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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Why 2017 Could See A Renewable Energy Boom In The Middle East

With solar panels becoming exceedingly cheap to produce, companies are scrambling to build. Enel SPA, an Italian energy distributor, has recently shown interest in the Middle East. The company is working with Dubai Electric and Water Authority to become more dependent on renewable energy as opposed to fossil fuels to power their grid. DEWA plans to finish an 800-megawatt project by 2020. Enel has also launched a deal with Saudi Electricity Co. to aid in Saudi Arabia’s goal of creating 10 gigawatts of renewable capacity by 2023.

Jordan recently announced a plan to auction off four solar projects and two wind projects by the end of the year, totaling 300 megawatts of power. Jordan hopes to achieve 20 percent dependence on renewables by 2020 or approximately 1,600 megawatts. These projects are becoming increasingly popular along the equator especially in the Middle East. Countries such as Saudi Arabia and the United Arab Emirates are traditionally known to be empires of crude but with costs for solar at an all time low oil companies may have to move aside.

Enel formed a subsidiary in 2008 named Enel Green Power to facilitate all of their business in renewable energy. Enel reabsorbed their subsidiary at the beginning of April last year hinting at the parent company becoming more holistically focused on renewables. Enel’s stock has grown nearly 9 percent since the beginning of December. As the company accepts future projects, investors can expect its value to continue rising. Saudi Electric Co. is the main source of Saudi Arabia’s power making them a valuable partner to Enel. The two partner companies will likely profit in unison. Related: Does Trump’s ‘America First’ Tax Plan Benefit Oil & Gas?

The market for solar power is growing at an exceptional rate. Bloomberg forecasts that solar will be cheaper than coal on a global level by 2025. As solar prices continue to fall, however, these energy producers may start running into a problem comparable to that of oil majors. With shale oil production inundating supply, the price of crude has fallen drastically. This has lead to the shut down of oil fields all across the globe and now OPEC has to find a solution so companies and countries can resume earning profits. If solar costs drop to similar levels energy producers may struggle going forward.

(Click to enlarge)

All of this comes against the backdrop of solar getting cheaper and cheaper. Solar costs have fallen so quickly that it is now competitive with coal in many parts of the world. Within a decade, solar could be decidedly less expensive than coal in regions ranging from the Middle East to Latin America. The clean energy field is shifting rapidly as a result of this sea change.

Within a few decades, the Middle East may be known for exporting something other than oil. Likewise, if these energy producers continue switching their primary focus from crude to renewables demand and price of oil could fall significantly. Investors should contemplate shorting crude futures while buying stock in these Middle Eastern and European utility companies.

By Michael McDonald of Oilprice.com

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  • Lee James on January 24 2017 said:
    The article is heavy on declining cost of renewables. As an aside, I trust the trend in capacity cost is somehow considering how many hours a day the renewable energy installations operate.

    Relative cost of renewable energy is part of its growth in popularity. Taking what Saudi Arabia is doing with renewables investment as a cue, I see a desire of oil-rich countries to diversify their economies. The oil resource cuts both ways: a source of wealth and a source of precariousness. The economy stands too narrowly on one source of income; citizens lack the broad skills found in a diversified economy. Plus, the world covets oil ... it is highly portable.

    I think it's a good move to develop sustainable economies and well rounded citizens. And, it doesn't hurt that other countries are less likely to go after the renewable energy resource!
  • Graeme on January 25 2017 said:
    Nuclear power works 24 hours a day, 7 days a week, unlike solar. Nuclear power provides consistent, high quality, transformable AC power, unlike solar.
    Nuclear power plants operate for 60 years or longer, unlike solar installations which quickly begin degrading from day 1 -- particularly in a harsh desert environment.
    Nuclear power plants require minimal land area, and provide power during rain storms, sand storms, and under low-sun and no-sun conditions.

    There is no good reason for a high-energy use society to choose solar over nuclear power, unless there are not enough intelligent engineers and technicians to run the plant safely. This may be the point you are attempting to make regarding the middle east. If so, a bit of honesty in this day and time is appreciated more than a ton of political correctness.

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