The solar catalyst

04 / 2013, Markets & Trends | By:  Shamsiah Ali-Oettinger

Saudi Arabia: One of the world’s largest producers of petroleum products is taking a sharp turn from fossil fuels to the sun. The need to cut back on conventional fuel dependence and to bank in on the sun has fueled forecasts that Saudi Arabia will be the solar market to look out for in the year to come.

Saudi Arabia is undergoing a period of energy transformation. The kingdom seeks to develop not just renewable energy sources, but also beef up its grid to support them.

The Middle East heavyweight’s fixed place in the global oil market is under threat due to unrestricted domestic fuel consumption driven by low energy prices. Over 80% of Saudi Arabian government spending is dependent on its black gold. Reports state that with a growing domestic energy demand of around 7% per year, national consumption is likely to double in a decade. This would inevitably lead to Saudi Arabia’s dethroning as exporter of fuels. This realization has slowly but surely hit home. Under the watchful eyes of K.A. CARE (King Abdullah City for Atomic and Renewable Energy) Saudi Arabia aims to develop 54 GW of renewable energy by 2032. 23,900 MW of renewable power projects are scheduled to be built by 2020.

More than US$108.9 billion is to be invested into 41 GW of solar power by 2032, a third of all total domestic consumption. The Kingdom of Saudi Arabia is not just looking to save oil in the process but also develop a more sustainable energy structure in the country and create new job prospects for its people. As Emirate Solar Industry Association’s (ESIA) President Vahid Fotuhi pointed out in the PV Insider webinar, “Photovoltaic market analysis in the MENA region,” the Arab Spring occurrence has a part to play as well in these plans. Fotuhi explains that with every megawatt of solar, about 15 jobs can be created. And thereby, solar power development in Saudi Arabia will attempt to kill two birds with one stone: curb domestic oil consumption and resolve unemployment issues.

Saudi Arabia has become a media solar darling ever since the announcement of the plans. Fotuhi calls the country the 800 pound gorilla in the Middle East solar market. Saudi Arabia is already being seen as the game changer for beleaguered solar companies but how quickly and efficiently are plans going to be executed? Will it be a breeze packing and heading east to find new solar fortunes?

The white paper

The extensive plan set forth by the country is, in a nutshell, rather immense, something K.A. CARE admits as well. But they firmly believe it is achievable. It states that its team of strategists has “undertaken a comprehensive evaluation of the alternative energy resources to ensure the derivation of their maximum benefit,” meaning under the scenario, proposed nuclear, geothermal and waste-to-energy will be providing base loads up to the demand at night during winter; PV power will meet total daytime demand all year round; concentrated solar power (CSP) with storage will meet maximum demand difference between PV and base load technologies; and hydrocarbons will then cover the remaining demand.

In a presentation given by Browning Rockwell, Founder of the Saudi Arabian Solar Industry Association (SASIA), a graph showed the possible peaks that solar power could meet (see graph “Solar offsets high cost generation,” p. 37).

In mid-February K.A. CARE released a white paper for its renewable energy competitive procurement program (CPP). A standalone government-backed entity known as SEPC or Sustainable Energy Procurement Company is responsible for administering the procurement and executing and managing the Power Purchase Agreements (PPAs). An interactive portal has been launched for potential bidders where information and documentation can be checked and feedback can be given. Comments on the white paper can be submitted until 5 April, 2013.

Project developers will be invited to bid on power purchase contracts and three tendering rounds will be held over the next two to three years. The three tendering rounds, introductory, first and second procurement rounds, will be held for 7 GW of projects. PPAs are expected to be paid over 20 years and eligible projects will be at least 5 MW. The power plant also has to come online within two years of a PPA execution to be eligible.

Over the first five years of the program, about 5,100 MW of renewable capacity is expected. In order to ensure that “sufficient timely renewables capacity is brought online consistent with targets,” the initial procurement rounds will be of larger sizes than the announced annual targets. This is said to allow some upside margin. The introductory round is expected to bring in contracts for 500 to 800 MW. For the first procurement, between 2,000 and 3,000 MW is expected, with an increase to between 3,000 and 4,000 MW for the second procurement. Now one thing that the government expects to learn by following the introductory round with “robust” procurements is to underpin local value chain development needs. This in turn leads to the question of domestic content.

