Solar projects and offtake considerations in Saudi Arabia
Climate, Energy & Utilities Focus
Green energy initiatives play an important role in relation to Vision 2030 and an increasing number of private entities (“Owners”) are establishing photovoltaic plants (“PV Plants”), pursuant to which the electricity generated is...
Law Update: Issue 372 - Climate, Energy & Utilities Focus
Euan Lloyd Partner,Construction & Infrastructure
Green energy initiatives play an important role in relation to Vision 2030 and an increasing number of private entities (“Owners”) are establishing photovoltaic plants (“PV Plants”), pursuant to which the electricity generated is, in the first instance, used to power existing facilities (in respect of which Regulatory Framework for Renewable Energy Generation for Self Consumption) applies with excess power being sold to the grid.
In this article, we briefly outline some key issues to be considered by Owners undertaking such projects, including from a construction, offtake as well as a regulatory perspective.
PV Plants fall under the jurisdiction of the Electricity & Cogeneration Regulatory Authority (“ECRA”) and the Owner is therefore required to obtain a license from ECRA to sell electricity to the grid. As most PV Plants are relatively small, the Regulatory Framework for Small – Scale Solar PV Systems Regulations (published in the Official Gazette on 04/11/1438 A.H. Royal Decree No 182) (“Regulation”) is often applicable, as the Regulation applies to PV Plants with outputs of between 1kw to 2MW.
Under the Regulations, installers of PV Plants (i.e., the EPC contractor) must be certified by ECRA to ensure they meet the necessary technical and safety standards for installation and operations, which include compliance with the requirements of: (i) the Saudi Standards, Metrology and Quality Organization (“SASO”) for electrical components and system design; and (ii) Saudi Building Code for structural integrity during installation.
Further, installed and operating PV Plants are subject to periodic inspection by ECRA and SASO, to ensure continued compliance with Regulations.
In terms of offtake, SEC is main purchaser of electricity from PV Plants, and therefore PPAs and inter-connection agreements (which must comply with the Grid and Distribution Code) need to be concluded with SEC.
Although the terms of PPAs can be commercially negotiated, it is important to note that: (i) the Regulations provide that PPAs must address the term, tariff and pricing, payment, termination and dispute resolution, while the tariff is further addressed by the Electricity Law (published in the Official Gazette on 14/05/1442 A.H. Royal Decree No 262); and (ii) the Saudi Electricity Regulatory Authority (“SERA”) is required to approve tariffs (including in light of operational efficiency, full cost recovery, adherence to state policies, incentives for improvements, clear consumer cost indicators, and non-discrimination among consumers in similar categories), and undertakes periodic reviews of the same.
While the offtaker (i.e., SEC) may have superior bargaining power (and in addition to the aforementioned mandatory requirements), it would nevertheless be prudent for the Owner to seek to address the following fundamental protections in the PPA:
The Owner’s title to the PV Plant.
The extent of the offtaker’s offtake obligations.
A ‘take or pay’ obligation on the offtaker (preferably backed-up by a payment guarantee).
The respective parties’ interconnection related obligations, and clarifying the extent of the off-taker’s obligations (including beyond the delivery point).
The point at which title and risk to the electricity generated passes to the offtaker.
Metering requirements, including rights of audit.
Billing and late payment procedures.
The procedure in respect of breakdowns and interruptions.
Permitted outages and relief events (including in respect of change in law).
Extension of the term and end of term procedures.
In addition to the regulatory and PPA related issues, the construction of the PV Plant needs to be carefully considered and, in this regard, Owners typically engage an EPC contractor to deliver the PV Plant on a turnkey basis.
It is therefore important that the Owner executes robustly drafted EPC contracts that fully protects its interests. Given the relatively low value of such projects, the use of a short-form EPC contracts is not unusual in the market, but it is important to score that such brevity should not compromise the owner’s protection or clarity.
Indeed, solar projects (like any other construction project) are subject to various risks, and it is therefore important that such risks are clearly identified, and that risk is clearly allocated. Accordingly, the EPC Contract should:
Ensure that the terms of any PPA are reflected on a back-to-back basis in the EPC contract.
Ensure that the EPC contractor (as well as any consultants) involved in the design, installation, and maintenance of solar PV systems in Saudi Arabia are certified to do so (including by the Ministry of Energy, and ECRA).
Address the relevant interconnection requirements.
Otherwise include the Employer’s Requirements, particularly the output requirements of the PV Plant (including in respect of the ‘guaranteed net output’ as well as any efficiency requirements), together with the performance liquidated damages regime that applies if such output requirements are not achieved.
Set out the time for completion of the PV Plant (including in accordance with the Employer’s Requirements), together with the delay liquidated damages regime that applies if the time for completion is not achieved.
Expressly and exhaustively defined relief events (which should not be more generous than the corresponding relief events set out in the PPA), the occurrence of which absolve the EPC contractor from liability (i.e., if the performance requirements and/or the time for completion is not satisfied).
Address extent of the EPC contractor’s design responsibility, including by reference to the requirements of SASO, ECRA and the Regulations.
Address responsibility for the procurement of materials (i.e., the PV panels), noting that SASO must have approved such products (and issued a Certificate of Conformity) before such products can be issued in Saudi Arabia.
Address responsibility in respect of the existing structure – for example, if PV panels are being installed on, say, a roof, it is important to specify which party is responsible for verifying the structural integrity of the structure upon which the solar panels will be installed. This can be a contentious issue as, for the example, the owner may argue that this forms part of the EPC contractor’s single point responsibility whereas the EPC contractor may contend that the owner is best placed to accept this risk as it is the owner of the structure (and should have the relevant design/load related information).
Cover insurance. Although this point needs to be considered on a case-by-case basis, the best (and more cost-effective option) may be to include the installation works as an extension under the Owner’s existing insurance for the Facility.
Include a clear change/variations mechanism.
Address any coordination and interface issues with the ordinary commercial operations of the facility.
Include customary other provisions, including in respect of payment, IP, suspension, termination, the rectification of defects, performance security and dispute resolution).
Once the EPC contract related works have been completed, the Owner will need to turn its mind to the maintenance of the PV Plant.
Although PV Plants typically require limited maintenance, it would nevertheless be prudent to enter into a long-term services agreement (potentially with the EPC contractor or the supplier of the PV panels) to ensure optimal operational performance and that any outages/breakdowns are expeditiously addressed. This point is made even more significant if the Owner is subject to obligations under the PPA.
This is a fast moving and dynamic area of law that will continue to develop – as part of this evolution process, we anticipate that the regulatory regime and contracting practices will similarly progress and, as such, all stakeholders will need to stay updated.
For further information,please contact Euan Lloyd.
Published in December 2024
