Saudi Arabia Launches Competitive Procurement Plan for 54 Gigawatts of Renewable Power by 2032
The Kingdom of Saudi Arabia started 2013 by taking the first steps towards achieving its ambitious goals to diversify its energy mix and dramatically increase renewable energy capacity to 54 gigawatts (GW) by 2032. By comparison, Saudi Arabia’s first solar plant, with a capacity of 3.5 MW, achieved COD in the beginning of 2013. The program, in which the Saudi Arabian government intends to invest $109 billion, comes from a desire to reduce both its carbon footprint and domestic use of its oil supplies.
On February 25, 2013, the government’s King Abdullah City for Atomic and Renewable Energy (K.A.CARE) published a white paper titled Proposed Competitive Procurement Process for the Renewable Energy Program. The white paper is available here.
The white paper details a proposed competitive procurement process (CPP) and PPA terms for seven GWs of renewable projects through three bidding rounds over the next five years. The winning projects will be awarded nonnegotiable, 20-year power purchase agreements to be administered by the government agency, Sustainable Energy Procurement Company (SEPC), as the offtaker under the PPAs. SEPC will then sell the energy to the Saudi Electric Company (SEC) at SEC’s avoided costs, and SEC will distribute the energy to the Saudi Arabian market.
The CPP set forth in the white paper is open for public comment until April 5, 2013, and is subject to final approval by the Saudi Arabian Council of Ministers.
Reaching 54 GW
K.A.CARE’s plan sets interim renewable energy targets to reach the ultimate goal of 54 GW by 2032. The plan targets 5.1 GW of added capacity by 2018 and 23,900 GW of added capacity by 2020, before reaching 54,100 GW of capacity by 2032. Solar PV, solar thermal, wind, geothermal and waste to energy are all eligible resources, and K.A.CARE may elect to include hybrid projects at any time after the introductory procurement round.
Solar projects are heavily favored in K.A.CARE’s plan. Of the 54 GW, 41 GW is allocated to solar projects (25 GW of solar thermal and 16 GW of solar PV) - enough energy to fuel one-third of Saudi households.
Five GW of renewable energy will be procured through three procurement rounds over the next five years.
The first round, referred to as the “Introductory Round,” will be the smallest, aiming for 500 to 800 MW of PPAs for prepackaged sites already vetted for resource availability and ease of grid connection by K.A.CARE. This Introductory Round is expected to begin in the first half of 2013 and last nine to 12 months.
The first “formal” round will begin after the PPAs are executed for the Introductory Round and will target 2,000 to 3,000 GW of capacity. The second formal round will target 3,000 to 4,000 GW of capacity. Each formal round will last approximately six to 10 months.
To ensure that winning projects are both cost-effective and viable, bids will be evaluated first by non-price factors and then by the bid PPA price through a four-stage process. The four stages are (1) completeness of bid application; (2) satisfaction of mandatory requirements (see below); (3) rating of financial strength, developer experience, development status and local content; and (4) PPA bid price. Each project must satisfy the requirements of the prior bidding stage before being considered in the next stage.
Mandatory Project Requirements
The white paper sets forth a number of requirements for eligible projects.
Threshold Financial Capability and Experience Requirements
As a threshold matter, in order to be eligible to participate in a procurement round, the developer must demonstrate that it has financial capability and experience developing renewable energy projects.
The financial capability test is satisfied is the developer has an investment grade rating, a proposed tangible net worth of at least Saudi Riyal (SR) 400,000 per MW of the anticipated project capacity or proposed net income of at least SR 200,000 per MW of the anticipated project capacity (each at the end of the last two fiscal years, supported by certified financial statements from an independent accounting firm).
The experience test is satisfied if at least three of the developer’s team members have planned and developed, constructed or operated at least one renewable project of a comparable size and using the same type of technology as the proposed project.
These preliminary thresholds are different from the ratings of financial strength and experience in the third stage of each procurement round. In the later stage, financial strength is demonstrated by the type of financing (internal v. external), the strength of the investor/lender and past experience financing similarly sized projects. While experience is based on the same factors as the preliminary threshold, higher points will be awarded for more experience. The projects receiving the highest points will have (1) firm equity and debt commitments; (2) equity providers with credit ratings of at least Aa3 or AA-, tangible net worth for the last two fiscal years of at least 50 percent of the proposed project costs or average net income for the last two fiscal years of at least 25 percent of the proposed project costs; (3) external lenders with credit ratings of at least Aa3 or AA-; (4) financing of a renewable project of at least 80 percent of the projected project costs within the last 24 months; and (5) a developer who has planned, developed, constructed and operated at least three similar projects.
