When Saudi Arabia’s King Abdullah City for Renewable & Atomic Energy (KA-Care) launched a white paper detailing its ambitious renewable energy programme in February 2013, companies and investors from across the world began to flock to the Middle East in preparation. The promise of being part of one of the world’s most lucrative renewable energy markets was too good an opportunity to miss.

Setting out targets for the initial procurement strategy for the construction of 54GW of renewable power capacity by 2032, the KA-Care white paper was widely regarded as an important first step towards implementing the kingdom’s vast alternative energy programme.

However, it has failed to live up to its promise, with no further news on the progress or procurement of KA-Care’s projects having been released since it invited feedback on the whitepaper 15 months ago. It has also fallen silent on plans to develop a civilian nuclear power programme.

Building progress

“KA-Care has gone very quiet,” says a Riyadh-based source at a major international bank. “The programme outlined by its white paper; nothing appears to have progressed. We are waiting to see what happens this year, but we have been disappointed by the lack of activity.”

With the initial target of 23.9GW of renewable energy installed by 2020 almost certainly going to be missed, Riyadh is now looking at how it can utilise its existing resources to make progress with its ambitious plans.

The kingdom’s decision to embrace renewable energy has been prompted by the rising domestic consumption of hydrocarbons to meet electricity demand. Riyadh is becoming increasingly concerned that this will steadily reduce the volume of oil available to export over the next two decades.

According to forecasts issued by the Electricity Co-Generation Regulatory Authority, peak electricity demand will climb from 53,864MW in 2013 to 75,000MW in 2020, and to 123,000MW by 2032, based on an average growth rate of 4.5-5 per cent a year.

In 2012, the kingdom was already burning 800,000 barrels a day (b/d) of liquids in its power plants. With the price of oil remaining above $100 a barrel on the international market, the government is aware that it must fully harness its hydrocarbon resources to achieve a maximum long-term advantage.

KA-Care was established under royal decree in April 2010 to spearhead the country’s plans to develop renewable and nuclear energy. The white paper, released almost three years later, detailed the competitive procurement process (CPP) that the body was planning to use to tender and award contracts for the initial rounds of the renewables programme.

Under the proposed plans, developers would be invited to bid on 20-year power purchase contracts, and the programme would be split into three tendering rounds. These rounds were to procure a total capacity of 7,000MW.

Over the first five years of the programme, about 5,100MW of renewables capacity was to be added to the kingdom’s grid. The introductory round was expected to result in contracts for 500MW to 800MW. Between 2,000MW and 3,000MW of capacity was proposed for the first procurement round, which would increase to between 3,000MW and 4,000MW for the second round.

The prequalification of developers for the introductory round was scheduled to take just one month, after which requests for proposals were to be issued with a six-month bid preparation process. Awards on the first round of projects should then have been made in the first quarter of 2014, with the second round starting just two months later.

However, while the release of a solar atlas, a study measuring potential resources, provided some encouragement, no progress with procurement of any of the projects has been achieved.

Not only have initial targets been missed, but KA-Care has not divulged any information on the programme’s progress and has declined to indicate when the first projects will reach the market. With KA-Care remaining mute, speculation over the future of its role in the kingdom’s renewable energy plans has intensified.

Inadequate resources

According to various sources in Saudi Arabia, KA-Care has not been adequately equipped to handle one of the largest renewable programmes in the world, which will require hundreds of billions of dollars of investment.

“[KA-Care] has hardly any staff,” says a source at a major power contractor active in the kingdom. “About 300 consultants were appointed to help with the white paper, but the organisation itself has no staff.”

KA-Care’s problems have been exacerbated by the departure of vice-president Khalid al-Sulaiman in May this year, who was regarded as a key figurehead of body. While it is not clear whether Al-Sulaiman retired or was pushed out, his exit has been considered a “blow to the programme”, according to a source in the kingdom’s power sector.

Whether as a cause or a consequence of KA-Care’s weak position, other players are emerging as candidates to lead the renewable energy efforts, with state oil major Saudi Aramco the most likely successor.

“Everyone is acknowledging that Aramco will play a major role in the renewables programme. The question is on what basis? And will it take over the whole programme, or just a major portion?” says the Riyadh-based source at a major international bank.

