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Rumah and Nairiyah tariffs set precedent

19 November 2024

Commentary
Jennifer Aguinaldo
Energy & technology editor

The levelised costs of electricity (LCOEs) for the four combined-cycle gas turbine independent power projects (IPPs) recently awarded in Saudi Arabia are expected to set a precedent for tariffs in upcoming thermal IPPs procured in the GCC region.

Two separate developer consortiums bid for and won the contracts to develop the Rumah 1 and 2 and Nairiyah 1 and 2 IPPs, which are located in Riyadh and the Eastern Province, respectively.

A consortium comprising Saudi Electricity Company (SEC), Riyadh-based utility developer Acwa Power and South Korea’s Korea Electric Power Corporation (Kepco) won the contract to develop the Rumah 1 and Nairiyah 1 IPPs, each with a capacity of 1,800MW.

The team offered an LCOE of $cents 4.5859 a kilowatt-hour ($c/kWh) for Rumah 1, and $c4.6114/kWh for Nairiyah 1.

A consortium comprising the UAE-based Abu Dhabi National Energy Company (Taqa), Japan’s Jera Company and the local Albawani Company won the contract to develop and operate the Rumah 2 and Nairyiah 2 IPPs. 

The Taqa-Jera-Albawani consortium offered an LCOE of $c4.5613/kWh for Rumah 2, and $c4.4960/kWh for Nairiyah 2.

LCOEs represent an all-in tariff including capital and operating expenditures during the power-purchase agreement (PPA) period. In this case, the principal buyer, Saudi Power Procurement Company, agreed to buy the electricity from the project companies for 25 years.

The last comparable IPP procured by SEC in Saudi Arabia was Rabigh 2, for which Acwa Power proposed a tariff of $c1.9/kWh in 2012-13. Rabigh 2 is older than the Fadhili IPP, which was awarded in 2016, but the latter is a cogeneration plant, which was won by France's Engie.

Engineering, procurement and construction (EPC) contractors and original equipment manufacturers say that capital expenditure (capex) for building thermal plants has significantly increased compared to before the Covid-19 pandemic.

Estimates indicate that EPC costs have increased from about $500/kWh to $700-$800/kWh since around 2020.

Despite this, the latest thermal IPP tariffs in Saudi Arabia do not appear significantly higher compared to the tariff for the Fujairah F3 IPP in the UAE, which was procured in 2020.

Several factors underpin tariff trends, according to experts. LCOEs cover fuel capex recovery and operating expenses, where fuel can represent 70%-80%, depending on the prevailing fuel price during the proposals stage.

It should also be noted that the fuel prices and project ownership structures vary depending on jurisdiction, which directly affects the LCOE.

Scale, with the four Saudi plants being awarded together, is also an important factor, as is the technology, because more energy-efficient gas turbines could have contributed to keeping the Saudi tariffs lower than initially expected.

A transaction adviser also notes that the 2024 cost of debt outlook is lower, so swap rates are lower.

Crucially, MEED understands that the tariffs submitted for Rumah and Nairiyah do not yet include potential exit costs, assuming a carbon capture, utilisation and storage (CCUS) solution is not reached while the PPAs are in force.

According to an industry source, CCUS discussions for the Rumah and Nairyah IPPs are set to begin in the 2030s, and the tariffs agreed today will be adjusted based on the outcome of those discussions. 

All this suggests that interesting comparisons will be soon drawn between the Rumah and Nairiyah tariffs in Saudi Arabia and the tariffs that bidders plan to propose for the Taweelah C and Madinat Zayed schemes in Abu Dhabi.

 

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Jennifer Aguinaldo

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