Growth in the solar industry over the next decade won't be driven by subsidies or government backing, but rather locations where the energy source is cheaper than alternatives. In the case of the Middle East, solar is not only economically viable, it's a necessity because its most valuable commodity -- oil -- is more valuable as an export than it is being burned in power plants.
For the solar industry, that opens up an incredible opportunity that could generate hundreds of billions in revenue and create incredible value for shareholders.
Why the Middle East needs solar
When your main industry is energy it's logical to use the energy you extract from the earth to generate electricity, which is why most Middle Eastern countries generate electricity from oil. In Saudi Arabia, that's become problematic because electricity consumption has risen rapidly in the past decade and that's lost revenue potential from oil exports.
According to a report from The Oxford Institute for Energy Studies, a growing middle class, higher standards of living, and the diversification of industries has led to a number of problems for Saudi Arabia. From 2003 to 2012 consumption nearly doubled from 128,629 million kW-hr to 240,288 million kW-hr. This was driven by residential consumption, which used 50% of electricity, no doubt to stay cool in the hot climate.
To generate that much electricity, the Saudi Electric Company consumed 995,000 barrels of oil equivalent per day and considering that they're 77% of capacity it's safe to say that oil equivalent used to generate electricity was over 1.2 million barrels per day. If the alternative was selling the oil for $100 per barrel, the country lost out on $43.8 billion in potential exports by consuming oil and natural gas to generate electricity.
The problem isn't getting better either. The country plans to increase generating capacity from 55 gigawatts to 120 gigawatts by 2020 just to meet demand. Then there's the insane swing in consumption from winter to summer, when air conditioning goes on full blast. According to the Oxford report cited above, overall consumption rose nearly 1 million barrels per day from low to high.
Why solar makes sense
The cost of solar has fallen rapidly over the last decade and new projects in the Middle East would likely be built for well below $0.10/kW-hr. SunPower's (NASDAQ: SPWR ) Henrietta project that's under construction has a power purchase agreement, or PPA, for $0.104/kW-hr, First Solar's (NASDAQ: FSLR ) Macho Springs PPA is $0.085 when state incentives are included, and even Germany's feed-in tariff rate for large solar systems is 9.19 Euro cents/kW-hr.
Saudi Arabia doesn't publish what its electricity costs or prices are but since it generates about 65% of its electricity from oil we can get a ballpark idea of the cost from the one state in the U.S. that generates a lot of electricity from oil -- Hawaii. In Hawaii, the lowest residential utility rate was an incredible $0.351/kW-hr and ran as high as $0.45/kW-hr in 2012, according to the latest data from the Energy Information Administration.
Solar energy would not only reduce oil consumption and increase exports of oil and gas in the Middle East, it would lower costs, reduce volatility of exports, and make for a cleaner future.
Most of the data provided above is for Saudi Arabia, but it can be assumed that Qatar, the United Arab Emirates, Iraq, Kuwait, and any other energy producing country will see the same dynamics. Solar energy is too cost effective to ignore and with domestic consumption rising it's in their best interest to build solar so they can export more oil and gas.
The opportunity is huge
The Middle East is a tiny solar market as it stands today, but that will likely change in the next few years. Saudi Arabia alone has a $109 billion plan to build enough solar to generate 1/3 of its electricity. It plans to tender 1 gigawatt of projects, or about $2 billion in investment, by the end of 2014.
Qatar has built a 300 megawatt solar manufacturing plant and sees 2.5 gigawatts of production in its future.
The UAE's Abu Dhabi region just completed a 100 megawatt concentrated solar power plant and also sees a great future for solar.
This isn't an opportunity that's lost on some of the best companies in solar. First Solar says about 10% of its potential booking opportunities come from the Middle East and its thin-film panels perform well in the desert heat.
1.7 gigawatts of SunPower's 7.65 gigawatt pipeline is in the Middle East and Africa and the company hopes its majority owner, Total, has been a presence in the Middle East for decades. Those ties could give the company a leg up in building relationships and its C7 concentrator design can be partially built in-country, satisfying the domestic manufacturing requirement many countries are looking for.
Of the big publicly traded installers, SunEdison (NYSE: SUNE ) trails the group with only 17% of its backlog in Europe, the Middle East, and Africa. As the company transitions to a project builder, look for this exposure to increase.
Foolish bottom line
The opportunity for the solar industry in the Middle East can be measured into the hundreds of billions of dollars and it'll be driven by economic factors, not political ones. It's in these countries' best interests to export more oil and gas to maximize revenue and lower electricity costs by installing solar.
Look for this market to be a huge point of excitement for the solar industry in the next few years because the Middle East is made for solar and now there's an economic interest to exploit that fact.
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