Barriers to Developing Solar Energy in Saudi Arabia:

A Profitability Analysis of the Transition to Solar Energy and a Cost-

Benefit Analysis of Installing 41 GW of Solar Energy by 2032

Energy & Energy Policy

University of Chicago

Team 28

Junil Kim, Sang Won Lee, Melissa Park, Jay Rho, Chan Yoon,

TABLE OF CONTENTS1

I. INTRODUCTION

1. Purpose

2. Background Information

3. Need for Transition

II. Solar Energy Transition in Saudi Arabia

1. Technological Overview

1.1 Solar Thermal System Technology

1.2 Concentrated Solar Panel (“CSP”)

1.3 Photovoltaic System Technology

1.4 Potential Technological Barriers in Saudi Arabia from Its

Geographical Issue

1.5 Solutions to the Potential Technological Barriers

2. Economic Overview

2.1 Economic Barriers with Petroleum Subsidies

III. Profitability Analysis

1. Background

2. Profitability Model: Opportunity Cost

3. Result

4. Interpretation

IV. Cost-Benefit Analysis

1. Background

2. RETScreen Analysis

2.1 Energy Production Estimation

2.2 Financial Feasibility Assessment

2.3 GHG Emissions Analysis

3. RETScreen Results

3.1 Projected Energy Production

3.2 Financial Analysis Results

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3.3 GHG Emissions Reductions

4. RETScreen Sensitivity Analysis

4.1 Global Solar Radiation

4.2 Losses Due to Sand and Dust

4.3 Initial Costs

4.4 Income from GHG Emissions Reduction Credit Trading

4.5 Electricity Export Rate

5. Remarks

V. CONCLUSION

VI. WORK CITED

I. IntroductionAround the world, countries conventionally gained energy from fossil fuels (coal, crude oil,

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natural gas). These conventional energy sources have increasingly been an area of study to people

around the world, where the advantages and disadvantages of these non-renewable energy are studied

in order to develop alternative renewable sources. Renewable energy sources refer to inexhaustible

resources such as sunlight, wind, rain, tides, waves, and geothermal heat. These renewable energy

sources are to serve as alternative sources to fossil fuels and nuclear fuel. The transition of energy

sources has been one of the greatest goals of the century, with the aim of abolishing nuclear energy,

coal, and other non-renewable energy sources to create a system of 100% renewable energy.

During recent years, concerns of decreasing fossil fuel reserves and environmental issues

have caused more and more conventional sources to convert to renewable energy. This transition to

renewable and sustainable energy sources take strong political and social power and also decades of

time to accomplish. This transition is seen to be crucial in many different ways.

One of the most important issue is its environmental aspect. The continued use of this

conventional forms of energy has seen to affect the earth’s ecological survival, as well as the health of

humans and other living creatures on earth. People’s health have been affected by air pollution that

arise from power plants, and acid rain that cause premature death with other severe side effects. Long-

run fossil fuel use also have been proven to cause carbon-dioxide emissions that result in severe

global warming issues.

Since 2014, the OPEC and its de-facto leader Saudi Arabia have maintained supply of oil

high to keep low prices. The decision to defend market share, instead of cutting back on output, came

through in attempts to drive high-cost producers such as U.S. shale producers out of the market. Such

measures are in stark contrast with what we witnessed in 1973 when OPEC nations cut back on

supply. Today’s measure comes at a high cost, as current oil prices are significantly below the

breakeven points for different nations. However, we believe such political gambit does not alter the

fact that fossil fuel reserves are diminishing and renewable energy development is yet to be at par to

completely replace conventional energy.

Although people realize the issues of using conventional resources – especially burning and

extracting fossil fuels, the proving issues have not stopped countries from gaining energy from these

sources as well as increased consumption of oil and fuel. There is still the issue of ever-increasing

population, with assumed increase of about 9,000 people per hour. Although the demand for fossil

fuels and dependence on conventional sources will grow due to constraints of alternatives, the

continued increase of population and increased demand of nonrenewable energy along with the

limited amount of reserves will result in a future that will have to rely on increased use of renewable

energy.

It would be ideal to use conventional energy sources without the externalities, but currently

with carbon dioxide emission and global warming, there seems to be stringent unresolved negative

externalities of using these resources. Nevertheless, the sunk cost of these resources, the cost that

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comes with transition of energy to renewable energy sources, and the barriers to renewable energy are

just a few factors hindering the process of building a new era of clean energy. Regardless of whether

the process is easy or difficult, however, sooner or later the world would have to deal with sustainable

measures of living with the ever-damaging environment and costly figures.

1. Purpose

The purpose of this research paper is to examine the potential and profitability of Saudi

Arabia’s transition to developing and exporting renewable energy, namely solar energy. Saudi Arabia

is a very interesting case study in that we attempt to show that even for a country rich with

conventional energy sources, making the transition to renewable energy can be profitable. The paper

examines a general background for the non-renewable energy sources and the country’s transition

towards solar energy as its main renewable energy source. Then, we conduct a profitability analysis

considering for externalities and economic factors, and a cost-benefit analysis. From the analyses, the

feasibility and profitability of converting energy sources are determined. Finally, the results of the

analyses and their implications are discussed.

