Saudi Arabia's power sector reforms spur faster solar growth outlooks

Progressive regulatory frameworks and rising banking interest could see Saudi Arabia surpass its renewable energy targets faster than expected and future tenders should evolve to support smaller market entrants, leading industry participants said at the MENA New Energy 2017 conference on April 25.

Saudi Arabia's National Renewable Energy Program (NREP) sets a target of 9.5 GW of renewable energy capacity by 2023 as the country looks to diversify away from hydrocarbon resources.

The Middle East kingdom is restructuring its power sector as part of its Vision 2030 plan to diversify its economy. Saudi Arabia hopes to attract up to $50 billion of investments in solar and wind projects and new development frameworks are boosting investor confidence after years of stunted growth.

Around 3.5 GW of new renewable capacity is expected online by 2020 and Saudi Arabia launched the first round of its NREP on April 17, inviting bids for the 300 MW Sakaka Solar PV independent power plant project in Al Jouf province and 400 MW of wind power in Tabuk province. Round 2 of the NREP will see a further 620 MW of PV and 400 MW of wind capacity tendered in the fourth quarter 2017.

Saudi Arabia's energy ministry has created the Renewable Energy Project Development Office (REPDO) to oversee the development of renewable energy projects. The REPDO reports to a committee of representatives from renewable energy departments, electricity regulator ECRA, Saudi Aramco and Saudi Electricity Company (SEC), and developers hope the new structure will streamline decision-making.

Under Saudi Arabia's tender criteria, the bidder will own 100% of the project company, making Saudi Arabia the first Middle East country to not invest directly in its first solar projects.

"This government is stepping back from this and saying we are creating the ecosystem and environment for this industry to take off...this is true for the whole [Vison 2030] transformation plan in Saudi Arabia," Browning Rockwell, Founder of the Saudi Arabia Solar Industry Association (SASIA), told the conference in Dubai.

"It opens up a lot of opportunities that didn't exist in the past, a lot of transparency in business," he said.

International companies have praised a pragmatic tender process which saw around 27 companies prequalify for the Sakaka PV project. Offtake contracts will be backed by state-owned authorities which will also allocate grid interconnection and land lease agreements.

This supportive development framework should enable Saudi Arabia to surpass its 9.5 GW target well ahead of schedule, Imtiaz Mahtab, Managing Director MEA and APAC regions at SkyPower Global, said.

"I think they will achieve it in [around] five years, based on all the experience that we have. Once they have 1 or 2 GW in place I think Saudi Arabia will move towards more inclusiveness and larger scope," he said.

Growth platform

Falling technology costs, low oil prices and ambitious climate change objectives have led to a surge in renewable energy capacity in the Middle East and North Africa (MENA).

Around 4 GW of PV capacity is currently under development in the MENA region, according to an annual report from the Middle East Solar Industry Association (MESIA) published in February.

The pipeline of projects includes 1.2 GW of capacity in Dubai, United Arab Emirates (UAE) and some 1.5 GW in Egypt following the award of the Feed-in Tariff (FIT) Round 2 projects, MESIA said.

                            MENA PV project pipeline (February 2017)

Source: MESIA

Saudi Arabia’s REPDO predicts the kingdom will build around 5.5 GW of utility scale PV by 2023.

In order to create a domestic solar industry, local content rules require at least 30% of project funds to be invested in Saudi Arabian employees or companies.

The provisional timeline will see proximally 1 GW of new capacity built per year and this steady growth will help support private sector investments in local manufacturing and engineering procurement contractor (EPC) assets, Mahtab told the conference.

"That gives them visibility as to what financial return they can expect within the framework," he said.

The financial criteria set out in the first tender round is expected to see larger companies with stronger balance sheets lead the development process and subsequent tender criteria must ensure smaller renewable energy firms can compete for projects, Mahtab said.

"That's something we hope will evolve...We want this to be more inclusive to all if Saudi Arabia really wants to create a real industry," he said.

In order to participate, smaller developers should look to partner with local EPC companies, firms setting up local manufacturing bases, and larger firms which have developed relationships with local banks, Mahtab said.

Saudi Arabia plans to create a “principal buyer” company as part of its power sector restructure, which will act as offtaker for all conventional and renewable power projects.

Offtake contracts are expected to be guaranteed by SEC or other Saudi government administrations and this will support the bankability of projects.

Investor interest

REPDO expects the solar projects to use limited or non-recourse debt financing and Saudi Arabian banks have shown significant interest in the new projects, the speakers said.

There is sufficient banking liquidity in Saudi Arabia to supply the projects, and the technology has now been proven on a regional and global scale, Mario Salameh, Partner, Project & Infrastructure Finance at PwC, said.

"My expectation is there will be a lot of interest from the banks," he said.

Rising confidence in PV technology was underlined last year when the Dubai Electricity and Water Authority (DEWA) agreed a record-low price of $29.9/MWh for its 800 MW DEWA III project.

The Saudi government's cross-departmental support for the NREP has also boosted banking credibility, Salameh noted.

Amaan Lafeyette, CEO of Nesma Renewables, confirmed his company has received calls from local banks looking to invest in renewable energy projects.

"That's a really positive sign...they want to participate and are looking at this sector as a real place to invest," he said.

Saudi banking support will be key to renewable energy growth and activity should grow as banks get used to the tenor and leverage of the financing contracts, Tristan Higuero, Country Manager EMEA at Spanish developer Fotowatio Renewable Ventures (FRV), told attendees.

"They have to get comfortable also with the technology. This takes time, so there will be a ramp-up period," he said.

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