Saudi Arabia – Electric Power & Renewables 2019

Saudi Arabia Sets Record Solar Targets

Published: 25 April 2019

 

1. Market Overview

The market outlook for solar energy in Saudi Arabia is positive. A considerable increase in (large-scale) project activity is expected. Important market drivers and obstacles are:

 

Drivers

  • Clear expansion target for renewable energies (27.3 GW by 2023)
  • Huge market potential
  • Diversification of electricity generation is supported by the government
  • Excellent natural conditions

 

Obstacles

  • Low prices of oil and gas
  • Market power of de facto monopolist Saudi Electricity Company (SEC)
  • Very low offer prices in tenders
  • Weak legal framework for renewable energy projects

 

2. Political Objectives

Saudi Arabia announces largest RE program in the region

Renewable energies (RE) account for less than 1% of the electricity mix to date. About 55% of electricity is produced from gas and 44% from crude oil. The share of gas in power generation is set to increase, in order to have more oil available for the petrochemical industry. In addition to gas, Saudi Arabia is focusing on RE and nuclear power. By 2030, 75% of electricity generation will come from gas and 25% from clean energies, i.e., renewable and nuclear sources.

At the beginning of 2019, Saudi Arabia significantly increased its target values for RE: By 2023, 27.3 GW should be installed (20 GW solar and 7.3 GW wind), and 58.7 GW by 2030 (40 GW solar, 16 GW wind, 2.7 GW concentrated solar power (CSP)).

With the new RE targets, Saudi Arabia surpasses all other RE programs in the Middle East. The target is also high taking into account the total capacity currently installed across all energy sources, which is estimated at 90 GW. Latest available data from the national regulatory authority ECRA from 2015 show an installed capacity of 82 GW. More recent official figures are not published.

The installed photovoltaic (PV) capacity in Saudi Arabia was estimated at 250 MW in 2017. In addition, there are some smaller private PV systems. In 2018 – driven by “Vision 2030” – the first round of the Renewable Energy Program (REP) was announced. In the second round, eleven PV projects will be put out to tender in 2019. By February 2019, expressions of interest could be submitted for the first seven projects with a total of 1.51 GW. Four further PV projects with a total of 1.1 GW are to follow in mid-2019.

The expansion of solar energy is controlled primarily through technology-specific tenders in which power purchase agreements (PPAs) are awarded to independent power producers (IPPs), usually over a period of 25 years. Responsible for the tenders is REPDO (Renewable Energy Project Development Office), which is planned to implement around 30% of the new capacities for renewable energies by 2030. The new projects that REPDO is tendering follow the Build-Own-Transfer (BOT) model. The public investment fund PIF (Saudi Public Investment Fund) is responsible for the remaining 70% of new capacities. The PIF negotiates directly with potential international partners instead of awarding projects through tenders.

Many external observers are cautious about the ambitious targets for RE. If only a couple of projects will be implemented, that would already be a success. In 2013, Saudi Arabia announced a 54 GW renewable energy program, which was quitted without implementing even a single project – also due to the oil price slump in mid-2014. This time the conditions are more favorable, as the first projects have already been tendered and awarded.

Saudi Arabia must invest in the expansion of power generation

Per capita electricity consumption in Saudi Arabia is high (2015: 9,346 kilowatt hours/capita) and the population is growing rapidly. At the same time, strong economic growth is expected if local production will be expanded as planned and economic diversification – stipulated in “Vision 2030” – will be implemented. Electricity demand is rising rapidly by around 5% per year. Therefore, a quick expansion of power generation capacities is necessary.

The development of RE is primarily countered by the vast availability of oil and gas. However, oil is also needed for the expansion of the petrochemical industry, demanding more use of alternative energy sources. In general, the Saudi government’s dependence on oil revenues makes it hard to plan expenditures and investments. Slumps in oil prices can always result in abortion of the RE expansion program.

 

3. Market Organization

Public electricity supplier SEC dominates the market

The public Saudi Electricity Company (SEC) dominates the electricity market as a quasi-monopolist with a share of 66% in the generation and 100% in transmission, distribution, and sales. In addition to the SEC, there are smaller electricity producers. Private investors can only enter the generation business: IPPs can sell their produced electricity to SEC, as is the case with the current PV projects.

Other areas have so far been inaccessible to private companies. According to statements of SEC employees, the company will be split up and privatized at some point in the future, which could lead to more competition in the country. No timetables were given.