2. Background Information on Saudi Arabia’s use of nonrenewable energy

Saudi Arabia’s main source of energy is in oil and natural gas. Because of the country’s

wealth in its natural resources, oil and natural gas were its main sources of electric generation.1

Particularly, Saudi Arabia is the world’s top oil exporter and producer. Its economy is petroleum-

based. Oil accounts for 90% of the country’s exports and nearly 75% of government revenues.

Compared to the world, it was the largest crude oil exporting country and second largest country with

oil reserves.2

2.1 Reserve

Currently, Saudi Arabia is the second largest country with proved oil reserves, owning about

one-fifth of the world’s proven oil reserves. They had the largest reserves in the world until Venezuela

announced their proven reserves in January 2011 (Figure 1).3

1 "Saudi Arabia Electricity - Production by Source." - Energy. CIA World Factbook, 21 Feb. 2013. Web. 3 Dec. 2015. http://www.indexmundi.com/saudi_arabia/electricity_production_by_source.html.2 "The World Factbook - Saudi Arabia." Central Intelligence Agency. Web. 23 Nov. 2015. https://www.cia.gov/library/publications/the-world-factbook/geos/sa.html. 3 "Venezuela: Oil Reserves Surpasses Saudi Arabia's." Ahramonline. Reuters, 16 Jan. 2011. Web. 4 Dec. 2015. http://english.ahram.org.eg/NewsContent/3/14/4060/Business/Markets--Companies/Venezuela-Oil-reserves-surpasses-Saudi-Arabias.aspx.

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Figure 1. Saudi Arabia and Venezuela’s Proven Oil Reserves in Billion Barrels

2.2 Production

Saudi Arabia was a founding member of OPEC and OAPEC. Currently, Saudi Arabia is the largest producer of crude oil, producing 542 metric tons of oil, or about 12.9% of the world’s total amount of crude oil in 2014.4

While it uses oil internally to produce its energy, Saudi Arabia exports about 80% of its crude oil output to countries such as Asia, North America and Western Europe. It was the largest net exporter of crude oil in 2013, where it exported about 377 metric tons of oil. In 2013, Saudi Arabia was the fourth largest net exporter of oil products such as LPG, motor gasoline, aviation fuels, fuel oil, and middle distillates. 4

Saudi Arabia has a significant stance of using fossil fuels as an energy source relative to the rest of the world. The country was measured to produce about 134Tw/h of energy through oil from fossil fuels. Saudi Arabia produces about 9.735 million bbl/day, according to 2014 estimates. In addition, it exports about 7.658 million bbl/day. 5

Every square meter of Saudi Arabia produces over 7 kilowatts of energy daily in each 12 hours of sun power. If the country was to use up their solar energy supply each day, they would use about 12,425 TWh of electricity, which is enough to use for 72 years. 6

4 "Country Comparison :: Crude Oil – Proved Reserves." The World Factbook - Saudi Arabia. Central Intelligence Agency, 2015. Web. 4 Dec. 2015. https://www.cia.gov/library/publications/the-world-factbook/rankorder/2244rank.html#sa5 "Oil in Saudi Arabia." World Energy Council. Web. 4 Dec. 2015. https://www.worldenergy.org/data/resources/country/saudi-arabia/oil6 Alhouti, Aljowhara. "Deployment of Solar Energy in Saudi Arabia: A Case Study." The George Washington University Law School Course on Energy and Environment. Web. 30 Nov. 2015. https://gwujeel.files.wordpress.com/2013/09/johara-alhouti.pdf

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Figure 2. Saudi Arabia Crude Oil Production 1950-2012

2.3 Consumption

According to a study of the Energy Information Administration, Saudi Arabia is the largest

oil consuming nation in the Middle East and the fifteenth largest consumer of total primary energy in

2008. Saudi Arabia consumed approximately 3 million barrels per day (bbl/d) of oil in 2012, almost

double 2000 levels, because of strong industrial growth and subsidized prices. There was constant

worries from scientific research that along with their increasing consumption oil, the population of

Saudi Arabia would lead them to drain their supply of oil. The population of the country has risen

17% since 1995, with domestic energy demand increasing about 8% per year since 2012. From the

amount of oil the country produces, Saudi uses about one-quarter of its production domestically.

Research shows that the demand has increased and will further boost in the domestic consumption of

oil.

3. Need for Transition / Reasons away from non-renewable energy source

Ever since oil was first struck in Saudi Arabia in March 1938, the Middle Eastern kingdom

has long enjoyed its status of being the top crude oil exporter in the world. Saudi Arabia has been so

well endowed with a resource that is fundamental to the functioning of the global economy. The

kingdom is heavily dependent upon petroleum, as the oil and gas sector account for approximately

85% of export earnings1. It thus comes as a surprise that Saudi Arabia is highly determined to

transition to renewable energy. There seems to be no compelling reason in the near term for what may

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be a very costly transition for a country that could continue making profits simply by maintaining the

status quo: selling more oil. However, Saudi Arabia has pronounced a detailed initiative to produce a

total of 54GW of energy by 2032 from renewable sources, of which 41GW will be produced by solar

energy. The transition is not necessarily about addressing environmental concerns or climate change,

but is fundamentally driven from an economic standpoint. The goal of such policy is to meet

significant proportion of domestic energy demands through renewable energy and use saved oil

productions for export, thereby simultaneously dominating the both conventional and renewable

energy market. Hence, producing petroleum and promoting renewable energy is not a mutually

exclusive agenda for the country. Based on its conventional revenue sources from oil, the transition is

essentially an investment.

