Just how cheap has solar energy gotten? Middle Eastern countries from Saudi Arabia to the United Arab Emirates are betting on solar to power their future -- not the oil that has fueled their electricity plants for the past century.
The decision to invest in solar isn't about climate change or any altruistic reason. It's based on simple economics. And a recent bid in Dubai shows just how powerful the solar industry could be in the Middle East.
The new record for solar
Early this month, Dubai Electricity & Water Authority announced that it had received five bids to build 800 MW of solar capacity, with a low bid of 2.99 cents per kWh. The headline number may not end up being exactly what the utility pays for electricity after escalators and potential government subsidies in financing and land acquisitions are factored in, but the fact that solar is even approaching 3 cents per kWh is amazing.
To put that number into perspective, the average U.S. retail electricity consumer paid 12.15 cents per kWh in February. In Hawaii, which -- much like the Middle East -- burns mostly oil to generate electricity, costs were 26.77 cents per kWh.
It just makes sense to burn less oil and generate more electricity with sunshine, which is abundant in most of the Middle East.
Big-ish plans for solar
The 800 MW bid may be just a small step toward an energy transition in a region defined by oil. Dubai is planning to get 7% of its power from renewable energy by 2020, which considering its 39,599 GWh of demand in 2014 (the latest data available), would require about 1.3 GW of solar capacity, assuming optimal solar conditions.
Saudi Arabia's Vision 2030 plan includes building 9.5 GW of renewable energy generation, and it's hoping to do so with local product. This means a big investment in renewable energy by a nation that would be seen as among the least likely to want to promote it. Instead, it's showing just how cheap solar energy can be.
Making an even bigger pie
What's positive about this for companies like SunPower (NASDAQ:SPWR) and First Solar (NASDAQ:FSLR) -- two of the largest solar project developers in the world -- isn't that Dubai or Saudi Arabia will be big markets in and of themselves. With 75 GW of solar expected to be installed in 2016, they'll be fairly small markets even if they hit the goals laid out above.
However, their embrace of solar shows that solar demand is starting to have breadth across the world. And economics are starting to drive decisions to go solar, not just subsidies and politics.
For most of the past decade, solar has been in a boom-and-bust cycle as Germany, Spain, Japan, and other countries raised and lowered their subsidies. The industry would go through periods of booming demand and massive oversupply as a result of its reliance on a relatively small number of markets. But, today we're seeing solar growth in the U.S., China, South Africa, Mexico, Chile, the Middle East, and even India.
As the industry grows and there's more breadth of demand, it will create a more consistent operating environment, which should bode well for leaders like SunPower and First Solar. Even if they aren't winning contracts in each of these markets, a rising tide lifts all boats, and as the biggest boats in solar, these are two companies with very bright futures.
Travis Hoium owns shares of First Solar and SunPower. 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.