Electricity is heavily subsidized. Although prices were strongly augmented at the beginning of 2016 and 2018, they remain very favorable in international comparison: a private household pays on average 0,048 US$ per kilowatt hour (kWh) with a consumption of up to 6.000 kWh (for consumption beyond that: 0,08 US$). In the industry, the price is 0.08 US$ per kWh. Current electricity prices from 1.1.2018 are published on the SEC website: https://www.se.com.sa/en-us/customers/Pages/TariffRates.aspx.

 

4. Opportunities

Power purchase agreements with SEC are the only option

Apart from the invitation to tender for long-term PPAs, no other support measures are planned to date. In 2017, a document was published by the ECRA (Electricity & Cogeneration Regulatory Authority) regarding a possible net metering system for small PV systems with up to 1 MW capacity.

Conventional electricity remains cheaper for consumers than solar power. PV systems for private use, such as solar panels on rooftops, are therefore rare and more likely to be found among wealthier homeowners, as they are not yet economically viable.

Many large companies in Saudi Arabia seem to be interested in solar technology. The oil giant Saudi Aramco and dairy company Almarai, for example, have already installed several megawatts of solar panels for their own needs. Rising energy costs and the opening of the country increase the pressure on companies to become more competitive. Therefore, it can make sense to use RE and implement energy efficiency measures to reduce electricity costs in the long term.

Extremely low bid prices in tenders

The 2018 tender for a PV plant was the first in Saudi Arabia. With a bid price of US$ 0.0234/kWh, the lowest price to date for such a system, the Saudi Arabian company ACWA Power won the tender with its 300 MW project in Sakaka. The company has extensive know-how in the solar industry (PV and CSP) but has hardly been active in the domestic market before.

Climate and topography favor solar energy

Exceptional climatic, geographical and topographical conditions favor the competitiveness of solar technologies. Solar radiation in the Saudi Kingdom is one of the most intense in the world. On average, around 2,450 kWh/square meter can be generated per year. Additionally, there are large open spaces available. These factors favor high electricity yields – provided that the solar modules are regularly cleaned and maintained. Under Saudi Arabia’s special topographical conditions (desert sands), up to 30% of the output can be lost if cleaning is not carried out accordingly.

Industry experts estimate that around 65% to 75% of the electricity needs of private households could be covered by PV. There are very high overlaps between the periods in which electricity could be generated with solar technology and the periods in which households actually demand power.

The availability of raw materials needed for solar technology could support the development of a solar industry. Saudi Arabia has copper deposits (for BoS, Balance of System), bauxite (aluminum for mounting systems) and silicon (for glass production).

Second RE tender round launched

In 2018, a total of 700 MW were tendered and awarded in the first round by REPDO (Renewable Energy Project Development Office): 300 MW PV in Sakaka (Acwa Power) and 400 MW to a wind project in Dumat Al-Jandal (EDF Renewables-Masdar).

In the case of the PV plant in Sakaka, Acwa Power’s bid was the second lowest at US$ 0.0234/kWh, Marubeni Corporation had the third lowest at US$ 0.0266/kWh. EDF Renewables-Masdar offered the lowest price at US$ 0.0178/kWh, albeit not winning the tender. By European standards, these bids are extremely low. The winning bid for the wind farm is even less. EDF Renewables-Masdar won the tender for the 400 MW wind project with a bid equivalent to US$ 0.0213/kWh ahead of Acwa Power with US$ 0.0269/kWh.

In 2019, the second round of the renewable energy program REP takes place. The EOIs for seven PV projects were submitted by 14 February and the documents for the prequalification by 8 April 2019. Another four PV projects are due to follow in mid-2019. REPDO’s advisors for the second round include Japan’s SMBC (Sumitomo Mitsui Banking Corporation) as leading advisor and financial advisor, DLA Piper from the UK as legal advisor and engineering firm Fichtner from Germany as technical advisor.