We believe that such transition makes much economic sense. Fossil fuels are expected to

deplete within the next 50 years and historically, energy transition from wood to coal, coal to oil have

taken significant lengths of time. For a country so dependent upon the world’s reliance on petroleum,

there is great need for an alternative. Therefore, we want to examine if transitioning to renewable

energy, even for a petroleum-rich country like Saudi Arabia, can be profitable. What follows in the

paper is a profitability assessment of the transition, whereby we point out the huge price gap between

domestic and foreign oil price to underscore the significant amount of opportunity costs realized from

excess subsidy of domestic oil consumption. Investing in renewable energy is a more efficient means

to meet increasing energy demand than subsidies and creates further revenue sources. We also

examine an in-depth cost-benefit analysis of the aforementioned policy to determine the validity of

such massive investments. Although renewable energy must someday be developed to its maximum

potential, our goal in this paper is to determine if now can be the profitable time for the transition.

II. Solar Energy Transition in Saudi ArabiaBefore going into an in-depth analysis on the profitability and cost-benefit analysis, it is

important to understand the technological and economic advantages and disadvantages of the use of

solar energy in Saudi Arabia.

1. Technological Overview

In this section, we will discuss solar technologies that are currently available to build power

plants in desert areas of Saudi Arabia. The section will also discuss the potential barriers that will

challenge the nation in terms of technology and possible solutions for the obstacles.

1.1 Solar Thermal System Technology

In the case of Solar Thermal System, there are more steps involved when transforming solar

energy into electricity. First, solar collectors capture and concentrate sunlight to heat synthetic oil 8

called therminol, or in a simple term, “heating fluid”, which then heats water to create steam. Next,

the steam is piped to an onsite turbine-generator to produce electricity, which is then transmitted over

power lines. On days without much sunlight, the plant has a supplementary natural gas boiler and an

energy storing system using materials like molten salts. The plant can either burn natural gas to heat

the water, creating steam to generate electricity or use the stored energy in molten salt to run the plant

to generate electricity. “Figure 1” below shows the schematic diagram of how solar thermal power

plant works for a better understanding.

The advantages of Solar Thermal System Technology can seem to be attractive, but they also

come with big price tags. To note one of the unique advantage that Solar Thermal System Technology

offers is that it is a reliable source of electricity regardless of the amount of sunshine because it can

store the heat energy in the form of molten salts. The “Figure 2” shows how molten salt can be used in

the system to store energy. The cold salt with temperature of 350oC is heated by sunlight to about

565oC, which is then stored in “Hot Tank”. In addition to this unique feature, there are many more

advantages. For instance, there are no serious environmental consequences regarding global warming

and pollution. Also, there are no extra fuel costs, which is significant compared to traditional fossil

fuels.

Figure 3. Schematic Diagram of Process of Solar Thermal Power Plant

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However, as previously mentioned, these advantages come with high costs. The system

requires significantly higher costs, as much as 50%, than the other systems to be mentioned later in

the paper. Furthermore, water must always be supplied at all times, which can be problematic when

constructing the system in a desert. There is also a limitation in size when constructing a power plant

using this system. To be profitable, the size of the power plant has to be at least 50MW, which

contrasts to Photovoltaic System Technology that is sold in size as small as 5 Watt. Lastly, the

gestation time for a power plant is long, which can take up to 7 years. As a comparison, Power plant

using Photovoltaic System only takes as short as six months to complete construction. [3]

Figure 4. Schematic Diagram of How Molten Salt Is Used to Store Heat Energy

1.2 Concentrated Solar Panel (“CSP”)

Concentrated Solar Panels are similar to Solar Thermal System Technology, but the

difference is in how they collect the solar energy. In the case of Solar Thermal System Technology,

each panel absorbs the heat energy from solar array as shown in the “Figure 1” above. However, in

the case of CSP, instead of using solar panels to collect solar arrays, it uses mirrors, which then reflect

the sunlight to a designated receiver. The designated receiver obtains all the solar heat energy, which

is utilized to heat working fluids just like how Solar Thermal System Technology utilizes the solar

heat energy. The following steps are identical to those of Solar Thermal System Technology, where

the heated working fluid is used to generate super-heated steam to drive a generator through a steam

turbine or a heat engine to generate electricity. The unique feature and advantage of CSP is its

superior storage option. The power storage for the system usually takes the form of storing heat for

later use, which is in contrast to how Photovoltaic System works, which will be further examined later

in the paper.

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There are three main types of systems that are available using CSP technology; Power Tower

System, Linear Concentrator System, Dish/Engine System. When constructing a power plant, the first

two systems, Power Tower System and Linear Concentrator System, are commonly used, but the

Dish/Engine System is not as popular as the other two because of its low capacity of generating

electricity. Each “dish” can generate only about 25 KW, when the other two systems can have

capacity up to 200 MW or even bigger in the specific case of Linear Concentrator System.

