PPA route to renewable energy

By Martin Preston

MANY GCC countries are now looking to introduce renewable energy despite having, in most cases, substantial oil and gas reserves.

There are several reasons for this:

• High power demand: The GCC countries are heavily dependent on oil and gas to meet domestic energy needs, which look set to increase over the coming years with continued high rates of population growth and rapid industrialisation. In 2001, primary energy consumption in the GCC was 200 million tonnes of oil equivalent (mtoe). By 2010, this had nearly doubled to 380 mtoe and the Economist Intelligence Unit has estimated that it could reach 660 mtoe by 2020.

 Desire to maintain production capacity for export: In 2008, oil and gas exports contributed 39 per cent of the collective GDP of the GCC and 83 per cent of government revenues. The more oil and gas is used to produce electricity and desalinated water, the less revenue is received from exports. Most GCC countries currently find themselves in a position where domestic consumption is increasing and eating into reserves that could otherwise be sold and bring in revenue.

• Diversification of economies: Initiatives such as Masdar in the UAE are designed not only to reduce the dependence on oil and gas as the primary means of producing electricity for domestic consumption but also to diversify the economy, invest in education and innovation and expand the export base by exporting cleantech know-how and technology. For example, a key goal of the Abu Dhabi Economic Vision 2030 is to increase the non-oil share of the economy from about 40 to 60 per cent.

• Reduce carbon footprint: The GCC is well known for high levels of greenhouse gas emissions per capita but the member states are committed to reducing these emissions. As a result, most GCC countries now have targets for the amount of electricity to be developed from renewable sources. These are seven per cent by 2020 for the UAE; 33 per cent by 2030 for Saudi Arabia; 10 per cent by 2020 for Oman; five per cent by 2020 for Kuwait; 20 per cent by 2024 for Qatar; and five per cent by 2030 for Bahrain.

A number of potential policies could be introduced to encourage the development of renewable energy and these can be targeted to attract investment in renewables from individuals (for example, rooftop solar) or corporate. These include:

(a) Net metering: Consumers produce their own electricity from renewable sources and if more electricity is produced than used, the excess is exported to the grid with the consumer receiving credits for the excess electricity generated. At the end of the billing period, the consumer pays for the net amount of electricity used.

(b) Feed-in tariffs: Under a feed-in tariff scheme, the government is obliged to purchase electricity generated by the consumer for a fixed price over a fixed time period, the intention being that the government will subsidise the additional cost of producing electricity from renewable sources.

(c) Green certificates: Carbon emission reduction targets are set for companies who can then purchase green certificates or credits if they exceed those targets. This creates a market for those who have earned credits by generating renewable energy.

(d) Power purchase agreements: The government seeks tenders for renewables projects on the basis of a long-term power purchase agreement (PPA).

The PPA approach is the one most likely to gain traction in the GCC and has already been adopted on the Shams One CSP project in Abu Dhabi. It is also the approach that KA Care has indicated it will adopt in relation to the Saudi renewables programme and is the model that has been successfully used in South Africa.

Net metering and feed-in tariffs are problematic in the GCC as the subsidised cost of electricity makes this unattractive to end-users. Similarly, introducing green certificates would not be easy as this would require the introduction of a new regulatory regime.

For these reasons, renewable energy projects in the GCC are most likely to be procured under PPAs. Although there is likely to be an element of subsidy in the tariff agreed under a PPA, the competitive tendering element minimises this. The PPA route also allows governments to take into account factors other than the tariff, such as local content, and this has been a key element of both the South African renewable energy programme and that proposed in the KA Care White Paper.

The KA Care White Paper provides details of how Saudi Arabia intends to procure 54,000 MW of renewable energy by 2032. Eligible renewables projects are wind, solar, geothermal and waste to energy, although the latter two are excluded from the introductory round, which is to comprise five to seven pre-packaged projects totalling 500 to 800 MW on sites selected by KA Care.

Each project will be let on the basis of a PPA with 20-year duration. Prospective bidders will be invited to provide comments on the PPA before the final PPA is released under the request for proposals (RFP). The PPA will not be subject to further negotiation or amendment once it has been released as part of the RFP.

The PPA will be entered into by the Sustainable Energy Procurement Company (SEPC), a government entity established to administer the procurement process and to enter into and manage the PPAs. Payments under the PPA will be made in Saudi riyals but with currency protection if there is a change to the rate at which the Saudi riyal is pegged to the US dollar.

Proposals will be evaluated on pricing and other factors. Non-price factors on which bidders will be evaluated are financial strength, experience, the status of project development and local content. The number of points awarded to a proposal for these non-price elements will give it a rated criteria score which will then be used to adjust its price and the winning bidder will be the one with the lowest evaluated price.

Gulf Construction

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