China’s wind power in Saudi: legal risks unpacked

Amid the global energy transition, Saudi Arabia’s renewable energy sector is rapidly advancing under its Vision 2030 strategic framework. With abundant solar and wind resources, the kingdom has emerged as one of the most promising markets in the Middle East for clean energy development.

Saudi Arabia has conducted six rounds of renewable energy tenders to date. The 1,500MW wind power project (R6 wind project), launched by the Saudi Power Procurement Company (SPPC) as a key component of the sixth tender round, is attracting significant attention from international investors.

The critical information and associated legal risks outlined in the project’s tender documents warrant particular attention from Chinese enterprises. Providing valuable insights for Chinese companies in future bidding rounds, this article introduces the project’s overview, technical requirements, contractual framework, compliance considerations and legal risks, based on the tender documentation.

Project mode

The R6 wind project is being developed under the Independent Power Producer (IPP) model, requiring the winning bidder to establish a wholly owned project company that is registered in Saudi Arabia as either a closed joint-stock company or limited liability company.

Utilising a Build-Own-Operate (BOO) framework, the project encompasses the entire lifecycle from development, design and permits through to construction, operation and eventual decommissioning. The successful bidder assumes responsibility for sub-station construction, grid connection infrastructure and net electricity sales.

However, the BOO model’s characteristics also require winning bidders to operate long-term within Saudi Arabia’s complex legal landscape, exposing them to sustained regulatory and policy volatility risks.

Insufficient understanding or misinterpretation of local corporate law, electricity sector regulations or other legal frameworks may trigger compliance failures at any project stage, potentially resulting in administrative penalties or operational delays.

EPC accountability

The tender documents include a schedule of key terms for the engineering, procurement and construction (EPC) contract, advising investors to pay particular attention to its commercial provisions. Special scrutiny should be given to the interplay between the EPC contract, the power purchase agreement (PPA) and other project documents, with thorough risk assessment of liability transfer clauses.

Additionally, bidders must evaluate the differing requirements for EPC models, parent company guarantees, performance bonds and defect liabilities as required by the SPPC, assessing EPC options through both economic viability and legal risk mitigation lenses.

Companies seeking contractor opportunities in Saudi Arabia must also carefully consider foreign ownership restrictions. Pursuant to the investment manual issued by the Ministry of Investment, foreign investors establishing local entities to obtain operating licences for “construction project management, detailed engineering design, and EPC contracts” must ensure at least 25% ownership is held by Saudi shareholders.

Localisation compliance

Saudi Arabia enforces stringent localisation requirements, with the R6 wind project imposing particularly rigorous thresholds: including a minimum 15% local content during construction, rising to at least 50% in the first five years of operations, before progressively increasing to 70%.

Bidders must also prioritise sourcing Saudi-manufactured goods specified on the mandatory procurement list, unless granted exemptions by the SPPC and Local Content & Government Procurement Authority. Failure to comply may constitute contractual breach, potentially resulting in disqualification – a risk requiring particular attention during tender preparation.

Saudi legislation and government policies additionally incorporate localisation requirements mandating employers to hire a minimum quota of Saudi nationals. The target percentage varies according to both the employer’s scale of operations and commercial activities specified in their business registration. Therefore, after establishing their project company in compliance with SPPC regulations, bidders must additionally fulfil these workforce localisation obligations based on their project’s scope and operational nature.

Contractual and legal risks

The R6 wind project’s bidding requirements mandate that newly established project companies must execute multiple project agreements including the PPA, the project development agreement, the EPC contract, the operations and maintenance agreement, and the grid connection agreement.

Regarding governing law, the project development agreement and grid connection agreement will be governed by Saudi law, while the PPA will be governed by the laws of England and Wales. Dispute resolution shall be conducted through arbitration administered by the Saudi Centre for Commercial Arbitration.

Additionally, the Basic Law of Saudi Arabia derives its foundation from Sharia law, while the Saudi legal framework incorporates royal decrees, supreme orders, royal laws, cabinet resolutions, ministerial resolutions and ministerial directives. This framework exhibits limited transparency, flexible legal interpretation and considerable judicial discretion.

Recent years have also seen the introduction of new legislation including the Civil Transactions Law and Companies Law to regulate investment activities.

Given significant differences between Saudi and Chinese legal systems, prospective bidders should thoroughly investigate the local regulatory requirements, with particular attention to licensing provisions for foreign investors in wind power projects. Securing all necessary permits and certifications in advance remains critical to avoiding legal complications.

Key takeaway

Saudi Arabia’s successive renewable energy tender rounds present Chinese enterprises with strategic opportunities to participate in major Middle Eastern clean energy projects, while posing multifaceted challenges including localisation requirements and legal system disparities.

Companies should therefore leverage their technological and operational expertise to conduct comprehensive analysis of tender documentation, develop robust project plans, and thoroughly research Saudi regulatory frameworks and project specifications.

By demonstrating respect for local legal requirements and proactively mitigating risks, Chinese firms can enhance their competitiveness in Saudi Arabia’s renewable energy sector, ensuring both successful project implementation and sustainable long-term operations.

Wang Jihong is a senior counsel and Liang Danni is an associate at Zhong Lun Law Firm