Solar power overtakes oil-fired generation in cost-effectiveness

19 January 2012

Renewable energy has traditionally been viewed as a more expensive alternative

For many years, renewable energy has been perceived as a costly option for power generation. For hydrocarbon-rich states in the Middle East, the contrast in price between renewable energy and conventional power generation has been starker still. Yet, the tide may be turning, due to advances in solar power technology and economic factors.

Over the long-term, technological advances have pushed down the cost of generating power from photovoltaic (PV) solar modules. In the 1970s, the cost of solar panels was about 100 times what it is today. New entrants to the market have created intense competition and the efficiency of PV technology has risen significantly.

In recent years, the cost of PV equipment has also been depressed by an easing in the supply chain. The generous incentives offered for solar power in Germany followed by Spain and then Italy through high feed-in tariffs elevated demand for solar panels to an artificially high level before the global economic downturn.

These countries have since slashed their feed-in tariff offerings, while capacity building from manufacturers has continued. These factors have readjusted the price of solar to reflect the true cost of the modules and brought the technology closer to grid parity.

Based on the assumption that the price of PV power is $1.7 a watt, the levelised cost of energy (LCOE) is $150 a megawatt hour (MWh). If the price of crude oil is at $111 a barrel at market rates, the LCOE is $160 a MWh. As a result, PV is cheaper than oil for power generation. There is also the potential for sale of the oil that would otherwise have been used for power generation, and there is an additional saving of $111.

For countries that currently use a lot of oil for power generation, this is important. About 72 per cent of power in Kuwait is generated from oil, while Saudi Arabia generates about 44 per cent of its power from oil. The economic factors, together with the severe environmental impacts associated with burning oil, mean that PV should be an attractive option for these countries, particularly if the oil price continues to climb in the long term.

There are some limitations to this analysis. It is difficult to account for the economies of scale on offer from large traditional power plants, transmission loss as a result of locating projects where the natural resources (and not the demand) is located, financial constraints due to upfront costs and the fluctuating nature of power from renewable energy. In addition, the economic incentives are easily obscured by the subsidy of power to consumers in the region and access to cheap and plentiful fuel to traditional power plants, as the costs can be seen as the price of extraction instead of market rates. 

But while it may make sense to replace oil-fired generation for PV solar, the technology is still a long way from grid parity with natural gas. Assuming a gas price of $4.37 a million BTUs, the LCOE is $26 for 1MWh of power, significantly cheaper than PV solar. Also, if gas is being sold at only $34 a million BTUs, the fuel savings from switching to renewable power do not significantly diminish the cost differential. As a result, it will be a while before gas-rich countries such as Qatar will benefit financially from a switch to PV solar.

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