Waiting game

To keep the air-conditioning running and extract maximum value from its fossil fuels industry Saudi Arabia, the world’s largest oil exporter, has announced an ambitious, albeit long-awaited, grand plan for making renewables a major component of its energy mix over the next two decades, targeting an installed capacity in excess of 54 MW. And because the sun is by far the most abundant of Saudi Arabia’s renewable resources, the lion’s share of the renewable mix will be solar; broken down as 16 GW of solar photovoltaic (PV) and 25 GW of concentrated solar power (CSP).
King Abdullah City for Atomic and Renewable Energy (KACARE), the agency set up to oversee changes to Saudi Arabia’s energy portfolio, presented the program at the Fourth Saudi Solar Energy Forum in Riyadh on May 8, 2012. The program, worth tens of billions of dollars, is still subject to approval by KACARE’s board, which includes King Abdullah and several high-ranking ministers.
In Saudi Arabia in the summer time, about 80 percent of power consumption is residential, and about 70 percent of it is used to power heating, ventilation and air conditioning (HVAC) systems. PV generation will be able to meet the highest demand peak occurring around noon time, where demand for power for air-conditioning and cooling in buildings will be at its highest, but there is another peak in early evening hours in summer. CSP plants, some with storage, are seen as a bridge between base-load generation, including geothermal, waste-to-energy and nuclear, and PV – of course – for daytime generation.
Presenting the plan, KACARE’s Senior Investment Consultant Mujahid Al Gain estimated the levelized cost of energy (LCOE) for PV by 2030 in Saudi Arabia at US$0.07/kWh. For CSP, an IPP project in Morocco was recently won by a consortium led by Saudi company Acwa Power for a tariff of US$0.1897/kWh.
In addition to maximizing returns for Saudi Arabia through saving oil, the success of the program long term will be its ability to generate new jobs and an economic sector based on solar and other types of renewables. By 2032, 80 percent of the value chain will be located in Saudi Arabia, not just manufacturing but also services, R&D and technology.
KACARE’s presentation paints the big picture, observes Zahid M Khawaja, Vice President Engineering and Energy Services & Head of Corporate Development at Olayan Financing Company, one of several local companies that attended the Solar Forum. He says: “Some expected KACARE to announce 3 to 4 GW in the next three to five years, or do it in a piecemeal approach. But doing it this way gives big solar players a sense of the amount of work over time and can help these companies see it is worth committing investment in Saudi Arabia.” Alexandre Allegue, VP Business Development, from Saudi solar engineering, procurement and construction (EPC) firm Sun & Life, adds: “Solar power is crucial for Saudi Arabia’s ability to meet its growing power needs, hence the size and scope of the program. The solar PV industry is desperate for new markets for technology, as growth rates of markets in Europe are settling down, so Saudi Arabia is going to be a market where companies are going to want to put their flag first.” One of these is Suntech. The company’s Chief Commercial Officer, Andrew Beebe, is bullish, saying the company will look to maximize opportunities to supply its panels to the market. “We like markets like Saudi Arabia, India and China, where the demand is for new power generation, as opposed to replacing existing capacity.”

Bidding rounds

No feed-in tariff will be defined initially. Instead a competitive procurement process will be used for two rounds to help KACARE define what the FITs should be, which will vary depending on technology, so PV will not compete with CSP.
The first procurement round will include 1.1 GW of solar PV and 900 MW of CSP. The second procurement round, separated by 12 to 18 months from the initial one, will be for 1.3 GW of solar PV and 1.2 GW of CSP. The first bidding round will serve to establish accurate pricing and will be done as a competitive bidding process on independent power project (IPP) contracts to supply electricity on 20 year power purchase agreements (PPA), typical of how most of the investment to increase Saudi’s power generation capacity has been structured over the last several years.
There will be no local content requirement in the first round. Depending on project size, capacity resulting from the first bidding round will be built in 2014 and will come online by the end of that year or in 2015. The minimum project size is 5 MW. In the first round, KACARE indicates the number of solar PV projects could range from 11 to 55 and in the second, between 15 and 65 projects. A balance between large and smaller projects will be achieved. On the one hand, having a greater number of smaller manageable projects to assess and learn from is better than having a just few mega-size projects, not least because of grid constraints, but also to mitigate risk. Despite some small pilots here and there, Saudi Arabia’s solar track record is very small compared with other markets.
The first round will focus purely on the lowest LCOE, which means silicon panels have the cost advantage against all other technologies. Nevertheless, there is some indication that these initial rounds are also concerned with opening the field up to different types of technologies. In PV this includes thin film, as well as crystalline silicon, and may also encompass concentrated PV (CPV). Saudi Arabia is host to different types of microclimates. On the eastern side it is very hot and dusty while solar irradiation levels are higher in the west, providing suitable conditions for CPV and CSP.
One PV producer that could benefit from the program is Japan-headquartered Solar Frontier, a supplier of thin film CIS modules. The company’s panels are used in three projects in Saudi Arabia including a 10.5 MW installation at Saudi Aramco’s engineering headquarters. Belectric, a European specialist solar EPC firm along with Saudi solar EPC business Sun & Life are completing the project to incorporate thin film modules into the new office’s car park shades.
Solar Frontier Director, Senior Vice President Atsuhiko Hirano, who oversees the company’s international business, says: “Saudi Arabia recognizes our CIS modules are an advanced PV technology, which is not commoditized in the way that silicon PV is.” Thin film provides scope for further development over the long term, he suggests, adding: “When Saudi Arabia talks about energy supply they need to be very comfortable with the technology.” According to Hirano it makes sense that the government wants to have a portfolio, or spread, of technologies initially, and then see how they perform. “This can inform any future decision to consolidate and focus on those that work best. There is not just one type of PV. I learned from the 500 kW PV-diesel plant Solar Frontier supplied for Farasan Island how Saudi Electric Company needed to see it perform to be assured. So this approach in the early bidding rounds seems pragmatic.” State-run Saudi Aramco has made no secret of the fact that it is looking at establishing a thin film PV manufacturing joint venture in Saudi Arabia at a future date. The state-owned oil and gas company has a 15 percent stake in Showa Shell Sekiyu K.K., which owns Solar Frontier. Saudi Aramco’s chief executive has suggested thin film solar technology could make a significant contribution, long term, to the nation’s goal of industrial diversification.
The second round of bidding, set to take place in 2014, will again be a pure competitive approach but with bigger capacity projects and with a local content requirement, weighted 70 percent on price and 30 percent on local content requirement.

