Across the globe, the cost of renewables technology is falling, and the rising expense of extracting and importing the world’s diminishing oil and gas resources is creating a compelling case for shifting the focus to alternative sources of energy. Solar power production costs are plummeting, while new opportunities are presenting themselves to exploit wind and wave power.

“The cost of production of solar power has fallen dramatically in recent years,” says Latif Faiyaz, head of renewable energy at Alfa Energy UK in London. “It used to take 12 years to get a return on investment in solar panels; now it’s taking eight to 10 years, and it’s still falling.”

But there are significant disparities between different markets. China is building two wind farms a week, while in Europe – once at the vanguard of the global push to promote alternative sources of energy – interest in renewables is currently in decline.

“Europe was a world leader for renewables construction, but is slowing down very sharply,” says Roderick McKinley, a renewable energy specialist based in Chile. “In a lot of European markets, renewables are still not competitive without government subsidies, but Europe has been stumbling out of an economic crisis, so there has been diminishing political support.”

Growing demand

Elsewhere in the world, it is a completely different story. In Chile, solar farms are being built with a capacity of 50-150MW. “It is the first country in the world where large-scale solar power is competitive without government subsidies,” says McKinley. “It is an indication of the fact that things are changing.”

There is also increasing renewables demand, not only in China but also in emerging markets in sub-Saharan Africa. “We will see hydroelectricity really pick up, especially for Africa,” says Faiyaz. “Kenya and Rwanda are also looking into geothermal energy. The cost of construction is very high – about $200m-300m per project – but it is very robust technology.”

Even in Europe, the long-term trend is encouraging. The rising cost of hydrocarbons-based energy sources and falling indigenous supplies are gradually eroding the marginal cost of investing in renewables. “In the UK, the rising cost of energy means that alternative energy projects are becoming less reliant on government subsidies than in the past, and that is a trend that will continue until at least 2020,” says Faiyaz.

Market reforms due to be introduced in the UK in 2015 will make conventional power even more expensive, with the addition of an extra levy of 1.3 pence ($0.02) a kilowatt hour. “Production costs are going up by about £20 a MW. There soon won’t be a need for a solar subsidy,” says Faiyaz.

In many countries, the intermittency of solar and wind power supply – and an inability to store it – has been problematic. “In Germany and the UK, renewable energy has been playing havoc with the power market,” says Faiyaz. “You cannot predict when it is running, and when it is running it has to have priority on the grid. With coal and gas generation you have certainty over three to five years, depending on how far out you can buy. With solar, you don’t know if it is going to be cloudy the next day.”

Storing energy

One solution to the intermittency issue is the storage of solar power made possible in concentrated solar power (CSP) projects. But the high cost of CSP technology remains a barrier. “CSP is incredibly expensive,” says Faiyaz. “It requires a serious amount of investment, and just hasn’t taken off.”

More hopeful is the development of batteries that can store energy produced by wind and photovoltaic solar power technology. “We are waiting for a battery solution,” says Faiyaz. “Growth of wind and solar power can be exponential with battery power, and we are getting closer and closer to that solution. I think in the next five years we will see a breakthrough.”

In the Middle East, there is every incentive to shift away from fossil fuels for power generation. “Middle East countries generally elect to burn diesel oil and other petroleum distillates that could be sold on the global market for a lot of money, while subsidies are so much that [power is] virtually free [to the consumer],” says McKinley. “You could also create additional employment with the development of a domestic [renewable] power industry.”

But growth in renewables in the Middle East is inhibited by sunk capital expenditure. “Part of the problem is that anything you are trying to build is competing with existing infrastructure where the capital cost has already been paid down,” says St. John Hoskyns, manager of renewable energy financing at accountancy firm BDO in London. “When you build renewables capacity in the US, Europe or the Middle East you might be using similar technology, but its viability depends on what it is competing against.”

There are some efforts in the Middle East to begin to leverage the economic advantages of renewable energy, although they are likely to take time to take root. “It is a big learning curve,” says McKinley. “There are some very strong drives towards renewables in the Middle East, but it is moving slowly. It is about coming round to that way of thinking.”

It used to take 12 years to get a return on investment in solar panels; now it’s taking eight to 10 years

Latif Faiyaz, Alfa Energy UK

Solar sector: Important lessons have been learnt

Part of the problem is that anything you are trying to build is competing with existing infrastructure

St. John Hoskyns, BDO

Cost comparisons and challenges

Advocates of renewable energy say considerable progress has been made with the technology over the past five years and that important lessons have been learnt about what makes a successful solar and wind energy programme in the Middle East and North Africa (Mena) region.

They also point out that the real cost of Mena conventional power generation, using heavily subsidised oil and gas feedstock, is finally being acknowledged, which provides better understanding of the economics of renewables. They forecast that the cost of renewable energy production will be driven down further by technological advances and mass production, and it could even match gas-fired generation within a decade.

Issues nevertheless remain, particularly for the region’s solar sector. The first is the high relative direct cost of generating electricity using solar power in countries where the oil and gas price is subsidised. In Saudi Arabia, average electricity production costs using oil and gas are about $0.04 a kWh. The equivalent for solar is now estimated at about $0.15 a kWh. Advocates of solar power say this is a false comparison and that the opportunity cost of using oil and gas in electricity generation should be the benchmark, making solar competitive.

Critics say this may indeed be the case, but the reality is that Mena governments – unless they sharply increase the domestic feedstock tariff (which is unlikely in the next five years) – will have to pay a subsidy to solar energy producers. Most of this will benefit the suppliers of technology, which are all foreign companies.

The most comprehensive study on the cost of renewable energy compared with
conventional power generation in the Mena region was prepared by Danish consultant Cowi in May 2008 for Oman’s Authority for Electricity Regulation. The report, which is specific to the Omani market, concluded that solar power would be the most expensive alternative to gas-fired generation, followed by diesel generation.

Wind energy fared much better than solar, coming in just behind coal-fired generation. In fact, at a gas price of $6 a million BTUs, which was close to the international average, the cost of electricity produced from wind turbines was marginally lower than that of power generated in a gas-fired plant, the report said.

Cowi concluded that the cost of power generated using fossil fuels at 2008 fuel prices was lower than from renewable energy sources. But it also noted that this would change if fossil fuel prices rose, the capital cost associated with renewable technologies fell and the cost of fossil fuel generation was adjusted to take into account the environmental impact of emissions.

Declining capital costs will significantly improve the economics of renewable energy projects. Technological advances, increased production capacity and economies of scale are already driving down costs, with the price of solar panels forecast to fall by more than 10 per cent a year for the foreseeable future. The US’ Solarbuzz forecasts that the projected cost of solar power generation globally will fall to $0.10 a kWh in 2019, while conventional power generation will edge up to $0.07 a kWh from $0.05 a kWh. Saudi Aramcohas produced a regional forecast, which also states that the cost of solar production will halve to $0.10 a kWh in the period 2010-20 in the GCC. This would make solar power cheaper than diesel-fired generation and place it on a par with gas.