How the Saudi Arabian Dream Could Lift Solar Stocks

Saudi Arabia plans to diversify away from petroleum, and this is good news for solar companies.

Feb 19, 2014 at 12:20PM

When Saudi Arabia runs out of oil, what will sustain the nation of 28 million?

That is the question that the nation's leaders have thought long and hard about. One solution is putting surplus petrodollars into a sovereign wealth fund, which would invest that surplus in good times and provide steady interest income when the oil runs out. 

Saudi Arabia has done just that, and now has the second largest sovereign wealth fund in the world with assets of $675.9 billion.

At its present size, however, assuming an 8% annual return, which would yield interest income of $54 billion, the sovereign wealth fund would not be able to compensate for Saudi Arabia's current oil income of around $300 billion a year. 

Saudi Arabia has the right resources to export solar energy through the grid
Another solution is for Saudi Arabia to export electricity to Europe by developing solar projects.

Saudi Arabia has the land, labor, and capital to make that solution a reality. Because of the Arabian Desert, Saudi Arabia clearly has a lot of unused land that gets plenty of sunlight. In terms of labor, Saudi Arabia has an unemployment rate of around 11%. 

Building solar utility plants would lower the unemployment rate without triggering inflation. With its $300 billion a year petrodollar income and large sovereign wealth fund, Saudi Arabia also has the capital to invest.

Because it is currently exporting the most valuable commodity in the world, Saudi Arabia has the political leverage to get Europe to accept its solar energy exports. 

Tentative steps 
In its present state, the European electric grid covers most European nations but is not connected to Saudi Arabia. The country plans to connect the grids together at some point. When they connect, Saudi Arabia can export electricity to Europe. 

Khalid Al Sulaiman, vice president for renewable energy at the King Abdullah City for Atomic and Renewable Energy, has said that it is feasible for the nation to export up to 10 gigawatts of electricity through North Africa and Spain or Italy. 

Assuming realized revenue of 10 cents per kilowatt hour and 16 hours of sunlight in a day, 1 GW of production would mean $584 million a year in revenues.10 GW of production would mean $5.8 billion a year in export revenues, or approximately 10% of what the sovereign wealth fund would yield in interest payments per year.

Ambitious goals
Building solar utility-scale plants would not only help Saudi Arabia's exports, but it would also help the nation conserve expensive crude oil that the nation currently uses for half of its electricity needs. 

Because using solar energy makes so much sense, Saudi Arabia has ambitious solar goals. The kingdom has plans to install more than 41 GW of solar capacity in 20 years. That number could get bigger as time goes forward.

The bottom line
Like many middle income, resource-rich nations, the Saudi dream is to build a sustainable modern economy that is not dependent on natural resources. Its leaders are aggressively adopting solar energy to realize that dream.

All of this means that solar companies will greatly benefit There have already been some tentative wins.  

According to multiple sources, SunEdison (NYSE:SUNE) is likely to win a $6.4 billion contract to build a solar panel factory that is projected to make 3 GW of solar capacity annually. While the project has not been officially approved, it is well on track. Government utilities have already agreed to provide the plant with natural gas and electricity.  If all goes to plan, the factory should open in 2017. 

If SunEdison does win the contract, it would be a game-changer. Besides the gigantic increase in production, if the company won the corresponding downstream projects, SunEdison would likely see large increases in its solar project pipeline. As of the most recent quarter, the company's solar project pipeline was only 3.4 GW.  

While missing out on the large contract would be a loss for First Solar (NASDAQ:FSLR) and SunPower (NASDAQ:SPWR), there is still opportunity. As both solar production costs and installation costs come down, Saudi Arabia's solar targets are likely to get bigger, not smaller over time. 

If all goes to plan, Saudi Arabia could be the solar capital of the world and realize its dream.

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Jay Yao has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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