Figure 5. Power Tower System

Figure 6. Linear Concentrator System11

1.3 Photovoltaic System Technology

Photovoltaic System Technology (“PV”) is the front runner in the market. The name “PV” is

from the process of converting photons (light) to voltage (electricity), known as the “PV effect”. PV is

the most widely used technology in the renewable energy market. Unlike the technologies that were

mentioned before, PV is easy to install, cost efficient, and other technological reasons that will be

covered later. These advantages make PV superior to the other methods of generating electricity using

solar energy. The below chart shows the continuous fall in price of PV system, which makes it even

economically attractive over other systems that cost much more than what PV costs.

Figure 7. U.S. PV Installations and Average System Price

PV panel brings in various advantages upon construction. It emits zero greenhouse gas. The

price of the technology as well as the operation and management cost is extremely low compared to

that of other renewable energy resources. There is no noise when operating, which makes it suitable

for usage in urban area. Nevertheless, these advantages come with little cost. For instance, the biggest

problem with PV technology is the intermittency and unpredictability of amount of sunshine. Also,

the PV panel generates direct electricity (DC), thus, to use on the power network or grid, it has to be

converted into alternating electricity (AC), which adds another step and facility to manage. Also, the

efficiency rate is on the lower side of the graph when comparing it with other sources of renewable

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energy.

PV system converts sunlight directly into electricity, opposed to the other two methods

where the sunlight was used indirectly to generate electricity. So, how does PV technology work? To

borrow explanations by Solar Energy Industries Association, “Photons strike and ionize

semiconductor material on the solar panel, causing outer electrons to break free of their atomic bonds.

Due to the semiconductor structure, the electrons are forced in one direction creating a flow of

electrical current.” The detailed schematic diagram example is presented below as “Figure 8”.

Figure 8. Diagram of Typical Crystalline Silicon Solar Cell

Thus, the panels are the core component of the system. There are several kinds of panels that

are slightly different from each other. The five major categories are Monocrystalline Silicon PV

panels, Polycrystalline Silicon PV panels, Amorphous Silicon PV panels, and other Thin-film PV

panels. First, Monocrystalline panel is the most efficient photovoltaic technology, converting about

15% to even 20% of the sun’s energy into electricity on average, which is greater than those of other

types, which usually sit between 5% and 13% of efficiency. With its superior production ability

compare to its peers, it can be space-efficient as well as perform well even under low-light condition.

Though, it is very vulnerable to the outside conditions such as, it can break down fairly easier than

others by dirt or snow, which can be critical factors when installing panels in the middle of desert.

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Figure 9. Monocrystalline Panel Diagram

We now consider the Polycrystalline panel. It is very similar to a Monocrystalline panel, but

a major difference between Monocrystalline panel and Polycrystalline panel is the existence of

Czochraski process. Czochraski process is used “to create monocrystalline silicon, which results in

large cylindrical ingots. Four sides are cut out of the ingots to make silicon wafers and a significant

amount of the original silicon ends up as waste. However, in the case of Polycrystalline panel, the

process of making is much simpler, thus, cost less and the amount of waste silicon is noticeably lower

compare to monocrystalline. Though, because of the recent fall in price of PV panels, the price

difference between the two is very small. Also, the efficiency rate is lower than that of

Monocrystalline; it resides at only 13%.

Figure 10. Polycrystalline Panel Diagram

Amorphous Silicon panel is the type that goes into small-scale applications such as in pocket

calculators. Though, the recent development in technology and innovations made them more

attractive for some larger-scale applications, its lower efficiency rate, which is only about 7%, turned

developers around and look into other technologies like Monocrystalline.

Lastly, Thin-film PV panel is consist of several thin layers of photovoltaic materials such as

Amorphous silicon, Cadmium telluride, Copper indium gallium selenide. The efficiency rate for such

technology is about 13%. Because of its unique feature of being thin and flexible compared to peers, it 14

is used in numerous applications to generate and supply electricity. Unlike typical crystalline panel, its

tolerance for high-temperature is greater; thus, make it more suitable in areas like the desert.

However, it can produce only a quarter of what Monocrystalline can produce in the same area,

meaning that the space-efficiency is low. In addition, it is less durable than that crystalline based

panels.

Figure 11. Types of PV

1.4 Potential Technological Barriers in Saudi Arabia from Its Geographical Issue

In a specific case in Saudi Arabia, there are two major barriers of Saudi Arabia’s transition to

Solar Energy: extreme heat waves and frequent dust storms. First, let us discuss how frequent dust

storms become a significant hurdle from a technology standpoint. Saudi Arabia, a country that the

most of its land is covered with deserts, experiences severe dust storm very frequently. This factor can

be very critical when it comes to installing solar panels over a desert land to produce electricity. Not

only does dust reduce the life-span of the panels, but also it reduces efficiency by a significant

amount, knowing that solar panel is already in the lower side of the graph when it is compared with

other sources of renewable energy. It is claimed that if the panels are not regularly cleaned after each

dust storm, they lose about 0.6% in efficiency rate per day, which can ultimately go up to 60%.

In addition, a research team from Stanford University conducted an experiment with PV

modules installed in the Dhahran region in Saudi Arabia to see how production of electricity is

affected by dust. The team installed four Monocrystalline PV modules and two Polycrystalline PV

modules to test and monitor daily. The results were dreadful. Not only does the dust that get on the

panels hurt production, but the sand scattered in the air blocks the sun, causing problems for the

panels to absorb radiation. No cleaning performed during the time span of 6 months, more than 50%

of power output reduction was observed. There was also one dust storm that single handedly caused

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20% decrease in power output. Though, it was observed that rainfall helps clean the dust on the

panels, but rain is not frequent in Saudi Arabia for us to solely rely on natural cleaning of the panels.