Saudi Aramco is the only client in the country to have completed solar energy projects of a notable scale, including a 10MW project on a car park in Dharan in the Eastern Province, one of the largest photovoltaic (PV) rooftop solar schemes in the world. Riyadh has also increasingly started to entrust Aramco with the responsibility of delivering large non-oil projects, with the 60,000-seat King Abdullah Jeddah stadium and the King Abdulaziz Centre for World Culture among major projects delivered under the oil company.

“Aramco has the experience of delivering major projects and has proven many times it can do it. It is trusted by the government and contractors like working for them,” says a contractor keen to see the oil firm take over stewardship of the renewables programme.

Solar power

State utility Saudi Electricity Company (SEC) is also set to play an increasing role in the kingdom’s renewable energy plans. The utility is currently tendering the Duba 1 integrated solar combined-cycle (ISCC) project, which will provide energy through a combination of solar and gas turbines.

While SEC’s progress with the Duba scheme has pleased contractors and technology providers, developers and project financiers have been left disappointed by the decision to tender the project as a standard engineering, procurement and construction (EPC) contract rather than as the originally planned independent power project (IPP). This disappointment has been heightened by the likelihood of Aramco’s growing remit in the renewable energy programme, with the oil major generally preferring to retain full ownership of projects.

“There is one worry for the developer market in that Saudi Aramco will probably have a tendency to finance its projects itself, and you’d probably start to have projects being procured on an EPC basis, rather than as an IPP,” says a Dubai-based source active in regional project finance deals. “And that would be a fundamental shift from the KA-Care programme.”

For developers, this would mean a major lost opportunity.

While forming a stable structure to move forward with the renewable energy programme is Riyadh’s immediate priority, whichever body is selected to spearhead the efforts will be under pressure to begin implementing projects promptly if renewable energy targets are to be met.

While its programme is of an unprecedented size, Saudi Arabia can learn from the successes of regional neighbours such as Jordan, which has recently signed off the initial round of its renewable energy plan.

“Just like in Jordan, they should kick off the project with an introductory round, as they have planned to do,” says Marc Norman, a project finance lawyer at US-based Chadbourne & Parke, which is advising several developers and lenders involved in Jordan’s renewables programme.

“They already have a bankable, conventional power IPP model – and they can build on that and start with a reasonably sized introductory round. This would give confidence to developers,”

Norman says Riyadh can learn from the teething problems Jordan suffered due to indecision on whether to have a feed-in-tariff for the initial round.

“KA-Care had excluded the idea of a feed-in-tariff in the first and second full-scale rounds, but suggested that the introduction of such a mechanism may be considered after the second round,” says Norman. “It may make sense to do it the other way round, like in Jordan. This would give everyone a bit of certainty at the outset – in terms of the economic deal – to kick-start the market and say we’ll give you this much per kilowatt hour for generating electricity from solar sources.”

Norman adds that it is also important the procurement process is kept as simple and as transparent as possible, particularly for the initial projects.

“It needs a streamlined process, ideally, where the land is already allocated and the legwork has already been done on permitting,” he says. “Some developers in Jordan struggled with land and permitting issues in the first round, so helping developers with such issues would be really helpful.”

Falling costs

Despite the challenges, those involved in the region’s renewable energy market say that the economic and environmental benefits for harnessing alternative sources of power in the kingdom are clear. The fall in costs of technology, particularly PV solar technology, has further increased the attractiveness.

“The prices of PV have come down quite significantly,” says Sami Khoreibi, CEO, Environmena, a UAE-based solar company that has built 35 of the 73 grid-connected solar PV projects in the Middle East and North Africa region to date. “In 2008, it was $5 a watt, now it is $2-3. The cost for a 10MW plant has fallen to about $15m now, so the [capital expenditure] has come down. And the [operational expenditure] is very low, so the economics of it are very good. Due to changing dynamics, solar will save the government money, not cost them.”

While Dubai and other Gulf markets are also pursuing renewable energy schemes, Saudi Arabia has attracted the interest of companies from across the globe. Success with its large-scale and multi-faceted programme is seen as crucial for driving a sustainable alternative energy market in the Middle East. After a stuttering start, Riyadh must select and give full support to a leader to spearhead its programme. Until this happens, achieving its ambitious targets will not be possible.