Why Saudi Arabia is taking a shine to solar

Prince Turki bin Faisal Al Saud, an important member of the Saudi royal family, announced last week that his hope was that Saudi Arabia would replace 100 percent of its power generation with renewables within his lifetime. This follows public announcements earlier in the year that the kingdom was in the process of raising $109 billion in investments for solar power and was already in the process of constructing 100 megawatts of solar generation in Mecca as part of a larger renewable energy plan for the city.
 
It's important to note that the energy proclamation by Prince Turki (a classmate of Bill Clinton's at Georgetown) needs to be taken in context. He has never held an energy related position in the Saudi government, but has held very high-profile government roles, including director of intelligence and ambassador to the United States. The 100 percent claim is clearly aspirational, but the $100 billion investment, representing enough solar to meet roughly one-third of current Saudi power demand, appears to be entirely serious.

Saudi Arabia's interest in renewables, and solar in particular, highlights a handful of important points:

1. Power demand growth in the Middle East
2. Saudi Arabia is bullish on future oil prices
3. Saudi's limited access to natural gas
4. Oversupplied solar market may have a new demand base

1. Power demand is growing at a sensational rate in Saudi Arabia (and across the Middle East) and is expected to more than double to 60 gigawatts (GW) within a decade. Currently more than half of the electricity produced in the country comes from burning oil products.  A number of analysts have even suggested that Saudi Arabia could be a net importer of crude by 2030 based on current growth rates (this is of course actually impossible, as this level of export decline and associated income would collapse the country's economy and with it the nation's energy demand). What is clear is that the kingdom must do something to manage the cost of growing power demand, and it's equally clear that it sees solar as an important piece of the country's future.   
 
2. The Saudi view on the future price of crude is bullish. At today's installation costs, solar infrastructure provides a solid rate of return compared to oil-based generation if the price of crude stays above a price floor of roughly $80 per barrel. This, of course assumes that the comparison is a barrel of oil sold, not produced. (No one can put a certain number on the marginal cost of production at current output levels, but it is certainly far below the solar break-even price point). Whether the view is based on information regarding reservoir depletion rates in the Middle East, or doubts about the production claims being made of new North American production, it is clear that an investment of this scale in solar assumes the ability to sell into the global crude market at consistently high prices.
 
3. Saudi Arabia continues to expect limited access to natural gas (and/or water). Natural gas is a much lower cost option for power generation than crude or solar, and easy access to low-cost natural gas would almost certainly undermine interest in large solar investments (carbon neutrality doesn't seem to be the driver for solar investment). The price per 1 million BTU (MMBtu) of natural gas would have to be above roughly $15 to make solar potentially competitive based on today's pricing. Despite plentiful gas in the region (Qatar, Iran), there is little appetite to sell this gas at significant discounts to global LNG or crude-indexed prices (currently higher than $15/MMBtu) and natural gas pipeline projects have been very slow to develop in the region. It's worth noting that some of the claims around renewables may be an effort to increase leverage with Qatar to provide discount gas pricing to Saudi via some new pipeline project – but based on available information this is merely speculative. 
 
The other consideration in comparing gas-fired generation is the need for significant amounts of water (air-cooled single cycle technology would be very inefficient in the desert heat of Saudi Arabia). Desalinization remains a relatively energy intense activity and the net output of power from a gas fired generator using desalinized water would increase the unit production cost significantly.  
4. In the solar supply market, where overcapacity is the critical story right now, the potential for a large new demand base can't be overlooked. Some large portion of the planned Saudi installation will be concentrating solar (though again water may be a limiting factor), which can add thermal storage at low or no cost. Regardless of a significant mix of CSP, early reports are a target of more the 15 GW of photovoltaic (PV) installations over the next 20 years. At a robust installation pace, this scale of demand of PV will have a meaningful impact on the global oversupply of PV capacity in the coming years.

– This article is a modified version of a story in Energy Trends Insider, a free subscriber-only newsletter that identifies and analyzes financial trends in the energy sector. It's published by Consumer Energy Report.