High temperature is another noticeable problem with Saudi Arabia. It may seem counter-

intuitive, but solar panel’s efficiency is lower with rise in temperature. The same team conducted an

analysis on data from 18 grid connected PV plants located globally, including Austria, Germany, Italy,

Japan, and Switzerland. 17 out of 18 PV modules in those regions showed reduction in efficiency

varying between 1.7% and 11.3% due to temperature change.

Figure 12. Correlation between PV Module Efficiency and Module Temperature in Dhahran,

Saudi Arabia

The graph above shows the result of the analysis on annual loss in efficiency due to

temperature change in the Dhahran region. As the temperature of the PV module rose from 38oC to

48oC, the efficiency of the PV module decreased from 11.6% to 10.4%, which results in a temperature

coefficient of -0.11△E/%oC. The interpretation of the temperature coefficient is the change in

efficiency with a unit decrease in temperature.

High temperature and dust storms are the main obstacles that will challenge Saudi Arabia

when transitioning to solar powered energy from fossil fuels. Saudi Arabia must find a way to make

the transition economically feasible by reducing these detrimental effects. Nevertheless, there are a

number of new technologies under development to overcome these environmental factors.

1.5 Solutions to the Potential Technological Barrier

As previously examined, sand storms can be a serious obstacle when generating electricity

using solar panels due to dust residue on the panel that disrupts the entire process. Thus, it is crucial to

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develop a technology or method to resolve this problem economically for Saudi Arabia.

First, let us discuss a possible solution for dust storms in Saudi Arabia. The technology that

recently came into the spotlight is the NOMADD developed by a team from King Abdullah

University of Science and Technology. NOMADD, “NO water Mechanical Automated Dusting

Device”, uses brush to clean the dust off the panels. It leaves no scratch or damage to panels, while

removing 99.6% of dusts with a cost effective daily clean. NOMADD can clean 1MW or 1000MW

system in under only 30 minutes. Also, the NOMADD system is scalable, meaning it can be specially

customized for each different project.

Figure 13. NOMADD in Action

The second problem that was addressed above is the temperature change due to high

temperature in the desert area. A group of engineers from Stanford University has developed solar cell

cooling coating technology to boost solar cells’ efficiency even under extreme temperature and

weather. By overlaying a transparent-thin-patterned film that was made by silicon, one can aid the

panels radiating the heat away from them, similar to how human kinds radiate heat from our bodies to

prevent overheating. The critical feature of the cooling film is in its “micro-patterns”, which enables

the panel maximize the radiating of heat, in form of infrared light, away.

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2. Economic Overview

This section addresses the economic barriers to developing solar energy, namely petroleum

subsidies backed by the government.

2.1 Economic barriers with petroleum subsidies

For many years, Saudi Arabia has subsidized the consumption of fossil fuels. Pre-tax energy

subsidies is the difference between the value of consumption at world and domestic prices. Domestic

price of fossil fuels have been maintained at significantly lower levels compared to international

market price. Saudi Arabia currently spends about US$86bn a year on petroleum subsidies, which

translates into a gallon of regular gasoline costing about 46 cents7. According to the IMF, energy

subsidies cost Saudi Arabia US$107bn, approximately 13.2% of GDP in 20158. Due to such low

domestic prices, it comes as no surprise that Saudi Arabia is the world’s largest consumer of oil per

capita with 4.7 metric tons (35 barrels) a year9. Furthermore, rapid population growth (3.2% per year)

is increasing fuel consumption (7% per year). It is evident that subsidies are becoming an economic

burden on the government and cannot be sustained for an indefinite period of time.

Why then does Saudi Arabia maintain such monstrous subsidies on domestic consumption?

There have been several reasons for keeping domestic prices of fossil fuels low. First and foremost,

the citizens consider cheap oil prices as a birthright and demand that their national resource be readily

available to the public. Subsidies have long been an easy and effective means for the government to

distribute state benefits to the people and provide support and protection to the poor. Other positive

effects can be managing inflation through lower energy prices and deterring potential protests.

However, the negative impacts of subsidies are significant, mainly economic inefficiency in terms of

foregone profits from petroleum exports and high fiscal cost for the government.

The lost revenue from not charging the international price for domestic petroleum

consumption represents an implicit transfer and an opportunity cost for the economy. Subsidies

introduce distortions to the energy sector. Low fuel prices encourages its continued use at the expense

of renewable energy and thus, acts as an economic barrier to the development of renewable energy.

Subsidies exert pressure on national budgets, crowding out expenditure in other areas such as

healthcare and education. In the long run, subsidies ultimately jeopardize the long-run productivity of

the economy.

