Oil Saving Win-Win Drives Saudi Solar Power Boom

A slide in solar power costs and a surge in oil prices over the last few years has made solar power a win-win strategy for Saudi Arabia: saving billions of dollars of crude for export while making electricity at less than half the cost.

Riyadh plans to install 41,000 megawatts (MW) of solar power over the next 20 years, but to date has built only 12 MW – or less than even Britain installed in early May.

Despite year round sunshine, the oil and gas rich countries of the Gulf have lagged far behind most of the world in solar power – so far. Saudi energy officials have talked of becoming major solar players for years, but while China built 5,000 MW in 2012 alone, Saudi solar capacity is still insignificant.

That is set to change, with an economic argument too strong to ignore.

“Saudi Arabia is determined to diversify its energy sources and reduce its dependence on hydrocarbons,” said Wail Bamhair, the project manager for the Saudi team that visited the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) last week.

“Renewable energy isn’t just an option, but absolutely necessary. We have the means to build renewable energy, and we need to do it,” he said in a statement published on the NREL website during the Saudi delegation’s visit on May 13.

Five years ago, high costs made harnessing the sun’s rays an uneconomic way to make electricity and development was driven mostly by environmental concerns of European politicians.

Thanks largely to multi-billion dollar subsidies, Europe had 70,000 MW of solar photovoltaic installed by the end of 2012, compared to a global total of 102,000 MW, according to data from the European Photovoltaic Industry Association.

Dim growth in debt-ridden Europe, combined with a trade spat that could limit EU panel sales to China, means the Saudi programme is a vital potential export market – and the economics should now guarantee that it takes off.

Solar panel prices have fallen more than 80 per cent over the last five years, because of global over-supply and lower demand in Europe, while average annual Brent crude prices have risen by a third, making the sun a very cheap source of electricity for a country that currently burns oil which it could export for over $100 a barrel.

After years if stalling on solar, Saudi authorities now appear to be moving quickly to capitalise on the slump in costs, with contracts for the first round of 500-800 MW of solar power expected before the end of 2013 and a target of over 5,000 MW installed in the next five years.

SIMPLE ECONOMICS

“Solar in the Middle East is not being prompted today based on environmental or reputational concerns. It is simple economics,” Michael Parker, an energy analyst at Bernstein Research said in a May 10 note.

According to a Reuters study of average selling prices reported by four of the top-10 manufacturers, silicon-based modules have fallen from around $3.5-$4.5 per watt (W) in 2008 to less than $0.8/W last year.

Bernstein estimates Saudi oil fired power costs at about 16 U.S. cents/KWh, based on a modern power station with an efficiency of around 37 per cent, compared to less than 9 cents/KWh for solar, assuming an installation cost of $1/W.

Solar power is still economically unattractive in a U.S. market awash with cheap natural gas. In Saudi Arabia, where a lack of gas forces it to burn up to 800,000 barrels a day of oil in summer, solar remains attractive even at well below $100.

“Falling oil prices reduce the incentive, but don’t kill it until oil hits $50/barrel,” Parker said.

According to a study by European engineering giant ABB, Saudi oil fired power plants have an average efficiency rate of less than 30 percent.

If valuing Saudi oil fed into these plants at international market prices of around $100, oil fired power costs Saudi Arabia far more, around 26 cents/KWh because its inefficient plants get less power from each barrel they burn, Robin Mills, chief analyst at Manaar Energy Consulting, said.

At a capital cost of $2/W for utility-scale projects, solar could produce electricity at around 12.6 cents/KWh, Mills said in a study for the Emirates Solar Industry Association published in early 2012.

Costs have continued to fall since then, dragging solar costs down to 9.9 cents/KWh when capital costs for large scale projects are around $1.50/W, he said.

Saudi Arabia’s light crude has been sold at an average of more than $108/barrel since the start of 2013, according to Reuters calculations, making solar power even more attractive by saving millions of barrels a week from power plant furnaces.

Bloomberg New Energy Finance agrees that utility scale solar photovoltaics costs are likely to average around $1.52/W globally this year.

At that installation cost, solar power offers Saudi Arabia an internal rate of return (IRR) on its investment of nearly 22 percent at $108/barrel. Even a drop in oil prices to $94 would still give an IRR of over 20 percent, Logan Goldie-Scot, lead Middle East analyst at Bloomberg New Energy Finance said.

Although Saudi power plants buy the oil they use at a fraction of international market prices, reducing the number of barrels burned at home still effectively increases potential Saudi export revenues by billions of dollars a month.

“The opportunity cost of oil argument is the key driver behind Saudi Arabia’s program,” Logan Goldie-Scot, lead analyst, MENA Region at Bloomberg New Energy Finance said.

“The fact that the Kingdom of Saudi Arabia has a clear rationale underpinning this makes it likely that it will be realised.”