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.
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.
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.