Australia: Renewable energy - K.A. CARE local content requirements

Last Updated: 9 October 2013
Article by Simon Currie

Introduction

In February 2013 the King Abdullah City for Atomic and Renewable Energy (K.A. CARE) released a white paper for the Proposed Competitive Procurement Process for the Renewable Energy Programme (the White Paper). The deadline for submission of comments on the White Paper was in early April and a large number of responses have been received.
One of the key areas of the white paper is the development of the local industry as a result of the programme. The development of local employment opportunities and the local industry are important aims of the programme that are supported through different mechanisms, such as evaluation criteria and the contractual documentation. The White Paper sets out the requirements for training, job localisation and research and development as follows:

Training

Developers are required to submit, as part of their bid, a training plan. Developers will also be required to specify their training expenditure during construction and start up in their overall budget.

K.A. CARE will establish a Developer Training Advisory Council (DTAC). DTAC will review developer training needs and the adequacy of existing training programmes and recommend improvements.

Developers will also be required to factor into their bids a 1% training surcharge on gross revenues that will be paid into a Sustainable Energy Training Fund (SETF). The SETF will use the funds to support sustainable energy training programmes across the Kingdom of Saudi Arabia (KSA). Developers that have projects which have been operational for more than three years will be eligible to apply for grants to train Saudis in skills relevant to their projects. Saudi educational institutions will also be eligible to apply for grants to develop skills related to sustainable energy.

Job Localisation

Once a project has been operational for two years, developers will be required to submit a job localisation plan, to be updated annually, to include a compliance report stating the total number of employees, the total number of Saudi employees, the total amount of wages paid and the total amount of wages paid to Saudi employees. Figures should also be included for contractors used by developers.

Developers will be required to comply with all local laws and minimum statutory thresholds for localisation. Developers will be benchmarked by technology regarding the level of job localisation achieved. The scores of the developers will be made public. Developers that fail to meet the statutory minimum for job localisation will not be allowed to take part in competitive procurements in the subsequent year.

As well as the minimum requirements, there will also be requirements where developers are evaluated by comparison to other developers in the same technology class. Subject to meeting certain criteria, the top performing developers will receive bonuses and developers performing badly in terms of job localisation will be subject to fines. The excess of fines over bonuses will be paid into SETF and any shortfall out of SETF. Developers in the bottom 10% will not be able to participate in competitive procurements in the subsequent year.

Research and Development

K.A. CARE will establish a Developer Research Advisory Council (DRAC). DRAC will review research and development opportunities and make recommendations as to those most likely to contribute to the KSA's intellectual capital. It will also sponsor an annual Sustainable Energy Research Conference and award prizes for the most effective sustainable energy research projects.

Developers will be required to account for a 1% research surcharge on gross revenues to be paid into a Sustainable Energy Research Fund (SERF) used to support sustainable energy research and development programmes across the KSA.

As with the SETF, developers with projects that have been operational for more than three years will be eligible to apply for funding, as will Saudi educational institutions.

Local content requirements

Local content requirements, by which we mean in this context the obligation to purchase local services and goods, are not new in the renewables sector (for example the South African renewable energy independent power producer programme contained economic development obligations).

The evaluation of bids in the K.A. CARE programme will be through a combination of price and non-price factors. One of the non-price criteria is local content. There is to be a four-stage evaluation process: completeness review; mandatory criteria; rated criteria; and price evaluation and selection.

Local content requirements are included in the mandatory criteria and developers at this stage must demonstrate that they meet the minimum local content requirements by answering questions in the technical and financial forms and providing supporting documentation.

Proposals which meet the mandatory requirements will then be evaluated in four further areas:

  • Financial capability and plan
  • Experience
  • Development status
  • Local content

Up to 100 points can be awarded at this stage. The total points awarded will be the proposal's rated criteria score. This rated criteria score will modify the proposed contract price for the purposes of selecting the successful bid.

The local content level will be calculated as the total allowable local expense as a percentage of the total project cost. Points will be awarded, on a sliding scale, depending on the level of local content. The local content level that gains the maximum number of points may differ between the technologies. The level will be set at a number that is deemed to be technically and economically feasible. No points will be awarded for achieving the minimum requirement and the general principle is that investors must achieve 20% local content to receive any points. The White Paper awards maximum points in the introductory and first rounds as follows: wind – 50%; solar thermal – 60%; solar PV – 60%; geothermal – 40% and waste-to-energy – 40%.

The White Paper specifically states that after the initial procurement rounds, the evaluation criteria for local content may change. This is presumably to allow the local content requirement to be increased as the local market develops. The White Paper specifically proposes that the local content requirements will become more onerous in round 2. They are the same in the introductory and first rounds.

The final stage of evaluation is price. For each proposal a discount factor will be applied to the contract price to reflect the rated criteria. Applying this discount factor (and also making an adjustment for behind-the-meter upgrades to the transmission system) gives a proposal its evaluated contract price.

The request for proposals (RFP) and power purchase agreement (PPA) will contain provisions relating to local content. They will deal with costs prior to commercial operation, for equipment and services. Only goods and services from a permanent establishment in the KSA will receive credit towards the allowable local expense. Items that are of limited added value, for example, local assembly, will only be eligible for a partial credit. The allowable local expense will be equal to the total cost of the services or equipment, multiplied by its local content factor, such as 50% or 100%. The PPA will contain reporting requirements in relation to local content. Within 6 months of commercial operation, a developer will have to submit an independently audited report stating the capital expenditure and the allowable local expenses. If the allowable local expenses are not at the level contained in the proposal, liquidated damages will be payable. The level of damages will be the difference between the proposed and achieved levels. The damages will be paid into the research and development fund. The rationale behind this being that the developer will then still have invested the proposed amount into the local economy.

WTO developments on local content

In addition to developers being concerned with how easy or not it is to fulfil the local content requirements, the WTO's Appellate Body reports of 6 May 2013 in respect of the Canadian feed-in-tariff programme may mean that the K.A. CARE programme comes under increased scrutiny. The KSA is a member of the WTO.

The Appellate Body found that the minimum local content requirements in Ontario's FIT Programme and related contracts are inconsistent with Canada's obligations under the Agreement on Trade-Related Investment Measures (TRIMs Agreement) and General Agreement on Tariffs and Trade 1994 (GATT 1994) obligations. The Appellate Body came to the same decision as the preceding Panel reports, although on different grounds. The dispute revolves around the national treatment obligations and the prohibition on a member country treating imported products less favourably than like products of national origin. There is a derogation to the obligations for governments purchasing products but the Appellate Body held that Ontario's FIT Programme and the related contracts did not fall within this derogation.

The Appellate Body has recommended that the WTO Dispute Settlement Body (DSB) requests Canada to bring its measures that have been found to be inconsistent with its TRIMs Agreement and GATT 1994 obligations into conformity. The DSB has 30 days in which to accept or reject the reports of the Appellate Body and therefore a decision by the DSB is due imminently.

Conclusion

K.A. CARE has received many comments on the White Paper and we wait, with interest, to see what changes, if any, to the competitive procurement programme are made in response. The draft RFP and PPA, once released, should also give further detail on the local content requirements. It will also be interesting to see if the WTO's decision in relation to Canada has any impact on the development of the K.A. CARE programme's local content requirements.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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