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Sun 12 Mar 2017 03:32 PM

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Natural solution: Saudi's renewed plans meet growing energy demands

Saudi Arabia has long toyed with the renewable energy sector, announcing ambitious plans to develop wind and solar projects, without any success to date. Recent new measures, however, have given hope that the kingdom is finally ready to embrace the sector and harness its climatic advantage.

Natural solution: Saudi's renewed plans meet growing energy demands
The kingdom was targeting 9.5GW of renewable energy by 2023.

When it comes to renewable energy in Saudi Arabia, there still remains more than a hint of scepticism.

Multi-billion dollar plans have come and gone and the kingdom has made little progress developing renewable energy capabilities to harness its advantageous climatic conditions.

In 2010, the King Abdullah Centre for Atomic and Renewable Energy (KA-Care) was established to develop the country’s renewable and nuclear capabilities, as the country looked to generate more income from oil, instead of using it for power generation.

Following a number of studies, the world's top oil exporter said in 2012 it would install 17 gigawatts (GW) of nuclear power by 2032 as well as around 41GW of solar capacity.

Currently it has no nuclear power, but has managed to develop some solar capability, albeit on a much smaller scale, including the 500 kilowatt (kW) pilot solar power plant on Farasan Island in the Red Sea, which opened in 2011.

Makio Yamada, a researcher specialising in the political economy and international relations in the Gulf Cooperation Council (GCC), wrote a paper last year entitled ‘Vision 2030 and the Birth of Saudi Solar Energy’ for the Middle East Institute in Washington.

He surmised that the growth of Saudi Arabia’s renewable industry has previously been hindered by “institutional ambiguity and fragmentation”. But the Saudi 2030 Vision, the economic reform plan launched last year to diversify the economy beyond oil, gives some hope.

The newly created super-ministry of Energy, Industry, and Mineral Resources, headed by Khalid Al Falih, who is also the chairman of the state oil giant Aramco, has paved the way for solar energy’s long-awaited rise in the kingdom.

The renewable plans were significantly accelerated in January when Al Falih announced that Saudi Arabia would unveil a renewable energy programme that would require investment of between $30bn and $50bn by 2030.

The first details of the programme were finally announced late last month when the minister said the kingdom was targeting 9.5GW of renewable energy by 2023.

Shams 1, on the outskirts of Abu Dhabi, is the largest concentrated solar power (CSP) plant in the world.

The first phase will see the development of a 300 megawatt (MW) solar photovoltaic (PV) plant in Sakaka, the  capital of Al Jouf Province in the north, and a 400MW wind project in Midyan in the northwest. The projects will be backed by 25-year power purchase agreements (PPAs) for solar PV and 20-year PPAs for wind energy. The ministry has invited investors to submit requests to qualify for the first round.

The energy ministry has also created The Renewable Energy Project Development Office (REPDO) to oversee the deployment of clean energy, in a sign momentum to see real development in renewables is finally gathering pace.

Al Falih made the announcement at the recent Abu Dhabi Sustainability Week, which was hosted by Masdar.

Bader Al Lamki, Masdar’s executive director for clean energy, says the event focused on the emerging renewable markets of India and Saudi Arabia and it was therefore no surprise that the Saudi minister announced the kingdom’s plans in the UAE capital, where renewables have been on the agenda for 10 years.

Masdar, a pioneer in the Middle East for developing and adapting various renewable technology, has 2.7GW of renewables around the world in its portfolio.

“We had a number of working sessions with them, primarily to understand their aspiration, their vision and their plans in this regard,” Al Lamki reveals.

“The conversation that we had developed broader in nature, in terms of where we can share with them our experience and how Abu Dhabi has approached this sector, in a holistic manner, looking at education through Masdar Institute, looking at research and development, but also looking at the energy in its two pillars — generation, where renewables are concerned, and also efficiency, which is where Masdar City is concerned.”

Al Lamki says Masdar, a subsidiary of Abu Dhabi-owned Mubadala, will submit bids for both Saudi projects.

“We are eager to participate in the tenders,” Al Lamki says.

Abu Dhabi is the leader in renewable energy development in the Middle East.

“They have issued expressions of interest to the market for the first batch of their vision — 700MW, split into 300MW photo-voltaic, and 400MW wind. We are in the process of preparing our statement for pre-qualification and we will pursue that as the programme unfolds.”

Saudi Arabia’s previous large scale targets were hard to progress, and so Gus Schellekens, partner in EY’s MENA clean energy and sustainability services team, says it is encouraging to see that the plans have been “refined and scaled down to more manageable sizes”.

“The fundamentals for the industry to take off [in Saudi Arabia] are there and everybody can see that this needs to happen,” he says.

“The question now is how it's going to be taken forward; how the capacity is procured [and] managed; how the installation goes; what the international arbitration rights are like; and whether the bills get paid.”

The kingdom’s construction sector, in particular, suffered with delayed payments as low oil prices prompted governments to conserve cashflow. Saudi Arabia paid in excess of $26bn in November and December last year, according to statements by officials and central bank data. While the situation is expected to ease this year, according to credit insurer Coface, it is these kind of “practical concerns that the international players will have”, according to Schellekens.

“Whether or not they get involved will also come down to their appetite for country risk, operational risk and cost of financing projects,” he says.

