Skip to content Skip to Search
Skip navigation

Costs versus profits in the energy transition debate

The Middle East has some of the world's cheapest renewable energy, but fossil fuels still have some advantages during the energy transition Reuters/Nasser Ishtayeh
The global weighted average cost of solar power is now 56% cheaper than fossil fuel and nuclear alternatives and very sunny regions such as the Gulf can benefit further
  • Gulf has cheapest renewable power
  • Cost structure different from fossil fuels
  • Oil and gas profits remain higher

The Abu Dhabi-based International Renewable Energy Agency (Irena) last month reported that, once again, if you want cheap electricity, then renewable energy is by far your best bet.

After “spectacular” declines in cost in recent years, according to Irena’s 2023 Costs Report, the global weighted average cost of photovoltaic (PV) solar – the most widespread renewable energy technology in the Gulf – is now 56 percent lower than its fossil fuel and nuclear alternatives.

This double-digit cost advantage is not a new phenomenon.

According to the International Energy Agency (IEA), solar PV became cheaper than gas or oil-fired power as long ago as 2015 – particularly in very sunny locations like the Gulf.

The region leads the world in building out low cost renewables. 

In May this year, the Saudi Power Procurement Company and Japan’s Marubeni Corp announced the lowest-ever power purchase agreement for wind power worldwide – just $15.65 per megawatt hour (MWh).

Saudi Arabia is also home to the cheapest solar power worldwide, at $10.5/MWh, according to Norway’s Rystad Energy research group. 

Irena typically puts the global weighted average cost of fossil fuel equivalents at around 10 times these levels.

At the same time, there is no shortage of renewable power equipment.

“We already have the capacity, worldwide, to deliver all the solar modules we need to limit the global temperature rise to less than 2C,” Simon Price, director of energy transition at analysts CRU Group, says.

The key reason solar is now so cheap is that Chinese-produced modules are largely sold at cost these days, thanks to overcapacity in module and polysilicon plants around the People’s Republic.

So, with renewables not only the key to cutting carbon emissions, but also so cheap and widely available, why does anyone still build fossil fuel power plants? 

The reasons for this are various, but, taken as a whole, they are central to understanding where the world is now with the energy transition – and why it is still behind target on its clean energy goals as Cop29 approaches.

True price of energy

One difficulty with cost comparisons is the major difference between the cost structures of renewables and fossil fuels.

For plants running on the latter, the main cost is the feedstock – the oil and gas, which is subject to the ups and downs of the global market. 

For renewables the cost of the feedstock is zero, but there is a considerable upfront expense. 

A larger amount of land is needed (or offshore seabed rights), and this cost tends to drive utility-scale solar and wind further away from cities and towns – the places where the greatest demand for electricity is located. Longer distances mean higher grid connection costs. 

These are factors overlooked by the standard metric used in cost comparisons – the levelised cost of electricity (LCOE).

“LCOE is not an adequate measure of the true cost of a power market,” Thomas van Lanschot, head of power and low carbon energy research at BMI, says. “It does not account for the comprehensive expenses associated with creating and maintaining an energy system.”

Gas or oil-fired power stations can also ramp up and down output with the flick of a switch. But solar and wind suffer from variability as night follows day, or the wind drops. 

The addition of 1kW of extra power from a fossil fuel-powered plant also costs next to zero. Adding a further 1kW to a solar plant involves buying and installing extra panels – a very low cost, but still not zero.

Pursuing profitability

A further issue is that of the bottom line.

“Even though the LCOEs have come down, the solar and wind business is not a particularly attractive one in terms of profitability,” says professor Brett Christophers of Uppsala University in Sweden, author of the book The Price is Wrong.

Returns on investments in fossil fuels typically range between 10-20 percent, while for a renewables project, 5-8 percent is the norm, Reuters reported in June 2023. 

“It’s also about the volatility of profitability,” Christophers says. 

Under most power purchase agreements a fossil fuel project can be reasonably sure that future price hikes in feedstock – its biggest cost – will be passed on to consumers, maintaining the project’s profitability. 

Meanwhile, if the price of the feedstock falls, that usually means fossil fuels are cheaper – and thus the level of profitability can still be maintained.

Renewable energy projects in contrast must contend with costs which are largely upfront and have to be met regardless of fluctuations in electricity prices. That makes investment riskier – and therefore costlier, cutting profitability.

Future costs

However, these drawbacks are far from insurmountable. 

New developments in battery technology mean storage is likely to become cheaper and more efficient, ironing out the problem of variability in output from solar and wind plants.

More co-location – factories and other heavy power consumers locating next to solar and wind farms – also cuts grid connection costs.

As for profitability, however, that may mean looking again at how electricity markets are structured – and at the role the public sector may have to take in future roll-out.

In the meantime, fossil fuels are likely to be widely used in generation, even as renewable costs plummet.

Latest articles

Qlik provides data integration, tracking and management software to businesses

Adia to buy $1bn stake in US software company Qlik

Abu Dhabi’s sovereign wealth fund is buying a $1 billion stake in data analytics software company Qlik, the latest deal in a string of Gulf purchases from buyout groups. Thoma Bravo, a US buyout group that specialises in software businesses, acquired Qlik for $3 billion in 2016 and is to sell a stake to the […]

AlAbraaj has several franchises in Saudi Arabia, including Mezza-W-Mashawi at Riyadh's King Khalid airport

Restaurant chain AlAbraaj plans IPO on Bahrain Bourse

AlAbraaj Restaurants Group is planning to list on Bahrain Bourse before the end of 2024. Founded in 1987, the restaurant chain manages 15 brands across 37 locations in Bahrain. It employs about 1,200 people. AlAbraaj also franchises five restaurants, three of which are in Saudi Arabia – Khobar, Jeddah and Riyadh. The company is finalising […]

DP World Australia operates four container ports and is taking on more than 40 Silk Logistics sites

DP World to acquire Australia’s Silk Logistics

DP World Australia has announced plans to acquire the freight and logistics service provider Silk Logistics Holdings, in a deal worth A$174.5 million ($114.9 million). The Australian subsidiary of Dubai’s DP World will buy Silk Logistics at a price of A$2.14 ($1.40) per share.  The transaction is subject to shareholder approval and regulatory approvals, and is […]

A Talabat delivery driver in Doha, Qatar

Talabat focusing on core markets ahead of listing, says CFO

Food delivery app Talabat aims to prioritise organic growth over geographical expansion, its chief financial officer says, as it prepares to launch one of the region’s largest listings. Delivery Hero, the German parent company of the UAE-headquartered app, announced on Monday that it plans to sell a 15 percent stake in Talabat.  The initial public […]