Updated legal framework to drive investment in Saudi energy transition

The KSA aims to produce about half of its electricity using renewable energy sources by 2030, with the remaining 50% to be generated from gas. The goal is part of Saudi Vision 2030, a government program launched in 2016, which aims to diversify the country’s economic resources away from its traditional reliance on hydrocarbons and promote sustainability throughout Saudi society, alongside the longer-term objective of reaching net-zero greenhouse gas emissions by 2060.

As part of the KSA’s move towards its 2030 renewable energy goal, the Ministry of Energy (MOE) has a developed a National Renewable Energy Program to roll out various initiatives, including the privatisation of all electricity generation by 2025. 

In addition, the Saudi Green Initiative (SGI) has set a goal to reduce carbon emissions by some 278 million tons annually by 2030. The KSA also intends to create 250,000 tons of green hydrogen per year by 2026 with significant investment in the advancement of green hydrogen projects including its flagship NEOM Green Hydrogen project which is intended to be powered by electricity produced by a mix of solar and wind.

Attracting international investors will be key to delivering these commitments and a major component of this will be having a developed legal framework that can promote private sector participation and provide certainty to investors. 

To that end, there have been a few important developments. These include:

• the Private Sector Participation Law (PSP Law) designed to regulate private sector involvement, including public private partnership (PPP) models;
• the Civil Transactions Law (CTL) aimed at codifying Saudi law principles in civil transactions; and
• the new Investment Law to enhance attraction of international investment into the KSA.

These recently implemented laws provide the legal framework essential to helping the KSA achieve its energy transition goals.

The Private Sector Participation Law

The PSP Law came into force in July 2021 and its ‘implementing regulations’ - providing details giving substance and clarity to the PSP Law - were issued by the National Centre for Privatisation’s board of directors in November 2021. Together, the PSP Law and its implementing regulations brought important changes into effect to help the implementation of PPPs and divestment projects - key pillars to achieving Saudi Arabia’s objective of generating 50% energy from renewable sources by 2030.  

Important provisions of the PSP Law and implementing regulations include:

• permitting four procurement routes for PPP and divestment projects – public competition, limited competition direct contracting and unsolicited proposals;
• a detailed process for issuing tenders - procurers need to obtain internal approvals from the Steering and Supervisory Committee, prepare a detailed business case - containing an analysis of affordability, value for money and contracting options - and ensure fairness and transparency in the tender process;
• a comprehensive list of elements that must be considered within the request for proposal and the evaluation criteria when evaluating technical and financial proposals;
• a defined grievance process for bidders; and
• permitting unsolicited proposals in certain circumstances to assist in achieving strategic goals.

The PSP Law and implementing regulations represent Saudi Arabia's commitment to encouraging PPP and divestment projects in the Kingdom which are built on proper due diligence at every stage of the project lifetime, transparency, flexibility and rigorous selection processes. 

The framework gives international investors and lenders confidence that projects that come to market have been specifically chosen based on a comprehensive selection criteria and are bankable. This will go a long way to putting Saudi Arabia in a good position to implement its sizeable pipeline of renewable energy projects to achieve Vision 2030.

The Civil Transactions Law

The CTL came into force in December 2023 to further develop Saudi’s 2030 Vision.

The new law represents the first time that Saudi Arabia has distilled its Sharia law principles into a codified system similar to that of other civil law jurisdictions in the region, such as the UAE and Qatar. Codifying KSA’s legal principles in this way provides a uniform set of rules that will be applied to contracts and this in turn provides increased certainty and consistency which is a key factor for international investors.

The CTL covers matters such as contract formation, performance and termination as well as principles of loss and damage and specific provisions tailored to particular contract types including construction, agency, insurance and partnership contracts.

Key contractual principles of the CTL include provisions to the effect that:

• contracts are the law of the parties – the literal interpretation of contracts applies where there are clear words and a clear regime for contract interpretation is provided for;
• contracts must be performed in accordance with their terms and the requirements of good faith;
• it is permissible for parties to agree to limit liability save for fraud or gross error, although it is not possible to exclude liability arising from a harmful act (tort);
• parties can agree to pre-determine damages in their contracts - such as delay or performance liquidated damages - but these may be adjusted to reflect the actual loss suffered in certain circumstances, similar to other Middle Eastern jurisdictions; and
• loss of profits is recoverable provided that the loss must be foreseeable at the time of entering into the contract, except in cases of fraud or gross error.

Many of these principles resonate with the civil codes of other Middle Eastern jurisdictions and provide increased certainty and predictability in the application and enforcement of contracts in KSA. This will be welcomed by foreign investors required to support and deliver the Kingdom’s energy transition.

The Investment Law

In August, KSA introduced a new Investment Law which repeals the existing Foreign Investment Law and will come into effect in February 2025, six months from its publication in the official gazette.

The Investment Law is designed to attract foreign investors by guaranteeing equal treatment for foreign and local investors in Saudi Arabia. In doing so, the law unifies and updates existing legislation that provides for differing rights and protections for local and foreign investors.

The new law is part of the wider regulatory developments aimed at attracting foreign investment which include the introduction of the CTL, the PSP Law and the 2022 Companies Law. It is based on international investment principles and enhances investor rights by guaranteeing the rule of law, fair treatment, intellectual property protection, the freedom to manage investments and seamless fund transfers.

It also recognises investors’ rights to resort to alternative dispute resolution such as arbitration, mediation and reconciliation in addition to seeking recourse in the courts, which is a positive development and will attract foreign investors.

It is anticipated that ‘implementing regulations’ for the updated Investment Law will be issued in the coming months and that these will provide further details on the application of the new law. As with the CTL, the new Investment Law will play an important part in attracting foreign investors needed to deliver Saudi’s energy transition through 2030 and beyond.

Since the announcement of its Vision 2030, the Kingdom has made significant strides enacting laws aimed at diversifying its economy and promoting sustainability. Another new law, the Commercial Transactions Law, is still in the pipeline and its future enactment will mark yet another milestone in the Kingdom’s legal evolution. For now, the PSP Law, the CTL, and the new Investment Law collectively contribute to the regulatory framework which will underpin the success of Vision 2030.

The highly anticipated next wave of legal reforms is expected to continue providing the certainty and stability needed to attract international investors and diversified growth in the Kingdom.

Co-written by Jack Tivey of Pinsent Masons.