 

Saudi Arabia: Solar energy projects

Project 1) Capacity (MW) Responsible (operator model) Status 2) Investment (in US$ millions)
REP II: 600 MW Al-Faisalia PV IPP 600 REPDO (BOT) PQ 800
REP II: 300 MW Alras PV IPP 300 REPDO (BOT) ST 400
REP II: 300 MW Jeddah PV IPP 300 REPDO (BOT) PQ 400
REP II: 300 MW Rabigh PV IPP 300 REPDO (BOT) PQ 400
REP II: 300 MW Saad PV IPP 300 REPDO (BOT) ST 400
REP II: 200 MW Qurrayat PV IPP 200 REPDO (BOT) PQ 250
REP II: 70 MW Al Saad PV IPP 70 REPDO (BOT) ST 100
REP II: 50 MW Madinah PV IPP 50 REPDO (BOT) PQ 70
REP II: 45 MW Rafha PV IPP 45 REPDO (BOT) PQ 60
REP II: 40 MW Qurrayat 40 REPDO (BOT) ST 55
REP II: 20 MW Mahad Dahab PV IPP 20 REPDO (BOT) PQ 30
Farasan Island Solar Project Expansion Not specified SEC ST 30

1) IPP= Independent Power Producer, REP II= second round of the Renewable Energy Program 2) ST= Studies, PQ= Prequalification for the main contract

Source: MEED Projects

 

5. Market Barriers

Hardly any local experience with PV projects

REPDO has set up a platform on its website http://www.powersaudiarabia.com to make the tendering process as smooth and transparent as possible. However, they have hardly any experience with RE or PV projects in particular, making it difficult for investors to assess the framework conditions.

Although the current calls for tenders are the first major public PV projects, private investments would already have been possible before. According to industry experts, this underlines the fact that domestic companies did not regard their own market as reliable, neither from a financial point of view for PV-CSP technologies nor in view of the regulatory framework for renewable technologies.

The legal framework for renewable energy in Saudi Arabia is still under development and not comprehensive enough to provide legal certainty. Possibly the lack of experience led to delays in the tenders (wind and solar) in 2018. The tenders were either postponed, or the announcement of the winner took place very late. The next rounds might run more smoothly.

As in many sectors, there is a shortage of skilled workers in the solar sector. Also, international investors are currently rather cautious with regards to Saudi Arabia.

According to industry experts, it is crucial to have excellent local contacts when implementing projects, in order to facilitate approvals, etc. As mentioned, the prices offered are extremely low. Observers suspect that companies have been able to access bank financing with very low interest rates, which is practically impossible for foreign companies.

It is also suspected that once the PV systems are installed, the connection costs could be incurred if, for example, a municipality bears the cost because it is advantageous for them to be connected to the grid. All this is difficult to initiate without having local contacts. Therefore, the wind and solar projects awarded to date were assigned to Acwa Power and EDF-Masdar, two companies with high regional expertise that are cooperating with international partners.

 

6. Local Industry Structure

Regional suppliers dominate, technology has to be imported

Regional players dominate the market, sometimes acting in partnership with international companies. For example, EDF Renewables-Masdar is a consortium between EDF Renewables (France) and Masdar (Abu Dhabi Future Energy Company PJSC).

Prominent Saudi Arabian firms include Acwa Power, Saudi Aramco, Abdul Latif Jameel (through the acquisition of Spanish company Fotowatio) and Zahid Group (through the acquisition of 50% of German company GreenCells). German engineering firm Fichtner plays a central role at REPDO as a technical consultant.

The value-added chain in the PV industry is hardly developed in Saudi Arabia. To date, almost everything is imported, from solar panels to inverters and complete systems. But Saudi Arabia wants to expand local content (as in other sectors) and has set itself a target of 30% in the solar sector.

In addition to the companies mentioned above, local companies include PV cell manufacturer Desert Technologies in Jeddah (https://desert-technologies.com), the dusting device manufacturer NOMADD (http://www.nomaddesertsolar.com) as well as EPC providers Haala Energy (http://www.haalaenergy.com) and GTEK (http://gtek.com.sa).

 

7. Contacts
Name Website Explanation
REPDO – Renewable Energy Project Development Office www.powersaudiarabia.com Contact point for tenders with REPDO
PIF – Saudi Public Investment Fund www.pif.gov.sa/en/ Contact point for tenders with PIF
MESIA – Middle East Solar Industry Association www.mesia.com Regional solar industry association
SASIA – Saudi Arabia Solar Industry Association www.saudi-sia.com National solar industry association
KAPSARC – King Abdullah Petroleum Studies and Research Center www.kapsarc.org National think tank, one of the world’s leading energy research institutes
ECRA – Electricity & Cogeneration Regulatory Authority www.ecra.gov.sa National regulatory authority also for the electricity industry