There have been previous dialogues on reducing such enormous subsidies on domestic

production. However, the kingdom’s oil minister, Ali al-Naimi, stated in November that Saudi Arabia

7 “Saudi Arabia Considers Cutting Energy Subsidies. Web. 27 Oct. 2015. http://www.wsj.com/articles/saudi-arabia-considers-cutting-energy-subsidies-14459470078 “Saudi Arabia looks to reform energy subsidy programme. Web. 12 Nov. 2015. https://next.ft.com/content/b9e1d072-893d-11e5-90de-f44762bf98969 “Saudi Arabia Must Review Its Oil Subsidies, Former Adviser Says. Web. 27 Dec. 2012. http://www.bloomberg.com/news/articles/2012-12-27/saudi-arabia-must-review-its-oil-subsidies-former-adviser-says

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did not need to reduce its substantial domestic energy subsidies because it was not “in dire need” for

slashing domestic energy assistance. From an economic standpoint, we believe domestic energy

subsidies must be gradually reduced if Saudi Arabia is serious about a successful transition and meet

its stated goal of producing 41GW from solar energy by 2032.

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III. Profitability Analysis1. Background

1.1 Petroleum dependent electricity production

Saudi Arabia produces over 60% of its electricity through oil conversion. Generally, countries are

more likely to consume natural gas or coal to meet higher summer electricity demands. But for Saudi

Arabia, there is no domestic gas production and most of its natural gas is associated gas, which is

produced along with oil from the same wellbore. Even though it has the world’s fourth largest gas

reserve, its production is directly related to oil production. Such bond between oil and gas made the

government to regulate mass extraction of natural gas as it defects the oil. Furthermore, efforts in

Saudi Arabia to expand onshore non-associated gas production have experienced difficulties in

finding and extracting natural gas because of the high sulfur content of the natural gas and low

domestic natural gas prices.

Figure 14. Saudi Arabia’s use of crude oil for electric generation (2009-2014)

1.2 Oil Subsidy

The domestic oil price in Saudi Arabia is less than 10% of the market price the country sells to

other countries. It is about $4.3/barrel for oil. The public perception of oil in Saudi Arabia is taken as

a birth right for the Saudi Arabian. This signifies that the government heavily subsidizes oil to

decrease the price. The total budget for energy subsidy amounts to $86 billion which amounts to over

10% of the country’s GDP. This is, without doubt, a burdensome weight on the government’s budget.

2. Profitability Model from Opportunity Cost

The current export price of oil is $41.61/barrel. Although the price is decreasing, the

opportunity cost of domestic use of oil is big enough to be better off by exporting the amount of oil

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that could be reduced from domestic consumption. Electric generation from use of PV could reduce

the amount of oil used to generate electricity. This reduced amount could be exported at a market

price without subsidization. Thus, profits are made with an increase in PV penetration in generating

electricity.

We test this theory as an economic model considering the actual costs and revenue. Break

down of the cost are as follows: investing of initializing new facilities such as PV and storage, the

maintenance fee of power plants, the cost for purchasing fuel in the conventional generation sector

and other expenses such as human resources expenditure.

Another cost factor we introduce is the levelized cost of electricity (LCOE). The

characteristic of PV cost is that it has high initiation cost but relatively low maintenance or generation

cost compared to other source of energy production. We therefore use LCOE, which is the net present

value of the unit cost of electricity over the lifetime of the generating asset. It can be calculated as the

net present value of all costs over the lifetime of the asset divided by the total electrical energy output of

the asset.

Formula used for calculating the LCOE of renewable energy technologies:

It = Investment expenditures in time t

Mt = Operations and maintenance expenditure in the year t

Ft = Fuel expenditures in the year t

Et = Electricity generation in year t

r = Discount rate

n = Economic life system

The rate considers electricity from the PV plant that is dispatched to the power grid to serve electricity

needs in Saudi Arabia. This rate is assumed to be equivalent to the cost of electricity production,

which is estimated to be $0.154 per kWh (Maesheng, Gento, 2013).

Thus a generation cost equation could be made with the variables considered.

denotes the annual fuel consumption when PV penetration is assumed. denotes the domestic

purchase price of fuel. represents the annual maintenance fee of the PV plants, denotes the

annual accumulated generation from PV, represents averaged cost of keeping battery per year, and

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K is for other expenditures.

As mentioned above, the domestic purchase price is $4.3/barrel. Battery is assumed to be

AGM sealed battery LC-LA1233P by Panasonic. Due to high temperature of the geography, the

lifetime of the battery is reduced to 8years. Considering the size of the project with 1 unit battery to be

around $45, the total cost of keeping battery per year should be $2.4 million per year. Annual

maintenance fee and other expenditure are held as constants. These last two variables cancel out by

the change in revenue equation.

The generation cost equation considers PV penetration. In order to calculate the change in

cost, business-as-usual cost equation has to be calculated. In this equation, every variables related

to PV is not considered. Thus the equation run downs to

denotes the annual fuel consumption without PV penetration assumption.

Thus the change in cost, or the additional cost from using PV   breaks down to

On the other hand, there’s the revenue equation. The saved oil from PV penetration could be exported

to make revenue at a much higher price.  Numbering down the opportunity cost of the oil export, the

revenue is calculated as

represents the exporting price of crude oil which is $41/barrel.

Thus the net profit equation would be change in revenue minus change in cost.

The profit result is from the perspective of the KSA which is the government. The final ratio that can

be used to scale the profitability of PV penetration profitability model would be the net profitability

per TWh generation and the return on investment rate ROI. could be defined as the net profit

E divided by the accumulated annual generation amount. This ratio can be used to figure out the

optional penetration rate of PV that maximizes the net profit. On the other hand ROI rate can be used

to evaluate the yield rate and the investment risk thereof.

