Saudi Arabia: Saudi Arabia Seeking 54 Gigawatts Of Renewable Power

The Opportunity

The Kingdom of Saudi Arabia is now soliciting comments on its recently unveiled draft plan to tap the sun and other renewables as major domestic energy sources. The Kingdom aims to procure up to 54 gigawatts (GW) of renewable energy by 2032, as part of a program to reduce domestic oil use and diversify its economy. The King Abdullah City for Atomic and Renewable Energy (K.A.CARE), a state-run entity created to implement the Kingdom's energy diversification goals, will develop and initially run the program. K.A.CARE will ultimately hand off the administration of the procurement process to a stand-alone government-guaranteed entity called the Sustainable Energy Procurement Company (SEPC), which will purchase the electricity.

Solar will account for the vast majority of projects. The goal is to have installed 25 GW of solar thermal, 16 GW of photovoltaics (PV), and an aggregate 9 GW of wind, geothermal and waste to-energy projects in the next 20 years. Hybrid projects with natural gas or oil-fired components may be included in later phases.

In a white paper issued on February 25, 2013 (available here: http://www.kacare.gov.sa/cpp/downloads) , K.A.CARE outlined a draft structure for the competitive procurement process, along with standard terms of the deals to be offered. Stakeholders are invited to comment on the white paper by April 5, 2013. The plan's final implementation is still subject to the Saudi Arabian Council of Ministers' formal financial empowerment of K.A.CARE, expected to be given in tandem with the program's official launch in the second quarter of 2013.

Why Renewables; Why Now?

Saudi Arabia is still the largest global exporter of crude oil, but growing domestic consumption at subsidized prices, especially for electricity and desalinated water, is speeding depletion of the country's reserves and burning billions of potential export dollars. The country consumes roughly one quarter of the oil it produces1. A 2011 report by England's Chatham House projected that, given domestic consumption rates, on a business-as-usual trajectory, Saudi Arabia would become a net importer of oil at 20382. A September 2012 report by Citigroup projected that if demand continued to grow at 8% a year, as peak power demand has been growing, the same could occur as early as 20303. With high current unemployment and heavy dependence on the oil industry for jobs and government revenues, the Kingdom is keen to chart an energy and economic transition, with an eye to preserving wealth and social stability.

Basics of the Renewable Energy Procurement Process

Developers will be invited to submit tender offers for standard, "non-negotiable" 20-year renewable power purchase agreements (PPAs), in successive competitive bidding rounds. After the first three bidding rounds, Saudi Arabia will consider whether to introduce a feed-in tariff in order to help scale up the program. The offtaker will always be the SEPC. In the first five years, the Kingdom aims to contract 5-7 GW of capacity, ramping up from there. Proposals will first be screened for compliance with local laws and other mandatory requirements. The prices of qualifying bids within technology groups will then be compared as part of a comprehensive evaluation of each project. Bidders who promise to spend more on local products, training, and research and development can gain points in the evaluation process, which justify awarding them a premium PPA price.

Localization is one of the key programmatic goals of K.A.CARE's mission, as the Saudis are not merely looking for the electricity generated by clean energy projects – they are looking to build a clean energy industry, given the magnitude of the program. Projects that garner high marks for (i) strong financial capability, (ii) deep developer experience and (iii) advanced project status (e.g. existing long-term data on the energy resource, and having obtained necessary licenses and permits) will also receive points that could allow them to win contracts at a premium.

Timing and How to Qualify

The introductory bidding round is set to open in the Spring of 2013. That round will offer five to seven "pre-packaged" sites close to existing transmission, for a total additional capacity of 500-800 MW. Winners are expected to be announced within nine to twelve months. The first full round will then be launched in 2014, to procure 2,000-3,000 MW, followed by the second full round, to procure an additional 3,000-4,000 MW. Eligible technologies will be solar thermal, PV, wind, geothermal and waste-to-energy (no hybrid projects will be allowed at first).

The bidding entity must be organized and existing under Saudi law, or in the process of registering to be so organized. In the introductory round, K.A.CARE will focus on the financial capability and experience of bidders in its initial screening process.

  • Financial Capability: Bidders must have either an investment grade credit rating or a two year record of (i) a tangible net worth of 400,000 Saudi Riyals (SR) per MW of capacity of the proposed project or (ii) net income of SR 200,000 per MW of installed capacity as shown on audited financial statements. For externally financed projects, K.A.CARE will review the firmness of commitments and the financial strength of the proposed investors.
  • Experience: Each bidder, or at least three members of its team, must have planned and developed, constructed or operated at least one renewable energy facility of similar size and technology as the proposed project. Bidders will also be evaluated based on relevant experience operating in Saudi Arabia.

