Solar an economically viable alternative to oil in Gulf States

• 13 years ago (2011-01-21)
• Junior Isles

Middle East 312 Nuclear 640 Renewables 752

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Solar photovoltaic (PV) would be more economically viable than oil-fired electricity generation in oil-rich Gulf states, according to Bloomberg New Energy Finance (BNEF).

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. "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 MWs,” he confirmed.

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 per cent, BNEF estimates. Even if oil prices stay flat, at around $80/barrel, the IRR would be 4.6 per cent, on a 100 per cent equity investment basis, a proposition which Leibreich described as "not a disastrous investment to make".

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.

“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 per cent and 57 per cent of their electricity mix respectively, through highly subsidised supplies of oil. Moreover, almost 100 per cent 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 Enviromena 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 per cent of its newly installed capacity, which would set it on course to install around 1.5GW of solar in the coming years.

"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.

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.