3. Result

According to the study done by Maesheng, Gento (2013) Rp behaves as a concave function in relation

to PV’s penetration rate and the exporting price of oil.22

They conclude that as long as the exporting price of oil stays above $80/barrel, implementing PV up

to 16% of penetration will always be profitable.

For ROI, the affecting factors are same as net profitability per TWH generation.

For ROI, the graph turns out to be descending with respect to PV’s penetration rate. This highlights

the fact that high PV penetration requires more expenditure on maintaining system stability.

The reason why the Rp graph turns out to be concave down is because system stability deteriorates as

PV penetration expands. Deterioration reflects the need for larger backup capacity from both the PV

and conventional energy sector.

23

As PV penetration go over 10%, the backup accumulated generation surges. This accounts for the

concave down rate of profitability per TWh.

4. Interpretation

The conclusion Maesheng, Gento (2013) makes is under an assumption that the price of oil

move around $85/barrel to $105/barrel. However, current (2015) price of oil per barrel remains

around $41/barrel.

The profitability rate per TWh has been adjusted to current trend of oil prices. What acted

against the drop of oil price is the drop of LCOE. It decreased from $0.150/KWh to $0.07/KWh10.

Calculating these changes in the input, profitability per TWh graph are recalculated.

Although the profitability rate significantly drops compared to $85/barrel, profit rate still amounts to

$1 million if the PV penetration reaches 0.12.

10 “Saudi PV LCOE between $70 and $90/MWh” Web. 11. Aug. 2014. http://www.pv-magazine.com/news/details/beitrag/saudi-pv-lcoe-between-70-and-90-mwh_100016050/#axzz3t16RN68n

24

25

IV. Cost-Benefit Analysis1. Background

1.1 Policy Assessment

Saudi Arabia has announced that it has delayed $109 billion worth of solar investment that

aims at building up 41 GW of solar power by 2032 to 204011. In order to assess this change of policy

regarding solar energy development, we examine the costs and benefits associated with constructing a

41 GW PV power plant. The energy production capabilities, economic costs and benefits, and GHG

emissions reductions associated with this plant are estimated using the RETScreen software.

Moreover, we are going to estimate what percentage of domestic electricity demand will be covered

by the PV-generated electricity production in 2032. Such policy assessment is especially important as

Saudi Arabia’s increasing electricity demand, high solar radiation levels, and lofty goal to be a leader

in clean energy make Saudi Arabia an optimal candidate for increased use of PV energy.

1.2 Methodology

This study has two main components in its analysis, shown in figure below. First, we lay out

which assumptions to be used for the input values in the RETScreen analysis, which is composed of

energy production, financial feasibility and GHG emissions reductions. Second, we will discuss the

results from the RETScreen analysis. Finally, we will conduct RETScreen sensitivity analysis to

investigate how sensitive the results are in accordance with the variations in the input values.

11 Bloomberg Business – Saudi Arabia delays $109 billion solar plant by 8 years - http://www.bloomberg.com/news/articles/2015-01-20/saudi-arabia-delays-109-billion-solar-plant-by-8-years

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1.3 RETScreen Model

RETScreen was created in 1996 by the Natural Resources Canada’s Canmet Energy Research

Center and can be downloaded for free12. This software enables decision makers to weigh the costs and

benefits of installing renewable energy (RE) projects. RETScreen is available in 35 languages and is used

worldwide by universities, colleges, private firms, and consultants for evaluating RE projects.

RETScreen software consists of user-friendly Excel worksheets standardized to provide a low-cost

preliminary assessment of RE projects. The software has flexibility options allowing users to select more

complex frameworks, which require more information but have more accurate and detailed results, or basic

frameworks for quick, inexpensive calculations. RETScreen uses built-in calculations to make the program

more user-friendly, requiring less detailed information and less computational power.

The RETScreen model calculates three different estimates for this PV project: energy

production, financial feasibility, and GHG emissions reduction. The modeler provides inputs like PV

module type, location of the PV plant, a variety of costs, electricity transmission, and 14 more, which

are then used in calculations. The following sections will discuss the various user-defined inputs

selected for the model’s worksheets.

12 RETScreen International - Download http://www.retscreen.net/ang/download.php

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2. RETScreen Analysis

2.1 Energy Production Estimation

2.1.a. Site Selection

In order to locate a site in which 41GWp of solar plant will be established, we have primarily

relied upon the information available in the research paper by Rehman et al. (2007). It examined the

potential production, cost, and GHG emissions reduction of installing a 5MWh PV system in Saudi

Arabia. There exists a network of 41 solar stations where global solar radiation and sunshine duration

is being recorded since 1970, and the study analyzed the data on global solar radiation (GSR) and

sunshine duration (SSD) for 41 solar stations. Moreover, using those meteorological data as input for

the RetScreen software, the study calculated the specific yield and the level of renewable energy

production for each 41 solar stations when a proposed PV based power plant of 5 MW capacity was

installed. It was found that the optimal location for the PV plant is Bishah, with the maximum specific

yield of 319.0 kWh/m2 and with the maximum annual energy production of 12.4 GWh. On the basis

of the results, we are going to assume that the 41 GWp of solar plant will be established in Bishah

which turns out to be the most efficient site for PV system.

