Saudi Arabia has long been known for its oil. According to Oil and Gas Journal, Saudi Arabia has almost 265 billion barrels of proven oil reserves or around one-fifth of the world's oil reserves. Those oil riches afford Saudi citizens one of the highest living standards in the Middle East with a purchasing power parity per capita of $31,800 per year.
With the trend of increasingly affordable solar, Saudi Arabia may soon be known for solar as well. According to Reuters, Saudi Arabia plans to install 41 gigawatts of solar power over the next 20 years from the current 12 Megawatts of capacity today. To put that in perspective, according to the European Photovoltaic Industry Association, the entire continent of Europe had 70 gigawatts of solar installed at the end of 2012.
Saudi Arabia is adopting solar in a big way because solar economics will help the country save money.
The country is burning nearly 1 million barrels of oil a day during the summer months for power generation. According to some estimates, that number could reach 8 million barrels a day by 2030 if energy efficiency does not improve.
To counter that trend and save oil for exports, Saudi Arabia has made an official goal of attaining half of its power needs from renewable energy by 2020. A big part of that renewable energy initiative is that using solar energy for power production is a lot cheaper than using oil.
Electricity from oil-fired power plants costs around 16 cents/KWh versus approximately 9 cent/KWh for solar. And, according to Logan Goldie-Scot, lead Middle East analyst at Bloomberg New Energy Finance, solar power plants yield an internal rate of return of over 20% with oil around $94 a barrel.
With solar costs poised to trend lower, the choice between oil and solar for power generation becomes even clearer.
Who will benefit
Although the majority of the Saudi solar contracts are not awarded yet, I believe leading solar companies such as First Solar (NASDAQ:FSLR), Canadian Solar (NASDAQ:CSIQ) and Trina Solar (NYSE:TSL) will benefit.
First Solar is the leading U.S. solar company. The company specializes in building large utility scale solar farms and has extensive experience building projects in high temperature desert areas such as Ordos City.
Trina Solar and Canadian Solar also have a good shot. Saudi Arabia exports almost as much oil to China as it does to the United States. In addition to being leading Chinese solar companies, both build highly efficient solar panels at competitive prices.
The bottom line
The Saudi Arabian solar initiative is a leading indicator of what will happen in more places around the world. As costs fall, more places will see compelling internal rates of return in solar, and solar demand will increase exponentially. The leaders in the solar sector such as First Solar, Trina Solar, and Canadian Solar will likely benefit greatly from this trend.
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.