Other Key Deal Points

  • Minimum Project Size: Nameplate capacity must be at least five MW, including smaller aggregated projects with a single common metering point. All output from a project must be contracted in the PPA.
  • Site Control: Except for the pre-packaged sites controlled by K.A.CARE or SEPC that are to be offered in the introductory round, bidders must include evidence in their proposals that they will be able to control the site – at the minimum, they must hold an option to purchase, lease, license or otherwise use the land for the project.
  • Collection of Resource Data: K.A.CARE has partnered with the United States National Renewable Energy Laboratory and Battelle to begin to map Saudi Arabia's renewable resources, and is already gathering data at the "pre-packaged" sites to be used in the introductory round. After that, developers will be required to collect and submit their own resource data.
  • Commercial Operations Deadline: Prior to commercial operations, SEPC will monitor the project's progress on development milestones including securing site control, completing resource studies, beginning construction, achieving financial close, and completing interconnection. Each project must achieve commercial operations within two years of the execution of its PPA. If it fails to meet that deadline, the term of its PPA will be shortened by three days for each day past the scheduled date. If a project fails to reach commercial operations within two years and six months from the date of execution of the PPA, the PPA may be cancelled and the developer's performance security will be forfeited.
  • Transmission Costs: Any incremental transmission costs necessary to interconnect a project will be expected to be recovered primarily through the contract price.
  • Bid Irrevocability and Security: A bid will be binding and irrevocable for a period of 180 days after its submission, while the project is being evaluated. Security must be posted with each bid in the amount of SR 37,500 per MW (capped at SR 3,750,000) in the form of a certified check, bond or letter of credit. Security will be returned to bidders who do not win PPAs. For winning bidders, upon commercial operations, half of the performance security will be returned to the developer, and the rest is to be returned in amounts of SR 18,750 every five years. Extended outages can serve as the basis of a draw on performance security.
  • PPA Counterparty and Legal Framework: PPAs will be between the project company and the SEPC, with an endorsement from SEPC's government guarantor. PPAs are expected to be governed by Saudi Arabian law, with an internalized dispute resolution process. The terms of the form PPA will be non-negotiable.
  • PPA Price and Payment: Bids must include a single PPA price value — an incomplete price or any qualifications will not be accepted. Payments to developers under the PPAs will be monthly, in Saudi Riyals, but indexed to the exchange rate with US dollars.
  • Limits on Individual Market Share: To encourage diversity of participants, developers will be limited to a certain percentage of overall capacity within their technology group in any given round.
  • Sponsors' Financials: Any equity investor providing at least 20% of equity in a project must either have an investment grade credit rating, or a two year record of (i) a tangible net worth of at least 10% of the total project cost or (ii) a net income of no less than 5% of the total project cost.
  • Local Content and Job-Creation Requirements:
    • Beginning in the introductory round, developers must include a plan to train locals in each bid.
    • K.A.CARE will fund its own local training programs in part with a 1% surcharge on gross revenues from each contract winner.
    • Developers must model projected local expenses (these will be defined as goods and services purchased from a permanent establishment in Saudi Arabia) in their bids and, if they fail to meet those projections, they will be liable for liquidated damages in an amount equal to the difference between the projected "allowable local expense", and the actual "allowable local expense" achieved. LDs will be taken out of the security posted under the PPA.
    • K.A.CARE has also proposed to mete out financial penalties to contracted projects that fall into the bottom 20% of local expenditures within their technology class in any given year. Operators in the top five percent of their technology class for job localization will receive bonuses.
    • After the first two years of operation, all projects must submit a job localization plan annually.
    • Mandatory local content minimums are to be required after the introductory round, at a percentage of project costs that K.A.CARE and SEPC deem "technically and economically feasible" when the RFP in question is issued. These minimums are planned to escalate over time.
    • Additional points for high levels of local content will be given within product and service categories using differentiated scoring, which is intended to concentrate incentives for proponents to use particular Saudi goods and services that may not currently exist, or which the government would like to develop. For example, points may be given for each riyal spent on complex manufactured goods made locally such as PV wafers and inverters, while the same amount of money spent on local balance of plant maintenance may only garner a quarter of the points.
    • Only goods or services purchased from a permanent establishment located in the Kingdom will receive credit toward "allowable local expense".
  • Special Projects: K.A.CARE may also elect to pursue special strategic projects with entities offering solutions with extremely high correlation to its local content and capital development mandates, but only if such projects are of a type not already covered within the announced procurement framework, and are competitively priced.

In December 2012 the World Trade Organization (WTO) ruled that local content requirements in Ontario's feed-in tariff for renewable energy violated the General Agreement on Tariffs and Trade 1994 (GATT) and the Trade-Related Investment Measures Agreement, by according less favorable treatment to imported equipment than that accorded to domestic equipment4. While that decision is being appealed, countries including the United States have launched complaints against other enactors of local content requirements. As a WTO member state, Saudi Arabia's local content requirements could be subject to WTO review.

Next Steps

On April 23rd and 24th, K.A.CARE will hold a symposium to present its renewable procurement program and introduce local companies and other stakeholders to international players. More information on the symposium is available here: http://www.saudisustainablesymposium.com/. Interested parties can register through the website.

Footnotes

1. Glada Lahn and Paul Stevens, Burning Oil to Keep Cool: The Hidden Energy Crisis in Saudi Arabia, Chatham House, December 2011, at 2.

2. Id, at 2.

3. Ayesha Daya and Dana El Baltaji, Saudi Arabia May Become Oil Importer by 2030, Citigroup Says, Bloomberg.com (September 4, 2012, 5:15 AM), http://www.bloomberg.com/news/2012-09-04/saudi-arabia-may-become-oil-importer-by-2030-citigroup-says-1-.html .

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