How Mena’s infant solar boom is affected by rising costs

Reuters/Sayed Sheasha

The Middle East has set record low prices for solar power. The second phase of Dubai’s Mohammed bin Rashid Solar Park in 2016 was awarded at 5.6 cents per kilowatt-hour (kw), and 1.04 cents was offered in April 2021 for the Faisiliyah project in Saudi Arabia.

Mena solar power tenders benefitted from the region’s excellent solar resources; the allocation of large areas of empty, flat land; the provision of grid connections by the utility; the huge scale of the projects; and low financing costs as banks grew comfortable with the low technical and business risks.

National governments or state utilities with strong credit profiles usually stood behind the agreements to purchase the generated electricity.

Solar system costs declined worldwide, driven by the ramp-up in Chinese manufacturing capacity, as well as technical innovations, notably bifacial panels that can collect light reflected from the ground.

In the Mena region, the UAE, Jordan and Morocco led the way, with enthusiasm spreading to Saudi Arabia, Oman, Egypt and Qatar.

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The bulk of the capacity has been in giant ‘utility-scale’ projects including the 5gw planned ultimate capacity at the Mohammed bin Rashid Solar Park and the 2gw Al Dhafra plant in Abu Dhabi, the world’s biggest single-site solar installation. 

Home to 3.5 million solar panels, Al Dhafra alone will power about 160,000 typical UAE homes. It will save 2.4 million tonnes of carbon dioxide emissions a year – roughly 1 percent of the UAE total.

Dubai also has a successful solar rooftop programme, mostly taken up by factories, car parks, malls and the airport, which now totals 0.5gw.

War-ravaged Yemen and crisis-hit Lebanon have also turned to small solar installations to replace non-existent state provision.

Pushing up costs

But now three factors are pumping up solar costs: headline inflation, a rise in the real-terms costs of solar systems and higher financing costs as interest rates go up.

General inflation should not affect future projects but it does create problems for companies who signed power purchase agreements for near-term developments at now uneconomic rates.

It also affects the mindset of governments and utilities firms. A solar bid price of 2 cents per kw-hour, which would have seemed excellent in 2018, now seems disappointing compared to the world-record low bids in 2020 and 2021. 

The rise in real costs is more problematic. In 2021 solar component prices jumped due to supply-chain bottlenecks and the pandemic-related stimulus spending.

In 2022 Russia’s invasion of Ukraine and its cut-off of most gas supplies to Europe sent energy prices soaring worldwide.

Europe has turned to solar power and other renewables to reduce its dependence on gas for electricity, while the US’s Inflation Reduction Act improves tax credits for solar installations.

The boom in green hydrogen production will also add to demand for solar systems, which are used to generate electricity to split water via electrolysis.

These cost rises could be persistent as solar deployment worldwide accelerates. One solar developer estimates that capital costs of solar power rose 56 per cent between its previous 2021 estimates and 2022, and will fall back only moderately by 2025, bucking a long trend of cost declines. 

This is substantial compared to the rock-bottom rates of barely over 1-1.3 cents per kw-hour achieved in auctions in Saudi Arabia and Chile in 2020-21.

Rooftop installations, with higher upfront costs and more expensive financing, could suffer more.

An attractive economic case

But this doesn’t mean the end of the Mena region’s infant solar boom – in fact the economic case for solar power has become even more attractive.

The price for power generation from gas has risen more dramatically than that of solar. Dubai Electricity and Water Authority’s top tariff for residential consumers is more than 12.5 cents per kw-hour.

Even in Mena countries, where domestic gas prices are usually government-regulated, the cost of burning gas for electricity instead of exporting it or using it in industry has gone up.

Some Middle East gas exporters, including Algeria, Egypt, Oman and Iran, have seen domestic demand eat into their available gas for export at times of record international prices.

The same goes for Iraq, Saudi Arabia and Kuwait, which still burn substantial amounts of oil in their power sectors.

The levels of solar penetration in the electricity mix are still modest across the region. Much more can be installed before intermittent output becomes a problem.

As much of Mena’s electricity consumption is for air-conditioning, it correlates well with solar output – a different situation from northern Europe or the US in winter.

Longer-term falls in battery prices offer the potential to pair with solar to provide reliable 24-hour electricity at moderate costs.

The Emirates Water and Electricity Company’s latest statement of long-term capacity needs recommends that it should increase its total solar capacity from about 3.3gw today to 7.3gw by 2030, and install 300mw of batteries.

The UAE, Oman, Saudi Arabia and Bahrain all have net-zero carbon targets. With the Cop28 UN climate conference coming up in Dubai in November, regional states face more environmental scrutiny.

Their export-oriented businesses, including petroleum, fertilisers, steel and aluminium, face the threat of European tariffs if they do not reduce their carbon footprint.

Real rises in solar power costs should be temporary but its advantages are permanent.

Robin Mills is CEO of Qamar Energy and author of The Myth of the Oil Crisis