Introduction

The Kingdom of Saudi Arabia (“KSA”) is pursuing an ambitious strategy to diversify the country’s energy portfolio over the next 20 years by procuring up to 54 gigawatts (“GW”) of electrical energy from renewable sources. The initiative is intended to diversify the country’s energy mix, introduce renewable energy as a major component of that energy mix, reduce the country’s reliance on fossil fuels and diversify the Saudi Arabian economy. It will be implemented and overseen by the King Abdullah City for Atomic and Renewable Energy (“K.A.CARE”).

While Saudi Arabia remains the world’s largest exporter of crude oil, steadily increasing domestic demand for electricity and desalinated water is rapidly eating into reserves. Various forecasts have predicted that, under projected rates of consumption, Saudi Arabia would become a net importer of oil within 25 years. Saudi Arabia’s effort to foster renewable energy development is one strategy to deal with this reality and counteract the nation’s current dependence on the oil industry. KSA recognizes the hazards of failing to adapt to its changing energy landscape and is proactively focused on transitioning to a more balanced energy mix as a means of preserving wealth and stability, in part by creating jobs for its growing population in the technology and other sectors important to its future.

The White Paper and Symposium

On February 25, 2013, K.A.CARE released a white paper (“White Paper”) describing a competitive procurement process to be administered initially by K.A.CARE and subsequently by another government-guaranteed entity, the Sustainable Energy Procurement Company (“SEPC”). SEPC will execute and manage standardized power purchase agreements (“PPAs”) under the program and purchase the associated electricity. Comments on the White Paper were invited and the plan will be subject to the Saudi Arabian Council of Minister’s formal empowerment of K.A.CARE, expected to be given in conjunction with the program’s official launch in Spring 2013.

According to the White Paper, renewable energy projects under the initiative would include solar, wind, geothermal and waste to energy (“WTE”) technologies, with each proposal being assessed according to technology type. The plan calls for installation of 25 GW of solar thermal, 16 GW of solar photovoltaics (“PV”) and an aggregate of 9 GW of wind, geothermal and WTE. K.A.CARE’s projections envision adding 24 GW capacity from renewable sources by 2020, and up to 54 GW capacity by 2032.

On April 23 and 24, 2013, K.A.CARE will hold a symposium to present the procurement process and to introduce Saudi companies and stakeholders to interested foreign participants. Additional information as well as registration information for the symposium can be found here.

The Bidding Process

In an introductory round set to open later this Spring, and thereafter in successive bidding rounds conducted along two to three year timelines targeting up to 7 GW per round, developers will be invited to submit offers on standardized 20 year renewable PPAs. During the introductory round, bidders will be given up to six months to prepare proposals; in subsequent bidding rounds, the response periods will be shortened as the program and renewable energy industry in the KSA mature. Bidding entities must be “organized and existing under Saudi Arabian law” or in the process of registering for such status and be formed consistent with the business of developing renewable power projects in the Kingdom. Each bidding round will include a request for qualification (“RFQ”) prior to the issuance of a request for proposals (“RFP”) and registered proponents will be given the opportunity to comment on the draft RFP and PPA.

Proposals will be evaluated for compliance with Saudi Arabian law and certain mandatory program requirements as well as on their relative merits in comparison with other proposals for a given project. Because one of the major goals of the procurement process is to enhance Saudi Arabia’s native abilities in the renewable energy industry rather than simply balancing the energy portfolio, the extent to which bidders focus on the use of local goods and services, including the employment of Saudi Arabian nationals, will enhance a given bid’s score in the procurement process. In addition, bids that feature strong financial capability, extensive developer experience and established project status will be given favorable consideration, with emphasis placed on financial capability and experience especially during the initial round. Transmission costs will be included in proposal evaluation. Projects must have a minimum 5 MW nameplate capacity, with the potential for smaller aggregated projects that share a common metering point.

