20 July 2016
One of the kingdom's main goals under Vision 2030 is to increase the kingdom's production of renewable energy.
Saudi Arabia in April unveiled Vision 2030, a far-reaching plan to diversify the kingdom's economy away from hydrocarbons. One of the main goals is to increase the kingdom's production of renewable energy, but how can the world's largest oil exporter go about achieving this?
For inspiration, Saudi Arabia could look no further than South Africa and its experience when it launched its Renewable Energy Independent Power Producer Procurement program (REIPPP) five years ago.
A significant target under Vision 2030 is the addition of 9.5 gigawatts of new renewable energy capacity, including 3,450 MW by 2020, which is not far from South Africa's goal when it issued the first request for proposal (RFP) under REIPPP.
In August 2011, the initial RFP sought 3,725 MW of renewable energy projects to be procured from the private sector over five rounds. At the time, South Africa had no history of large-scale renewable energy installations and a limited renewables industry. Nevertheless, it procured nearly 4000 MW in the first three bidding rounds alone.
To date, REIPPP has generated 92 new renewable Independent Power Producers (IPPs) across four bidding rounds and $12.7 billion in investment has been committed to the construction of over 6,200 MW of capacity, with the majority of this coming from onshore wind, solar photovoltaic systems and concentrated solar technologies. The REIPPP program was also able to deliver megawatts to the national power grid quickly and in a cost effective way.
Local job creation
A feature which set REIPPP apart from other international examples of competitive bidding was the inclusion of economic development requirements. The program mandated that projects meet minimum thresholds for black South African ownership and management, job creation, inclusion of local content, capacity development, and other commitments for socioeconomic development. Altogether the stringent economic development requirements jumpstarted the renewables sector, lured foreign investment and bolstered the capacity and experience of South African institutions.
Saudi Vision 2030 has a similar goal and aims to increase the contribution of small and medium enterprises to the kingdom's economy. South Africa's REIPPP sought to achieve this by limiting foreign ownership in project companies and by requiring minimum shareholdings by South African enterprises.
The Development Bank of Southern Africa (DBSA) and the Industrial Development Corporation (IDC) assisted by providing loans and other forms of financing to South African enterprises to bolster their participation.
If Saudi were to institute similar requirements, it would need to determine whether or not small and medium Saudi enterprises would need financial or other forms of support to participate in the renewables program. If so, the kingdom would then have to explore which entity would serve a function similar to that of DBSA and IDC.
Under REIPPP the South African rand denominated power purchase agreements (PPAs) and this made it uncompetitive for foreign commercial lenders to provide long-term funding. Thus a majority of the project debt under the program was provided by local South African commercial banks.
Given the kingdom's currency peg and the fact that PPA tariffs are typically indexed to the US Dollar, one would expect foreign financiers to have a greater role under a renewables program in the kingdom.
Since local and foreign banks have each played a significant role in the kingdom's successful conventional IPPs both are familiar and comfortable with financing the energy sector and would likely contribute to the success of the kingdom's renewable program.
Above all, the South African experience highlights that a well-designed, transparent and robust procurement process encourages private developer and lender participation. In the end, a comprehensive renewables program would enhance Saudi's institutional capacity, experience and knowledge in the renewable energy sector as well as spur a local renewables industry - all in addition to the primary goal of increasing renewable generation capacity.
It is undoubtedly an exciting time for the kingdom and renewable energy industry participants, one which the global energy community will continue to monitor with interest.
Stephen Jurgenson is the managing partner of Winston & Strawn's office in Dubai, Fadil M. Bayyari is an associate specialising in energy and infrastructure sectors in the Middle East and Africa and Jason Parker is Of Counsel and specialises in project finance. Winston & Strawn is an international law firm with around 850 attorneys in 18 global offices, with its Middle East headquarters located in Dubai.
© Winston & Strawn 2016