Solar photovoltaic (PV) would be more economically viable than oil-fired electricity generation in oil-rich Gulf states, Bloomberg New Energy Finance (BNEF) said today.
BNEF's research makes the case it is more profitable for state treasuries to sell the oil on the international markets, while incentivising a switch to solar PV to meet some of their domestic electricity demand. "You have got to value [this oil] at the market value," argued Michael Leibreich, at a press conference at the World Future Energy Summit in Abu Dhabi today. "Then you find PV is extremely economically attractive."
Power generators expect that policy support for solar power could be forthcoming. Paddy Padmanathan, president and CEO of ACWA Power International, a Riyadh-based power developer and generator, said that an announcement on the Saudi government's policy on renewables and nuclear power is due in April. “We fully expect the Kingdom to set a target into tens of thousands of megawatts,” he added.
If oil prices rise to $163 a barrel by 2030 (in 2010 real terms), then the internal rate of return (IRR) of a theoretical 100MW solar wind farm would be 9.4%, BNEF estimates. Even if oil prices stay flat, at around $80/barrel, the IRR would be 4.6%, on a 100% equity investment basis, a proposition which Leibreich described as "not a disastrous investment to make".
“It definitely makes sense for the policy-makers of the oil-producing countries to subsidise solar,” said Tufan Demircioglu, a director at Standard Chartered, which provided oil-price forecasting for the research.
Kuwait and Saudi Arabia rely on oil-fuelled power stations to supply 70% and 57% of their electricity mix respectively, through highly subsidised supplies of oil. Moreover, almost 100% of Saudi Arabia's 3GW of peak capacity – the power stations which sit idle most of the time, only to be brought online during times of high demand – is oil-fired, noted Sami Khoreibi, from solar project developer Environmental Power Systems. Peak times are between 11am and 3.30pm, when cooling systems place extra demand on the system, making solar an attractive alternative, Khoreibi argued.
ACWA has an internal target that solar should make up at least 5% of its newly installed capacity, which would set it on course to install around 1.5GW of solar in the coming years.
Gulf solar demand to mop up solar oversupply?
However, this is dependent on a change of incentives from the Saudi government, Padmanathan acknowledged. The firm estimates it can deliver solar power at around $0.17 per kilowatt hour, but this is competing against state-subsidised fossil-fuel generation at around $0.03/kWh.
BNEF's analysis is based on the lowest cost for a PV plant in 2010, which BNEF estimates at $3.14 per watt in its solar price index.
Khoreibi added that a price of $2.73/W for a 100MW “is achievable”. The firm pitched for solar projects in the Gulf region at levels below $3.00/W in 2010, he said, although these projects did not end up going through – largely for reasons linked to policy.
If Gulf states respond to the macroeconomic case for a switch to solar, the levels of growth in the region could help mop up some of the excess solar equipment on the market, said Leibreich at BNEF. "We don't expect to see overcapacity in the solar market to persist for very long," he added.
Regional renewables coordination needed
"This region is a future megamarket for solar energy," said Ennir Rimawi, managing partner at Jordan-based Catalyst Private Equity, which invests in energy- and water-focused clean technology.
But some are advocating that solar policy be co-ordinated on a regional level, rather than country-by-country.
Rob Bradley, senior policy advisor in the directorate of energy and climate change, in the UAE's Ministry of Foreign Affairs, said that the development of regulatory incentives for renewables in the region is "still in the stage where that's more fragmented and stop start than you would want". However, he described the process as "a learning phase that this part of the world is going through, at what is, from a historical perspective, an enormously fast pace".
By. Jess McCabe