Saudi Arabia has been talking a big game about solar energy for years, setting a goal of building $109 billion of solar power plants as far back as 2014. But until recently, the country hasn't been putting a lot of shovels in the ground to build solar power plants. 

That may be changing in 2018 as Saudi Arabia plans to auction off 3.3 GW of solar tenders with 9.5 GW of renewable energy capacity planned by 2023. The big shocker recently was a 200 GW, or $200 billion, memorandum of understanding (MOU) signed by Saudi Arabia and SoftBank Group (SFTBF 2.02%) to build solar in the country. To put this project in perspective, 200 GW could power 32.8 million American homes and would be the biggest solar farm in the world by a mile. 

Solar farm in the desert on a sunny day.

Image source: Getty Images.

Solar energy's biggest deal ever

The MOU between Saudi Arabia and SoftBank for 200 GW of solar would be about 100 times the size of the next biggest solar project and double the amount of solar installed globally in 2017. If completed by 2030, as planned, it could help drive a surge in global installations and upend the entire region's energy infrastructure. 

For the solar industry, the impact could be huge. Solar panels are priced like a commodity with prices swings as large as 30% per year when supply and demand are out of alignment. In 2016, a sudden drop in installations in China led to industry oversupply and about a 30% drop in panel prices. Manufacturer profits naturally plunged and the drop in volume hurt results as well. In the second half of 2017, conditions reversed and panel prices in the U.S. jumped nearly 30% as a surge in building in the U.S. and China led to an undersupplied market. It may not seem like a single project would drive solar panel prices long-term, but 200 GW of demand could be a nearly 20% increase of demand from 2017's 100 GW installed baseline, which may lead to strong margins for solar manufacturers. 

Three companies to watch as Saudi Arabia develops its solar plans are JinkoSolar (JKS -1.29%), Canadian Solar (CSIQ -1.87%), and SunPower (SPWR -13.37%), who all produce a commodity panel that would be ideal for a large scale project. They also all have experience or aspirations in the Middle East. 

JinkoSolar is one of the largest solar manufacturers in the world and has a 1.2 GW project in Abu Dhabi that's slated to be completed in 2019, so it could see the Middle East as a major source of demand in the future. Canadian Solar supplied solar panels to an early Saudi Aramco project and has been aggressive selling panels and building projects all around the world. SunPower says it will leverage its majority owner Total to win business in oil-producing regions like Saudi Arabia. The company could also build a solar panel assembly plant in the country, supplying the local content Saudi Arabia has preferred in the past. 

Not coincidentally, all three manufacturers were aggressive bidders in Saudi Arabia's 300 MW solar tender in 2017. They could all see Saudi Arabia as a source of tremendous demand over the next 12 years. 

Why solar is a win for the Middle East

Saudi Arabia going solar won't just help solar companies, it'll help Saudi Arabia economically. The country powers most of its electric grid with oil and natural gas power plants, burning as much as 900,000 barrels of oil per day in the summer to power the grid. If we assume that oil sells for $60 per barrel on the international market, that's $54 million per day of lost potential oil sales for the country. 

On top of the lost exports, oil is a very expensive way to power an electric grid. Hawaii, which is the only analogous region in the U.S. because it imports and consumes oil to power most of its grid, has electricity costs about three times the continental U.S. at around 30 cents per kilowatt hour (kWh). Solar energy, by comparison, is one of the cheapest forms of new power generation in the world and, in desert regions in Saudi Arabia, we will likely see power purchase agreement rates lower than $0.02 per kWh

By building massive solar power plants, Saudi Arabia could lower its cost of electricity and increase its oil exports. It's a win-win for the country. 

The really, really big caveat

A 200 GW solar project in Saudi Arabia could be a huge deal for the solar industry long-term, driving both sales volume for the industry as well as higher solar panel prices. But Saudi Arabia's latest announcement is only a memorandum of understanding. This isn't a firm contract yet, and there's no guarantee anything near 200 GW will be built. 

What I find encouraging, though, is that oil-rich countries like Saudi Arabia are seeing any benefit to announcing such big solar ambitions. That development alone should give investors the confidence to be very bullish on solar energy long-term.