Decarbonising GCC power sources

With the changing environmental and social climate, the Gulf Cooperation Council (GCC) states are on the path to decarbonising their power sources – away from the historic dominance of fossil fuels in the region. However, the need to achieve energy transition across the GCC has become ever more urgent for both economic and environmental reasons.

Despite the delayed start, the UAE and, to a lesser extent, Saudi Arabia (KSA) have recently made great strides in investing in clean energy and are developing wind and solar facilities considerably faster than the other GCC countries. The UAE, which hosted COP28 last year, is especially dynamic with the Barakah nuclear plant in the Emirate of Abu Dhabi (being the Arab world's first commercial nuclear plant) now contributing almost 25% of the country's electricity.

Both the UAE and the KSA deploy state-owned enterprises (SOEs), such as power developers Masdar and ACWA Power respectively, to develop major renewable energy projects at home and invest in those abroad. In parallel, state-controlled sovereign wealth funds such as KSA's Public Investment Fund and Abu Dhabi's investment trio (Mubadala, ADIA and ADQ) invest heavily in sustainable assets worldwide. The respective government will usually retain control over and derive dividends from domestic projects through either directly or indirectly owning majority shareholdings in the locally incorporated project company/special purpose vehicle. This distinctly "big state" approach to developing energy projects distinguishes the UAE and KSA certainly from how things are done in the UK and, to a lesser extent, in other GCC countries such as Qatar and Kuwait (where national oil companies have been more involved in developing renewable energy projects).

China's evolving role

Globally, Chinese companies already play a crucial role in the energy transition both domestically and abroad. Home to Tongwei Solar (通威), the world's largest solar panel manufacturer, Chinese companies dominate supply chains for critical components in renewable energy projects, including solar, battery storage and wind. Following recent industrial policies from the US and the EU aimed at reducing their reliance on China for products needed for the green transition, Chinese companies appear to be at least partly diverting such exports to the Gulf. In the GCC countries, where there is a strong focus on achieving the lowest project tender tariffs, developers have tended to focus on importing the most cost-efficient components, which usually come from China, although there may now be growing competition from Indian solar panel manufacturers.

What is interesting, however, is that Chinese companies in the Gulf have quickly evolved from acting solely as component suppliers or EPC contractors to taking on roles higher up the project value chain, such as co-developers and investors. A notable example is the Silk Road Fund's (丝路基金) 49% share acquisition in 2019 in the holding company of ACWA Power, a leading KSA developer active in power generation and water desalination projects across the Middle East and emerging markets. Together, the Silk Road Fund and ACWA Power have successfully co-invested into the fourth phase of the Mohammed Bin Rashid Al Maktoum Solar Park in the Emirate of Dubai – one of the world's largest renewable projects. More recently, various Chinese developers have been pre-qualifying as co-sponsors to various Gulf renewable projects, including State Power Investment Corporation Limited (国家电投) (an SOE) in the Saudi Power Procurement Company's fifth round of Kingdom-wide solar PV projects with a combined capacity of 3,700MW.

In short, the GCC countries and China share a state capitalist model for developing projects where the government often retains ownership of the concession site/project assets and different arms of SOEs act as both procurers and developers, thereby negotiating on both sides. This similarity in mindset and the increasing bilateral trade (notably, China is currently eclipsing the US and France as KSA's main trade partner) lends toward a promising future for Chinese investment and knowhow flowing into the region's renewable energy projects.

Issues faced by Chinese contractors

Chinese contractors often come up against several key commercial and legal issues in the region.

Commercial

Chinese contractors sometimes face challenges in securing business in certain sectors such as solar power – a major push in the region – due to their lack of historic market dominance and established brand. This factor is being somewhat alleviated with the rise of Chinese solar developers such as Jinko and the passage of time which has seen a consortium including Harbin Electric International winning its bid to develop DEWA's 1,200MW Hassyan clean coal power plant.

Chinese contractors may also need to become accustomed to the somewhat slower pace of payments in the region – from procurers to sponsors and then down the contractual chain to contractors and suppliers. Additionally, clients in the region often introduce project scope variations for which contractors have to be prepared to claim additional time and cost, and manage such claims expeditiously.

Legal

We have often seen cultural implications in play where Chinese contractors tend to prefer resolving disputes via amicable settlements over formal arbitration. This is also perhaps due to their unfamiliarity with laws in the region as well as local business customs. Such actions often lead to delays as parties fail to mediate, before a formal dispute is ultimately launched. Chinese contractors may then have to seek external counsel for expert advice and representation in arbitration centres or local courts – an often lengthy and costly process.

Another factor which often surprises contractors new to the region (not just Chinese ones) are the increasingly stringent "local content" requirements of concession, construction and operation contracts. These requirements mean that a certain percentage (usually 30%-60%) of the contractor's sub-contractor or supplier companies, in addition to goods and materials to be used on the project, have to be locally sourced. Unless they are incorporated in freezones, project companies may also have to comply with contractual "Emiratisation" or "Saudisation" targets – this means that 1-20% of a project company's staff (often including in top management positions) may need to be UAE or KSA citizens.

We therefore advise Chinese contractors to seek expert legal counsel early on to ensure a smooth project bid and avoid disputes later down the line.

How Dentons can help

Dentons is a prominent law firm in the Middle East with more than 55 years of experience in the region. Clients benefit from our deep understanding of the region's legal and business environment, long-standing relationships with local business communities and government bodies, and significant cross-border capabilities.

Our network in the Middle East is the largest of any international law firm and spans the UAE (Dubai and Abu Dhabi), KSA (Riyadh and Jeddah), Oman, Qatar, Jordan, Lebanon and Egypt. With more than 130 legal professionals in the region, we are able to advise on both international and local law across all the major areas in which we operate.

If you have any questions, please reach out to Projects Associate Elen Roberts or Banking Associate Patrick Yeo (杨捷伟), who is fluent in Mandarin Chinese. Both Elen and Patrick are based in Abu Dhabi.