Technology-specific targets

Technology

Round 1 (MW)

Round 2 (MW)

Solar PV

1,100

1,300

Solar thermal

900

1,200

Wind

650

1,050

Others (including geothermal, waste-to-energy)

50-350

50-350

Source: K.A.CARE

Local content factors –PV polycrystalline (as in white paper)

Engineering

Service

50%

Legal

Service

50%

Other professional services

Service

50%

Construction labor and management – Saudi

Service

50%

Construction labor and management – other

Service

0%

Polysilicon manufacturing

Equipment

50%

Wafers

Equipment

100%

Cells

Equipment

50%

Modules

Equipment

50%

Inverters

Equipment

100%

Racking system

Equipment

100%

Balance of plant

Equipment

25%

Source: K.A.CARE

Getting a foot in

The local content question also plays a big role for companies interested in this new market. Saudi Arabia has placed a huge emphasis thus far on this point. With local content Saudi Arabia wants to create an industry and, more importantly, jobs. Fotuhi adds that 1,000 jobs are needed daily in Saudi Arabia. Solar power can potentially provide 15 jobs per MW as mentioned before. Hence the development of renewable energy is predicted to bring in new job prospects from upstream manufacturing to downstream operations and management (O&M).

The table, “Local content factors-PV Polycrystalline,” (see p. 35) from the white paper shows the intended approach of K.A. CARE. This table only shows the factors for polycrystalline PV but similar local content approaches have also been outlined for other technologies.

The local content provisions in the PPA and request for proposals (RFP) are intended to focus on costs incurred by proponents prior to commercial operation. The proposed percentages are based on the concept of allowable local expense.

As the white paper states, “…in the initial procurement round, proposals will receive up to X points [an undetermined number] in the rated criteria evaluation based on the local content level. As the level of allowable local expense increases as a percentage of the total project cost, the number of points awarded to the proposal will increase.” The calculation for local expense will be defined in the RFP and PPA. Both K.A. CARE and SESC will oversee a list of eligible companies that can qualify for receiving credit.

IHS analyst Silvia Macri says that Saudi Arabia does not have a track record in solar project development and there is also no value chain in place to support local manufacturing. Macri adds, “K.A. CARE could adopt some flexibility with local content criteria in the initial tenders, although it is expected that local content will play a bigger role as the renewable plan moves forward and the first projects are developed.” Macri believes that pursuing the local content rules will depend on how the tender goes and Saudi Arabia’s long term plans. A local value chain will be justified by the size of future opportunities.

Things are already moving in the direction of PV production knowledge finding its way into the country. The International PV Equipment Association (IPVEA) entered into a mutual cooperation agreement with the Saudi Arabia Solar Industry Association with the aim of promoting the benefits of PV and sharing knowledge, as SASIA’s Rockwell states. Localized manufacturing will be one issue to be discussed as well.

In the PV Insider webinar, more than 60% of the participants voted that Saudi Arabia presents the biggest opportunity for PV in the MENA region. The Saudi Arabian market could become so competitive that many companies will be tempted and eventually also rush in.

Fotuhi cautions that these opportunities are however over the long term. “Anyone looking for a quick fix will be disappointed,” he says.

Furthermore, adds Daniel Zywietz, Deputy Chairman of the Clean Energy Business Council and Managing Director of Ambata Capital East, even though Saudi Arabia is going to be the biggest market, moving in will be tough. Zywietz believes that any company that decides to move into the country to bank in on the future solar opportunities needs to find a serious local partner. ESIA’s Fotuhi says that having a “quasi-protectionist” environment enables them to empower local businesses and finding a local partner who fits culturally and strategically would be crucial.

Partnering up

Solaria Energia y Medio Ambiente SA has managed to find the right partner in Saudi Arabian construction company AB Group having signed a collaboration agreement with the aim of registering a joint venture company with a 50/50 share. Solaria has mentioned that it aims to invest in PV projects in Saudi Arabia, namely 16 GW in the years to come and to design and build turnkey PV power plants and manufacture PV modules.

German company Kaco New Energy has also linked up with Saudi Arabian Advanced Electronics Company (AEC) to develop new business opportunities in Saudi Arabia and the MENA region. Among a number of objectives and initiatives that are in consideration, is the potential to develop a PV inverter manufacturing facility at AEC, for Saudi Arabia and MENA. The plan is to also establish a customer support and maintenance services center at AEC’s facility in Riyadh.

Challenges ahead

One big PV power plant has already been developed in the country. The 3.5 MW Leed-certified King Abdullah Petroleum Studies and Research Center (KAPSARC) PV plant in Riyadh is a good example of large-scale PV in Saudi Arabia. Phoenix Solar’s journey from clinching the deal to getting the plant up and running was no easy feat. They had to deal with challenges.

Phoenix Solar’s Klaus Friedl, Vice President Projects, Middle East, explains that working under Saudi Aramco’s high technical standards was a challenge. But they pulled it off. Friedl believes that companies that aim to develop PV projects in Saudi Arabia have to be prepared to live up to the expectations of authorities in charge and uphold standards required. “Saudi Aramco’s technical standards, for example, are very high, one of the highest in the world,” he adds. Strictly only approved suppliers could be utilized. The entire process was also one that demanded patience. Phoenix Solar waited for about one and a half years between project tender and project awarding.