“What we have previously seen in some other countries, for example, where the commitments or requirements are too onerous, is that a number of the key players will decide that it’s not within their risk or investment profile and they decide that they will pass.”

Ahmed Nada, First Solar vice-president and regional executive for the Middle East, says the strategy will be to attract foreign investors to the country, and also to encourage local participation.

“The programme is not designed to attract small players or those who are not capable of raising serious funds; it’s a model that requires certain development skills and abilities, including being able to raise the right equity and financing from local or international sources,” he says.

“At this pre-qualification stage, I believe it’s designed to attract the strong players, whether they are local in partnership with international developers, or those who are purely international developers with the total expertise.”

Al Falih is a veteran of the energy industry.

While the investment upfront is significant, as is the case with most renewable projects, the lower operational costs over the lifetime of the project will give investors an opportunity to recoup the outlay.

“As a result, the risk-reward profile for investors can be different to other conventional projects,” says Schellekens.

“There’s a big risk for initial investors because they have to put almost all of their money down up front and they only get paid back over time. One way the finance sector addresses this is by adding risk premiums to the cost of capital to cover the investment made. The more comfortable they are, the less of a premium asked, and the less the whole programme costs and the faster the outcomes are likely to be achieved.”

He says there is an opportunity for the Saudi government to make this programme as risk-free and as open and transparent as possible.

“This will create broader momentum, because by automatically driving down the costs, more domestic and international investors will get involved, and the larger sums of money being committed will allow the creation of the supporting industrial infrastructure, in terms of manufacturing, assembly, construction, operation and maintenance,” he says.

Schellekens cites the examples of Morocco and South Africa, where international and domestic companies were able to achieve very low prices per kilowatt because large domestic operations were set up.

“Local partners were very tightly embraced as part of the project structure, and that brought about 30 to 40 [percent], sometimes 50 percent, savings in certain areas of project development and delivery,” he says.

Masdar, as one of those who will submit a bid for the projects, says the business case for renewables in general “is quite solid”.

“The cost of generating electricity from renewable sources is quite competitive now, and has reached parity in many places. In this region, we take pride that in 2016 we submitted the lowest tariff in this industry - 2.9 cents per kilowatt hour for the DEWA tender for 800MW. That's already competitive and cost-effective to the alternatives,” Al Lamki says.

“The renewables as an emerging sector will have a positive ripple effect in terms of diversification of the economy [and] creation of new jobs. The kingdom is also known to be an industrial hub for many sectors and I think this ingredient that the renewables represent will bring value to the kingdom. We are very excited about their pursuit in this sector.”

Saudi Arabia’s electricity demand is projected to double by 2030, according to Business Monitor Intelligence (BMI).

While the momentum is strong, particularly following the minister’s announcements, Schellekens says a more general challenge remains around taking forward the renewable energy agenda.

“How do you operationalise the procurement and roll out of renewable energy? Because it’s being done in a country that has been defined by oil and gas for decades,” he says.

“The current infrastructure and everything else has been set up to support this focus [on oil and gas]. Now you need to make room and support a new industry that will require a different focus by industry, government and the finance community.”

Schellekens says, ultimately, the success of renewables in Saudi Arabia will be built around the core reason that it makes economic sense for the kingdom, just as it has for Dubai and Abu Dhabi.

“By producing electricity using sustainable resources, it saves the government consuming oil for domestic purposes that it could sell to the outside world,” he says.

“So you’re expanding the amount of revenue that you can achieve from your domestic resources. At current international price levels, solar and wind are also cheaper than many conventional options.”

Dubai and Abu Dhabi have led the way in terms of making solar energy, in particular, competitive when it comes to pricing. However, being able to achieve that lower rate depends on a number of key factors.

“Nobody has executed a large project in Saudi Arabia yet, so many will have different views on whether it’s going to be higher or lower than the rest of the Gulf,” Nada says.

“A very important part of the equation on the tariff value is financing,” he adds.

The cost of funding from financiers and lenders will have a significant bearing on where the tariffs are set.

“International funding is based on certain dynamics in the US or Europe, which could change the cost of funding globally and this will definitely reflect on Saudi Arabia,” he says.

“It’s the timing and the worldwide situation that can impose that, plus of course how the international developers in particular will look at the creditworthiness of the offtakers and to which extent they will be happy with the lower returns on investment. All of that will determine whether we see higher or lower prices.”

In addition to the planned projects under the renewables plan, Nada says he would like to see legislation introduced to encourage private solar projects.

“Saudi has very large industrial cities and is looking at adding more and more cities as part of the Vision 2030 programme. Broadly, it’s time for Saudi Arabia, maybe one year from now to also launch guidelines or incentives or regulations that certain industries in particular should start to have 20 to 30 percent, or even 10 percent, of their energy renewable,” he says.

“I think the Saudis should also look at issuing legislation to allow for what we call ‘wheeling’. While respecting that SEC [Saudi Electricity Company] is the national distributor of energy across the kingdom and the owner of the distribution, captive power generation should be allowed in Saudi Arabia.

"If someone can build a power plant 100km away in the desert to supply a particular farm or factory, for example, by using the network of distribution and transmission lines of SEC, that should also be allowed and make it part of the programme, which will boost renewable energy.”

The global renewables industry will be closing monitoring Saudi Arabia's first round of project tenders. Thus, they may do more than supply energy to homes and business but potentially energise an entire new sector.

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