Eligible projects must provide at least five MW of new nameplate capacity. Expansions and upgrades of existing projects are eligible so long as the expansion is at least 5 MW of nameplate capacity and uses a different meter than the existing project. Projects less than 5 MW can be aggregated so long as they share a metering point.
In an effort to promote developer diversity, the capacity of an eligible project must not be more than 30 percent of the total capacity for such procurement round. Projects by the same developer will be aggregated for the purposes of determining whether this cap has been reached.
K.A.CARE’s plan places a strong emphasis on the use of local resources in the project. Local expenses for the goods and services used in the engineering, construction and operation of each project will be calculated pursuant to a formula. Projects with the highest percentage of the total project costs comprising of local expenses will receive more points in the procurement process. Projects must have at least 20 percent of local expenses to receive any points in this category.
In addition, the PPA will require ongoing reporting of the use of local resources, including an annual job localization plan. Failure to maintain the level of local expenses in the developer’s RFP bid or falling within the bottom 20 percent of local expenditures within the applicable technology class (subject to safe harbor) will result in assessment of liquidated damages (deducted from the performance security discussed below).
In furtherance of local development, developers will be required to factor a surcharge into their bid PPA price equal to 2 percent of the project’s gross proceeds for a Sustainable Energy Research Fund and a local training project (1 percent for each). These amounts will be withheld directly from PPA payments.
Other conditions for eligible projects are (1) all of the project’s output must be delivered under the PPA, (2) commercial operation must occur no more than two years after execution of the PPA, (3) the project must be located entirely within Saudi Arabia, (4) the developer must be able to demonstrate site control (with at least an option to purchase or lease land), (5) a plan for obtaining all required permits, (6) resource adequacy data and (7) financial capability by major equity investors.
Key PPA Terms
Winning bidders will be required to execute a nonnegotiable, 20-year PPA in the form presented with the RFP for the applicable procurement round. Before the start of each round, qualified applicants will have the opportunity to provide comments on the form of PPA suggested for such round. The white paper summarizes the key terms of the PPA, the most significant of which are highlighted below.
Payments and Escalation
SEPC will pay for up to 105 percent of the contract capacity at the full bid price. The payments for energy generated in excess of 105 percent of the contract capacity will be equal to the “levelized cost of a simple cycle turbine.” While all payments will be made in Saudi Riyals, the contract price will be adjusted based on changes in the United States-Saudi Arabia pegged exchange rate.
Winning bidders will be required to post performance security through a certified check or bank draft, irrevocable standby letter of credit or bond. The proposed security amounts are SR 75,000 per MW of project capacity after PPA execution, increasing to SR 150,000 per MW of project capacity one year after PPA execution.
The developer will forfeit the performance security if COD is not achieved. Upon COD, 50 percent of the performance security is released to the developer, and the remaining 50 percent will be returned in pro rata portions every five years over the 20 year PPA term. The performance security will be used to pay liquidated damages in the event that the project fails to operate for certain time periods or the local content thresholds are not maintained.
Milestones and Liquidated Damages
The PPA will require typical milestone dates for site control, interconnection studies, financial closing, commencement of construction, grid connection and COD. However, these milestones are mainly for tracking development progress, and liquidated damages will be assessed only for failure to achieve COD by the milestone date.
The proposed liquidated damages for failure to timely achieve COD is an unusual approach of shortening the PPA term by one day for every three days of delay after the COD milestone date.
As the next step, K.A.CARE will host a symposium on the proposed CPP on April 23-24, with a goal of attracting and fostering discussion among government entities, and domestic and international investors, lenders, private sector entities and original equipment manufacturers. Information on the symposium is available here.
If you have any questions regarding this alert, please contact -
|Dino E. Barajas
|Rick L. Burdick
Adam S. Umanoff
Jacob J. Worenklein
 Liquidated damages will be assessed if COD is delayed beyond two years after PPA execution, and SEPC will have the right to terminate the PPA if the delay is longer than six months after the expected COD.