Under the harsh climate conditions, a few concessions had to be made as well. A special feature was the location of the string combiner boxes in an air-conditioned and insulated inverter building. The more than 12,000 solar panels were supplied by Suntech and the central inverters were provided by SMA. The products that are used in the desert development also have to survive the climate conditions present.

Suntech’s Ryan Ulrich explains that they designed the panels with better cell operating temperatures to withstand the harsh sand storms of the desert. Ulrich adds, “In order to develop GWs of solar in the Saudi desert, it’s important to begin the process of planning and development a year or two in advance. Once production starts, roughly 1 MW a week can be installed at the site, so the power plants can be built and constructed very quickly. If Saudi Arabia continues on their indicated path of development, they will be the leader in solar in the region.” IHS’s Silvia Macri raises another issue: the status of the power grid and the response to intermittent solar power generation. Is the power grid ready to receive solar power?

Rockwell explains that Saudi Arabia has been working on equipping its grid. Saudi Electricity Company (SEC) has awarded local contractors three deals totaling SAR 986.7 million (US$263 million) to boost power grids in Makkah, Jeddah and Madinah in the western region, the Saudi Gazette reported. The first contract, worth SAR 194 million (US$51.7 million), is for setting up 380 kV transmission lines to link with the Al-Salam transformer in Madinah, while the second deal, costing SAR 530 million (US$141 million), is to establish 380 kV capacity of central cables in Makkah. The last contract for 380 kV of underground central cables in Jeddah was awarded for SAR 262.7 million (US$70 million).

The KAPSARC PV plant for example will feed directly into KAPSARC’s medium-voltage grid.

Additionally Zywietz adds that integration and cost issues are the root causes of challenges. Zywietz also says education of local governments and solving local integration problems will provide the solution. The local conditions in the MENA region specifically are different compared to those in the tried and tested European countries. Issues such as snow loads may not play as big of a role as generation and demand peak differences.

The biggest challenge however, as the experts voice, not just in Saudi Arabia but the MENA region, is the lack of a PV-specific regulatory framework. This needs to change and efforts are being made. ESIA, for example, has been working with investors via public and private cooperations to provide a better insight into technology and regulatory issues.

Rockwell says that another hurdle in Saudi Arabia has been the ability to make a statement on how things will proceed. He says the entire process is akin to a marathon and for the last years the marathon had not even begun even though the idea was present. “Finally now there is some structure and everyone is trying to get to the nitty gritty of things,” Rockwell concludes.

Saudi Arabia is, despite all the possible obstacles that stand in the way and the possibility of plan changes along the way, poised to grow. As Ulrich explains, “Although the 3.5 MW project has been the largest to date, we do expect to see more large scale projects sprouting up in the long term. In the short term, there is still a demand for rooftop, commercial and off-grid projects.” The lack of reference projects and test beds can also make bankability harder but investments are still expected. Saudi Arabia has made significant strides as mentioned. The plans have been laid out and the ball has started rolling. If plans are successfully executed then Saudi Arabia will be a catalyst in the region for the solar boom.


A chance for CPV?

PV and CSP are not the only solar technologies being discussed. Saudi Arabia has a myriad of climates. So every technology has its own redeeming factors and thus the markets need to be picked appropriately.

CPV is a niche technology; it aims specifically at high DNI areas. “Somewhere like Saudi Arabia is fantastic and all of the benefits of CPV work and it can perform highly efficiently and with high yields,” says Sam Wilkinson, Research Manager, IHS. SASIA’s Rockwell adds that CPV could also be interesting as it can be easily manufactured in Saudi Arabia with its industrial competence. The possibility to manufacture CPV components in the country and then re-export them to other countries in the region and even to southern Europe is very plausible.

Things have also been developing on the CPV front as well in Saudi Arabia. CPV specialist Soitec has been active in Saudi Arabia having recently signed a cooperative agreement with the Medina College of Technology. The three year agreement will foster applied research in CPV technology in Saudi Arabia while allowing implementation of a joint training program on CPV. Soitec also aims to use the CPV demonstration system installed on the college campus for applied research projects with regards to sunny, hot and arid conditions. Soitec claims CPV does have the ability to be the most competitive solar energy in desert conditions with its 37% efficiency marks. Wilkinson also believes that within this region CPV will be able to compete on costs. According to IHS predictions, the MENA region is going to be the second largest market for CPV.

However solar PV holds a very clear cost advantage at the moment thanks to plummeting panel prices as a result of the sheer size of the PV supply base. Wilkinson asserts that CPV does not have as big a supply base as PV, adding that according to an IHS forecast, 3.4 GW of ground-mounted PV is predicted in the Middle East and North Africa and 540 MW of CPV by 2016.