Even at $10/barrel, oil can’t match solar on cost

One of the biggest banks in the Middle East and the oil-rich Gulf countries says that fossil fuels can no longer compete with solar technologies on price, and says the vast bulk of the $US48 trillion needed to meet global power demand over the next two decades will come from renewables.

The report from the National Bank of Abu Dhabi says that while oil and gas has underpinned almost all energy investments until now, future investment will be almost entirely in renewable energy sources.

The report is important because the Gulf region, the Middle East and north Africa will need to add another 170GW of electricity in the next decade, and the major financiers recognise that the cheapest and most effective way to go is through solar and wind. It also highlights how even the biggest financial institutions in the Gulf are thinking about how to deploy their capital in the future.

“Cost is no longer a reason not to proceed with renewables,” the 80-page NBAD report says. It says the most recent solar tender showed that even at $10/barrel for oil, and $5/mmbtu for gas, solar is still a cheaper option.

The bank says intermittency of wind and solar is not an issue, notes that fossil fuels resources are finite and becoming increasing hard to reach, notes that governments want local supplies and want to disconnect from the volatility of the oil price, and says policy frameworks are seeking to decarbonise economies in response to climate and pollution concerns.

Remember, this is coming from a leading bank in the oil-rich Gulf, the most emissions-intensive countries in the world, and where energy demand is rising so quickly it risks overwhelming domestic production, turning states such as Kuwait and UAE into importers of energy rather than exporters. Hence the local push into solar, so that the Gulf states can keep more gas or oil for export.

The thinking is consistent with broader trends within the Gulf. Last month, Saudi Arabia said that the end of the oil era was already on the horizon.

The NBAD report, prepared in conjunction with Masdar, the Abu Dhabi government’s renewable energy arm, The University of Cambridge and PwC, says the Gulf has a real opportunity to lead the world in renewables, deploying its considering financial weight, and by exporting its technology know-how.

It notes that solar PV and onshore wind power have achieved grid parity in many areas, particularly those in need of energy additions, and will be at parity in 80 per cent of world markets within two years.

In some instances, the price of renewables are remarkably low. “The latest solar PV project tendered in Dubai returned a low bid that set a new global benchmark and is competitive with oil at US$10/barrel and gas at US$5/MMBtu.”

This refers to the 200MW solar tender won by Saudi firm ACWA Power, a $23 billion energy major, which bid $US0.0584/kWh (5.84c/kwh), without subsidies, which is the lowest in the world to date.

This is already one third below the cost of gas-fired generation and ACWA believes costs will continue to fall. Much of Saudi Arabia and other Gulf states rely exclusively on oil (34 per cent) or gas generation for their electricity.

Given that the Gulf countries are expected to increase their energy demand three-fold over the next 15 years, or 170GW, the NBAD report notes:

“As Government and utilities are driven to bring new generation capacity on stream, this new reality presents a significant opportunity to make savings, reduce fuel cost risks, achieve climate ambitions and, at the same time, keep more oil and gas available for export.

“This could herald an era of increased focus on solar PV as the future generation technology of choice to tackle the challenge of how best to meet current daytime peaks in demand. Once this has been done, there is the potential for exporting this expertise to neighbouring countries and along the West-East Corridor more broadly.”

The report highlights many longer term investment opportunities, particularly storage technologies and concentrated solar power. It says these technologies are currently running behind solar PV and on-shore wind in the maturity curve but are rapidly catching up. “They can already be seen to be following a similar path towards proven deployment and operation, reliability and falling costs,” it notes.

(Indeed, ACWA Power said much the same thing in January, highlighting the fact that solar tower with storage technology was falling in price, and combined with solar PV would soon be challenging “baseload” fossil fuels on costs.

As for intermittency, the age-old argument against renewables, the report says intermittency and variability are not an issue. “There has been an historic concern that renewables are an unreliable option, because the wind blows only intermittently and the sun does not shine all the time, but that is proving to be less of an issue,” it says.

In the Gulf region, it says, demand peaks tend to occur in the middle of the day, and grids “can now easily cope” with at least 40 per cent of renewable input before requiring modifications. And gas is an ideal complement to deal with the intermittency where it occurs.

“Furthermore, developments in storage technologies are progressing rapidly, and in the next few years utility-scale solutions will be deployed that further minimise concern around what was until recently seen as a major inhibitor to the uptake of renewable generation.

Even without the remarkable price achieved at the Dubai auction by ACWA Power, the report notes that wind and solar are cheaper options in the Middle East at any oil price above $US-20 to $US30 a barrel.

Even against existing oil-fired generation that have been more than half depreciated, new solar is a cheaper option at any price above $US45/barrel. Fully depreciated oil generators can no longer compete against new solar at prices above $US60/barrel.

The report also notes that energy efficiency is becoming an increasingly obvious investment, with five-year returns in many investments.

“We should not underestimate the scale of the task that is facing us all,” said Alex Thursby, the CEO of NBAD. “To meet the significant demand for energy globally – in particular across the West-East Corridor, the rapidly growing super-region that stretches from Africa through the Middle East to Asia – we need to develop innovative approaches to financing energy projects.

“The future gap in energy demand and supply presents a real opportunity for the banking sector and the Financing the Future of Energy Report marks the start of a strategy to learn, collaborate more and to make a real contribution to helping this region meet its own energy challenges.”