed seven projects in Round 1 with a total capacity of 102 financing, collective negotiation allowed the developers to MW in three locations across Jordan. That included five side-by- receive better pricing from their suppliers. side solar plants in Ma’an executed by different sponsor groups formed from across the globe. As mandated lead arranger, IFC ultimately provided $91.5 million in senior loans, sub-debt, and interest rate swaps while Seven Sisters Solar Projects successfully syndicating an additional $115 million from six Project Name Site MWp regional and developmental banks. Tenors were 17 years, seven years longer than available locally. Some of the projects’ Adenium 1 Ma'an 11.0 international developers insured their equity investments against Adenium 2 Ma'an 11.0 perceived political risks with political risk insurance from the Multilateral Investment Guarantee Agency. Adenium 3 Ma'an 11.0 Arabia One Ma'an 11.5 In line with the objectives of speed and simplicity, the projects were appraised, approved, syndicated, and signed within four Falcon Ma'an Ma'an 23.1 months of the mandate. All of the Seven Sisters projects entered Jordan Solar One Mafraq 24.0 into their power purchase agreements with NEPCO in March 2014, mandated IFC by May 2014, and completed finance by Shamsuna Aqaba 10.1 MWp refers to the solar power capacity at peak generation in direct current This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group. October 2014. Depending on size and location, the individual projects were commissioned between February and September 2016. As mentioned above, the Jordanian government’s several false starts created some initial skepticism about its commitment to aggressively develop its renewable energy sector through the launch of a direct proposal program. While Tafilah’s success under this model was indeed a turning point that set the stage for the launch of the program on a mass scale, it had also been a single project large enough to stand on its own merits and absorb the requisite time and development costs. A Seven Sisters photovoltaic solar power project in Jordan It took the successful, innovative implementation of the Seven Sisters projects, together with the other Round 1 photovoltaic competitive tariffs then offered, ranging from 6 to 7 US cents per projects, however, to put an end to such skepticism. This kilowatt-hour. Those tariffs were significantly below Jordan’s demonstration proved the commitment of both the Jordanian cheapest sources of power generation at the time. government and the financing community to the implementation of an industrial scale renewables program accessible to Round 2 has already seen the extension of the Seven Sisters developers of all size. standardized financing program to an eighth sister that, at 50MW, will be larger than its predecessors. It is evidence of the efficacy Jordan has already reaped the fruits of its efforts. In 2015, due to and benefits of standardized model, even as project sizes increase. the unprecedented investment demand for renewables generated from Round 1’s success, rather than offering a pre -determined The success of solar photovoltaic and project standardization in feed-in tariff, the government instead opted to tender the four Jordan’s Seven Sisters together demonstrate how renewables can planned 50MW Round 2 projects on a competitively bid tariff provide a sustainable and affordable energy supply for the region basis—thereby benefiting end consumers. going forward.  Not only did the government receive a record number of Jordan Pace, Research Assistant, Office of the Chief Economist – proposals, they were also priced with some of the most globally Thought Leadership (Jpace1@ifc.org). This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.