The transition from hydrocarbons to modern renewables is normally accompanied by targeted industrial policy instruments like tax incentives, and Feed-in Tariffs (Butler and Neuhoff, 2008) which are instrumental in reducing price and volume risk for developers (Mitchell et al., 2006) yet such policies, or their equivalent in the KSA do not exist.
Instead, the KSA has initiated an auction process with recent auction prices being as low as $US 0.088 SAR ($0.0234) per kWh and USD c 2.3417/kWh being typical for solar projects such as the Sakaka development, 400-MW Dumat Al Jandal wind farm, the 80-MW Layla and 120-MW Wadi Al Dawaser solar projects.
Notwithstanding recent price falls for solar PV due to technological learning, it is not clear how these projects remain competitive at auction with such low electricity prices, particularly against a background of a highly subsidized oil and gas industry and we think these merits further investigation and analysis.
This paper aims to critically evaluate the potential use of SWFs as a means of financing renewable energy development using a real options approach in KSA and globally. The study has the following objectives:
1.2 Objectives
1. To critically evaluate the financial performance of the Sakaka project using a real options analysis (ROA).
2. To quantify the option values and risk during each of the four phases of project development including planning, design, construction, and operation for the middle East region using the Sakaka case study.
3. To use a real options analysis to explain how public (PIF) and private (ACWA power) investments in the Sakaka project remain profitable given very low auction prices and subsidised oil and gas.
4. To measure the dividend and rate of return on investments by the KSA’s public investment fund in the Sakaka project.
