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The real cost of solar energy adoption: A perspective for the Middle East

View this blog post in Arabic.

In a recent Utilities Middle East article, Zeyad Al-Shiha, Chief Executive Officer of The Saudi Electricity Company (SEC), commented that “solar energy is currently too costly to replace traditional methods of energy production.” Later in the article, he also states that “producing electricity with fuel costs seven halala per megawatt, compared to 50 halala when using solar energy.”

While DNV GL has not attempted to independently verify the precise calculation behind this claim, it is important to understand the real cost of solar energy adoption.

Economists assess capital and operating budget decisions on the basis of real prices,, and refer to this as economic cost.  However, in many markets financial calculations are carried out using actual prices which may well be distorted. The most notable market price distortion emanates from direct government subsidies aimed at reducing the market price of the commodity to the end user.

Therefore, capital budgeting decisions are generally implementing using the concept of economic opportunity cost which may well be independent of the production cost. For example, if the extraction cost of a barrel of oil is US$2/bbl, this does not mean the cost of using that barrel of oil for power generation is US$ 2/bbl in economics terms. If the same barrel of oil could have been exported at an international market price of US$ 100/bbl, then mathematics shows that the real economic cost of using that barrel in power generation is US$ 100/bbl. In other countries, the situation is worse as a government may purchase the oil at US$100/bbl, but then sell it wholesale into the domestic market for a much lower price, which results in a comparative loss for the government.

Consequently, from an economics perspective, it is erroneous to compare the production cost of electricity—using fuel supplied at a very low cost rate—with solar PV procured at international market prices. In the absence of complete information from the Kingdom, we make a comparison of all technologies in the US, in the same currency and at international ‘undistorted prices’.

As with most renewable energy technologies, solar PV requires a high up-front capital investment, but has very low O&M costs. Figure 1 shows a comparison of the expected costs for new generation in the US for plants that come online in 2019.

Figure 1: Current levelized cost of new generation in the US, based on EIA Annual Energy Outlook 2014 data (IER)

Figure 1: Current levelized cost of new generation in the US, based on EIA Annual Energy Outlook 2014 data (IER)

The costs of conventional power technologies are highly dependent on price developments of hydrocarbon resources and the possible future cost of CO2 emissions, together with the yearly full-load hours that these plants can achieve.

For regions with a higher irradiance, like the Kingdom, the levelized cost of new electric generation (LCOE) from solar PV is significantly lower. The current LCOE and trend for solar power technologies is shown in Figure 2. For high irradiation regions the current estimated LCOE can be just above 0.06 EUR/kWh (or about 0.08 USD/kWh), with an expectation to reduce further due to the effect of additional learning and innovation.

Figure 2: Trends in the levelized cost of electricity for solar power in Spain and MENA region

Figure 2: Trends in the levelized cost of electricity for solar power in Spain and MENA region. Source: Fraunhofer Study, 2013

If undistorted market prices are applied when comparing solar PV costs, the result shows that solar is not as expensive relative to thermal conventional power generation.  Much more economic analysis is required by the Kingdom regarding the adoption of solar energy, and this analysis should encapsulate real economic prices as well as the impact of innovation and learning on future prices.

3 Comments Add your comment
Avatar Ahmad Tawfik says:

The cost of oil is coming down too, due to rapid development and abundance of shale oil in both Canda and the US. Crude is expected to reach $50-70 over the coming 2yrs, which would make it still cheaper for electric power generation. Further, given the added infrastructure cost of solar plants, most developing countries will delay making a transition. Finally, China’s shift to longterm reliance on natural gas imports from Russia will further curb the spread of Solar, China being the biggest importer of crude worldwide. Significant tech advances have yet to be made with Solar technology , for it to attain economic feasibility.

Thank you David, I assume he means MWh also. You rightly point out that there is a possibility that the ‘cost of oil’ could continue escalating. Indeed, the thrust of the article is based on real costs of fuel rather than distorted prices; yes they can escalate as they become scarcer, and technological advances could make solar comparatively more cheaper.

Avatar David Thorpe says:

For Al-Shiha to say “producing electricity with fuel costs seven halala per megawatt” makes no sense. He should be talking megawatt-hours. Is this what he means? Then the figure can be compared to your levelized costs. Divide by 1000 to get kWh. The levelized or lifecycle costs should be over the lifetime of the project, typically 25 years. You could also calculate the internal rate of return of the investment for both plants over 25 years. I’m sure solar would win, because of the escalating costs of the oil.

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