Cleantech Investor

First published in Cleantech magazine 2011 Issue 5. Copyright Cleantech Investor Ltd

 By Felicia Jackson

The EPIA’s Global Market Outlook for Photovoltaics until 2015 notes that the will of governments in the MENA (Middle East North Africa) is “…to deploy renewables only in exchange of substantial local value creation.” The assumption is that energy security is not a major challenge in oil rich states. However, there are economic reasons beyond ’value creation’ for the Gulf States to explore solar. Member states of the Gulf Cooperation Council (GCC), including Bahrain, Kuwait, Oman, Qatar and the United Arab Emirates, are all showing an interest in the role of renewables.

Saudi Arabia’s King Abdullah City for Atomic and Renewable Energy was launched in 2010 to meet growing energy needs and reduce dependence on fossil fuels. Saudi Arabia, which controls 20% of the world’s oil reserves, is focusing on nuclear and solar as alternative power sources. The nation, which consumes about 800,000 barrels a day for domestic power consumption, announced in April 2011 that it plans to pursue renewables in an effort to cut its dependence on fossil fuels by half, investing at least US$100 billion into clean sources over the next decade.

Abu Dhabi has already set a target of 7% renewable power generation by 2020. Its Masdar Initiative is investing billions of dollars in Masdar Power (focusing on solar and wind), Masdar Carbon (CCS and CDM projects), Masdar Capital (half a billion dollars invested in renewables and cleantech), Masdar City and the Masdar Institute.

A recent White Paper by Bloomberg New Energy Finance (BNEF) and Standard Chartered Bank suggests that relative costs may become a driving factor behind the introduction of solar in GCC states in coming years. It suggests that solar could in fact be a more cost-effective source of power generation than oil in the region. The Gulf Region has some of the best solar resources in the world and, according to BNEF, solar PV is already a viable economic option for power generation where it can be used to replace the burning of oil valued at the international selling price.

The study accepts that any assessment of the economics of PV in the GCC is critically dependent on the cost comparator. If the comparison is made on the extraction cost of oil rather than its sale price, the costs remain uncompetitive. What’s important in the comparison is an analysis of the overall economic picture, including levelised cost, peaking demand, cost of idle plants and more. A key issue is that governments in the region have historically valued oil and gas at cost, providing local populations with subsidised electricity at very low rates. Yet there is considerably more value to a Treasury to sell oil at market cost on the international market than at the cost of extraction (market prices of oil have reached $100/barrel versus the extraction cost of c.$4/barrel). In Kuwait, for example, where 70% of electricity is generated from oil-fired power stations, the financial impact could be immense.
 
Integral to the equation is the future price of oil, which will have an impact on the return on investment for any project. Standard Chartered’s methodology uses oil intensity as the basis for its model, being less volatile than oil demand as a function of GDP growth, incorporating trends including price driven demand destruction (through increased efficiency, fuel substitution, etc.) and policy driven moves towards lower carbon energy generation.
 
According to BNEF, if a 100MW solar plant were to be built in 2011 for $3.14 per Watt, and oil prices follow Standard Bank’s central scenario assuming oil prices rise to $163/barrel when adjusted for inflation in 2030, this plant would generate an IRR of 9.4%. According to Sami Khoreibi, Chief Executive of Enviromena Power Systems (a leading solar developer in the Middle East and North Africa), the company was able to offer solar power at $3.14 per Watt in 2010 and expects to get sub $3 in 2011, with a target of $2.73 per Watt. Even in the case of flat real oil prices to 2030, this implies a rate of return of 4.6%.
 
A shift to solar is economically sensible for other reasons, including peak power demand and how the oil is used. In Saudi Arabia, 57% of power is generated by oil. Around 65% of that power generation is used for industrial purposes, with roughly 60% used for space cooling. Peak load demand for air conditioning/space cooling is between the hours of 11am and 3.30pm, which corresponds with the peak generating hours for solar PV. Currently, that peak load of around 3GW is met with oil-fired power stations, which then lie idle for the remainder of the day. In terms of the energy demand load, solar could easily displace peak curve energy.

Analysis of grid stability suggests that 10% of total capacity could be met by solar without impacting the grid, allowing 5GW of solar in Kuwait and Saudi Arabia alone.
 
It is true that the economics of this opportunity are dependent on oil in the region being treated at market price. However, it’s also true that, if power demand in the Gulf States doubles in the next 20 years, domestic consumption will grow significantly, with a corresponding impact on oil revenues for the region. Paddy Padmanathan, president of ACWA Power International (which has already tendered for a 100MW solar plant) is convinced of the economic viability of solar in the Gulf, based on the market value of oil, peaking factor and opportunity cost. He believes that the “sun will set on oil as a component of the generation mix” and expects to see 5% renewables in ACWA’s generation mix, which would be 1,500MW by 2020.

The legislative framework and country targets to drive market growth are not in place. Yet the pressure on oil consumption, the differential between extraction cost and international market price, the matching of solar power peak with peak demand and the region’s growing focus on the importance of renewable energy all suggest that solar is poised for massive growth in the Gulf.