Wednesday, April 11, 2012

Could Solar Power Boost Saudi Oil Exports?

How often have we heard that installing renewable energy sources like wind and solar power will improve US energy security and reduce oil imports? There are other reasons for promoting these technologies, but this one has little substance, because we generate less than 1% of our electricity from oil. Ironically, this logic looks much more relevant to the part of the world with the largest oil reserves and that accounts for the lion's share of global oil exports, the Middle East. This week's Economist reports that Saudi Arabia generates 65% of its power from oil, and the impact on its oil exports could grow dramatically as the country's population and economy expand. Other Gulf producers have similar profiles. The Saudi government's strategy to increase its use of nuclear and renewable energy could pay big dividends in preserving oil for exports, though the volumes freed up by such means wouldn't be cheap.

Saudi Arabia has set a goal of deriving 10% of its electricity from renewable sources by 2020. Solar power looks like the leading option, and a Saudi company recently announced a deal to build a plant to produce polysilicon, the raw material for many of today's photovoltaic (PV)cells. (Its output would likely be exported for some time, until the downstream value chain developed.) Saudi Arabia has tremendous solar potential, with much of the country receiving more than 6 hours per day of peak sunlight, on average. Based on recent electricity demand of around 200 billion kilowatt-hours (kWh) per year, it would take roughly 9,000 MW of PV capacity to achieve their goal. How much oil would that save, and at what effective cost?

With average Saudi power generation operating at 31% efficiency, according to a report by ABB, saving the oil used to generate 20 billion kWh would free up roughly 100,000 bbl/day for other uses, including exports. That doesn't sound like a lot for a country that's currently producing 10 million bbl/day, but it's the equivalent of a medium-to-large offshore oil platform. However, the more interesting aspect of this strategy is its cost, both in aggregate terms and in the effective cost of the oil it would release.

A recent report from Lawrence Berkeley National Laboratory estimated the installed cost of utility-scale solar power in the US last year at around $4 per Watt. Assuming current costs are 10% lower--module costs have fallen by more, but balance-of-system costs typically fall more slowly--that would result in a required investment of $32 billion at today's prices. That's about what ExxonMobil spent on its entire global oil & gas development program last year, which will presumably yield a lot more than 100,000 bbl/day of future production. Moreover, using NREL's simplified model for calculating levelized electricity costs from different technologies, the output of PV in Saudi Arabia at $3.60/W installed would cost around $0.13/kWh without subsidies. Using that same 31% efficiency factor for oil-fired power generation yields an effective cost for each barrel saved by solar power of $70. That looks cheap compared to current oil prices, but it's almost an order of magnitude higher than what many assume it costs the Kingdom to produce a barrel of oil today. Even if we assumed installed PV costs fell to $2/W before they're done, that's still around $40/bbl. If that looks attractive to them, what does it say about their other opportunities?

One way to address that without getting into thorny questions about peak oil is to consider the alternative of using gas-fired generation to displace oil from Saudi Arabia's power sector. The Kingdom has the world's fifth-largest natural gas reserves. At 264 trillion cubic feet they appear more than ample for the purpose, if developed. Even if gas from new fields cost $5 per million BTUs, the effective cost of the oil freed up by switching to efficient gas-fired combined cycle power generation would be about $25/bbl. And with recent trends showing the energy intensity of the Saudi economy getting worse, not better, the scale of the efficiency opportunity there indicates that the cheapest displaced barrels might be from investments in improving energy efficiency, rather than new generation of any kind.

I'm not suggesting that solar power has no place in Saudi Arabia's energy mix. If the technology makes sense anywhere, it is in sunny countries like this that rely on expensive fuels for most of their current generation. Yet as clever and appealing as the idea of using abundant solar energy to free up Middle East oil for export might sound, from both an environmental and oil-consumer perspective, the numbers suggest that it's probably not even their second- or third-best option for that purpose.

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