Time frame

The program’s announcement may have piqued the interest of the global solar industry but it could be two more years before the market starts to get going, according to Browning Rockwell, President of the Saudi Arabia Solar Industry Association (SASIA). In the meantime there is still a lot to be done.
By Q3 2012 KACARE will issue a draft request for proposal (RFP), followed by a final RFP by Q1 2013. In large investments in utilities, infrastructure and services RFPs are designed to bring structure to procurement decisions and allow for risks and benefits to be identified up front.
Before the final RFP is issued, a new legal entity called the Sustainable Energy Procurement Company (SEPC) will be established. This government-controlled corporation will be the off taker, handling procurement of renewable energy capacity in Saudi Arabia. According to Apricum, a renewable energy consultancy, the government is devising an internal scheme to funnel funds from sales of oil saved in power production into the solar projects. From the government’s perspective, the scheme is net profitable.
An initial procurement funding mechanism will also be agreed covering, at the very least, the funding requirements for the first procurement round. Saudi’s National Grid Company will also start ramping up resources to prepare for inquiries regarding grid connection and sites will be identified where site control issues are worked out, including establishing grid connections. Either before or just after the RFP is issued, grid connection costs will be finalized with the Electricity and Cogeneration Regulatory Authority (ECRA).

Consortiums

Until full details of KACARE’s program are fully disclosed, Hirano says it is premature to say what share of the PV capacity in the first tendering rounds Solar Frontier is targeting.
Bidding consortiums led by local companies that specialize in developing IPPs or with EPC experience are more likely to be successful. Companies such as Acwa Power, which – like Sun & Life – is part of Saudi conglomerate Acwa Holding, understand local market dynamics and issues.
Sun & Life, Belectric and Solar Frontier have experience in delivering projects in the country and recently Belectric and Solar Frontier consolidated European ties in a joint venture to develop thin film projects on the continent initially. On the other hand, says Allegue, as an EPC company it is better to have several partnerships and remain technology agnostic as opposed to have an exclusive arrangement with one. And for solar technology providers, the right partners depend on the size of projects. Hirano says: “If it is going to be a large build operate transfer-type project then we may work with a company with a good track record of developing IPPs. We have good options in terms of potential partners to form the right consortia.”

Learning curve

The program is substantial enough to attract local companies working in adjacent industries, or with limited experience in renewables, with an opportunity to diversify. Olayan has a background in off-grid solar PV where small PV units and batteries are used in telecoms but the company is looking to go further. “In recent months we have met with companies across the solar value chain – cells, modules, IPP companies, EPC contractors. We wanted to see how the solar industry emerged in Europe and the U.S., to see how it might emerge in Saudi Arabia.” Dar Al Riyadh, owned by the Saudi royal family, was set up primarily to work in oil and gas as a project design/EPC group on both infrastructure and energy projects such as new refineries. The company is looking to become a large EPC player in solar and other renewable energy projects initially. “Right now we are technology neutral, in terms of the various solar technologies such as CSP, silicon PV, thin film and CPV,” says Sumit Mathur, Senior Manager Business Unit, Dar Al Riyadh.
There is concern that these early bidding rounds could risk a race to the bottom in terms of quoting prices of electricity per kWh. Allegue says: “As Saudi Arabia is going to be a market where companies want to put their flag first this could lead to some very low bids for projects.” “The bidding rounds will see a low price offering for silicon modules, but this should be tempered by the Saudi government also looking for stable, reliable performance at LCOE and the focus will be on reliable systems as well as cost,” explains Hirano.
As one observer puts it, Saudi Arabia is shaping up as a “pay to play” market that suppliers, whether established silicon PV module brands desperate to find new sources of demand or emerging players in search of new reference sites, cannot afford to ignore.
While KACARE has indicated that the program will be administered in a transparent way, chosen projects, especially the biggest ones, could most likely end up being led by domestic firms that dominate the power, water and IPP industries on home turf as such companies have the connections, the capital and the resources to execute projects and adhere to low prices.
Globally it is in liberalized energy markets where renewables have been most successful so far. The kingdom’s progress in opening up its energy sector is glacial and it is likely that investment in solar and other renewable energy capacity will, in the early years at least, occur at a pace that Saudi Arabia is comfortable with.