Selected Issues to be Considered by Potential Investors

Based on Saudi Arabian law and our extensive experience in Saudi Arabian project development, we have identified a number of issues that should be considered by potential investors in a renewable energy project in KSA. This is not intended to be an exhaustive analysis of all issues a prospective bidder should consider, and we do not purport to offer any legal advice herein. Rather, this list is offered to stimulate thought and generate discussion about the K.A.CARE initiative.

  1. Corporate Structure. As noted above, the White Paper states that bidding entities must be “organized and existing under Saudi Arabian law” or in the process of registering for such status. Limited liability companies and joint stock companies are referenced expressly in the White Paper and, although not specifically ruled out, both a branch of a foreign company and an “unincorporated project company” might be deemed ineligible company forms depending on how K.A.CARE construes the term “organized and existing under Saudi Arabian law.” A clarification from K.A.CARE should be sought on this point prior to corporate structuring. We note that bidders often choose joint venture and consortium agreements for the purposes of submitting a bid, and form a limited liability company thereafter. Each approach has unique advantages and disadvantages.
  2. The Site. After the introductory round, proponents will be required to source their own site and demonstrate their ability to operate the project thereon. An ideal project site should be appropriately sized and attractively located (from SEPC’s perspective) to achieve project objectives. Careful consideration should be given to the manner in which the proponent obtains the rights (through lease, purchase or license) to land suitable for the project to ensure its enforceability under Saudi Arabian law. Because specific performance and other equitable relief are generally not available under Saudi Arabian law, the proponent would be limited to bringing a lawsuit for monetary damages against the defaulting party. However, this would provide only limited relief, as only direct, proven damages are recoverable under the Hanbali school of Islamic jurisprudence predominant in Saudi Arabia. Speculative damages, including in the nature of lost profits, are not recoverable in KSA. On a practical note, foreign developers that lack the local business relationships in Saudi Arabia requisite to select and obtain a suitable project site will find it beneficial to partner with a local entity that is responsible for sourcing a proposed project site.
  3. Local Content. Partnering with a local entity or entities could also foster business relationships helpful in further satisfying K.A.CARE’s express local content requirements. The Saudi Arabian government is committed to increasing the proportion of Saudi Arabian nationals in the domestic workforce, especially in managerial and technical positions. A commitment to employing Saudi Arabian citizens and utilizing locally-manufactured equipment will put a proponent at a significant advantage in the bid process. Bidders should ideally adopt a concerted strategy to accomplish local content objectives early, such as entering into local joint ventures for the manufacture and procurement of project equipment and establishing robust employment recruitment and training programs for Saudi Arabian citizens.
  4. Proposal Security. Based on the forms of proposal security described in the White Paper, we expect that a proponent would require an ongoing commercial banking relationship with a bank in Saudi Arabia. The bid bond or letter of credit will likely take the form prescribed by the Saudi Arabian Monetary Agency for performance security used in government tenders. As a general rule, the issuing bank is required to pay funds to the government agency upon receiving a demand against these instruments.
  5. Power Purchase Agreement. Proponents should plan to develop their full set of comments to the PPA as soon as it is available. SEPC will field comments on the PPA prior to issuing the RFP, but thereafter will not negotiate the terms of PPAs on an individual basis. Below are some PPA-related topics for consideration, culled from the White Paper.
  • Local Funding. Designation of Saudi Riyals as the currency of payment for the PPA will require the bidding entity to heavily favor local funding and payments to contractors in local currency in order to reduce finance costs.

  • Governing Law. Similarly, designation of Saudi Common Law as the governing law represents a concern to potential financiers, and will serve to restrict the pool of banks willing to assume the associated risks primarily to Saudi banks. In addition to the rationale for Saudi commercial banking relationships outlined in the discussion of the bid proposal security above, that relatively few Saudi banks are currently active in project finance underscores the importance to bidders of developing local banking relationships.

  • Performance Security. A proponent risks forfeiting the performance security if it cancels a project or fails to reach commercial operation in accordance with the PPA. It is unclear whether forfeiture of the performance security will be the sole damages that SEPC would seek. Under the Saudi Arabian Competition and Procurement Law, SEPC could seek damages for the cost of replacing the contractor to perform the project.