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2.1.b. Global Solar Radiation

In order to accurately predict the electricity generation from the solar module, RETScreen

must have site-specific global solar radiation (GSR) values. GSR values represent the energy from the

sun striking a horizontal surface. RETScreen offers two options for inserting insolation and weather

data into the RETScreen models: 1) worldwide ground-based meteorological data from the

RETScreen weather database that has been collected from more than 1,000 locations of ground

monitoring stations, and 2) the 22-year average GSR values from NASA’s Surface Meteorology and

Solar Energy database. For the worldwide ground-based meteorological data, ground stations are

located near the populated area, making this option useful if the project is located near one of those

stations, and the second one is useful if the project is located away from any ground monitoring

stations.

The red dots represent ground monitoring station data locations and the blue dots represent the NASA

global satellite/analysis data locations for populated areas.

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Bishah has both ground monitoring station data and NASA global satellite/analysis data location.

However, since the area in which we assume to construct 41 GW plant is far away from the ground

monitoring station data locations, this model will use the climate data from NASA’s Surface

Meteorology and Solar Energy database, other than from the RETScreen weather database. The GSR

values from both RETScreen ground monitoring station data locations and NASA’s Surface

Meteorology and Solar Energy database are shown in <Table 1>.

30

<Table 1> Monthly variation of global solar radiation in Bishah (kWh/m²/Day)

Month GSR (RETScreen) GSR (NASA)

January 5.02 4.78

February 6.21 5.55

March 6.89 6.03

April 7.57 6.41

May 7.71 6.87

June 8.39 7.21

July 8.13 6.84

August 7.88 6.37

September 7.65 6.41

October 7.13 6.03

November 6.22 5.03

December 5.23 4.58

Annual 7.00 6.01

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2.1.c. Selection of a PV-module

1. PV-Module

RETScreen requires information about the specific PV module used to calculate energy production.

PV modules consist of collections of cells that convert the sun’s energy into direct current (DC) electricity,

and a group of PV modules together form an array. The number of modules in the system is selected to

provide the desired energy production. Large number of PV-modules with widely different characteristics is

available in the market, and RETScreen has an existing database of module brands with associated input

data required to run RETScreen.

The study by El-Shimy (2009) examined a number of different solar PV module types. A survey of

the characteristics of most of the available PV-modules from different manufactures was done, and PV-

modules with efficiency less than 15% were not selected in this study. After the candidate modules list was

formed, the selection of a specific module from the candidate module list was then based on the value of

ratio of the module capacity and its frame area (Capacity/Area criteria). Based on the stated selection

criteria, the study selected the model with the maximum ratio of capacity/area, which turned out to be the

mono-So-HIP-205BA3 PV-module from Sanyo. Since the procedure through which the PV module was

selected in this study helps choose the PV module that optimizes its efficiency in terms of collecting the

maximum solar energy with the minimum area needed for installation, this paper will assume the same PV

module that was selected in the study by El-Shimy (2009).

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2. Tracking system

RETScreen offers four selections for the type of sun tracking device upon which the solar collector

is mounted. The options from the drop-down list are; “Fixed”, “One-axis”, “Two-axis”, and “Azimuth”.

“Fixed” is selected if the solar collector is mounted on a fixed structure while the remaining choices may be

selected if the solar collector is mounted on a tracker. A tracker moves the solar collector in a prescribed

way to minimize the angle of incidence of beam radiation on the collector’s surface. Hence, incident beam

radiation (i.e., solar energy collected) is maximized. In this paper, two-axis tracker, which always position

PV-modules surface normal to the beams of the sun by rotating about two axes, is selected to maximize the

electrical energy production from the considered PV power plant.

3. PV Miscellaneous losses

Power production of photovoltaics can decrease significantly with the accumulation of dust or sand

on the surface of the PV cell, often called “soiling.” There have been numerous studies of the soiling effect

on PV cells (Kimber et al., 2006; Tang et al., 2006; Thornton, 1992). The soiling effect is especially

important in the desert conditions of Saudi Arabia, where sand storms can deposit large amounts of dust and

sand on the PV cell. This loss of energy production is input into the model as “miscellaneous losses,”

representing the percentage decrease in production.

The proposed PV system utilizes a two-axis tracking system, which will experience fewer

production losses as compared to a fixed solar collector. Solar tracking systems maximize electricity

production by rotating the PV module throughout the day to follow the sun path to increase the direct

sunlight received by the panel. Tracking arrays can also be useful to protect against destructive sandstorms,

often higher above ground and movable to decrease wind load, rotating the face of the PV cell away from

the dust and wind (Thornton, 1992).

A 1990 study by Said examined the performances of photovoltaic and thermal modules during

several months of outdoor exposure in Saudi Arabia. In the case of photovoltaic modules, the monthly

average degradation was 7%. In our model, we take into account that the tracking arrays (two-axis for our

model) will further prevent the effects of soiling. Therefore, we assume that dust and soiling will decrease

annual production by 5 %. Later, sensitivity analysis will be performed to measure how the input value for

PV miscellaneous losses affect the result.

4. Inverter

Direct current into alternating current (DC/AC) inverters are utilized in the proposed power plant to

convert DC into AC to feed the grid. From the study by El-Shimy (2009), each inverter has an efficiency of

95% and a capacity of 4750 kW for 5MW PV system. Therefore, for our model, we will assume the same

efficiency and multiply the given capacity by 8,200 (5MW x 8,200 = 41 GW), which results in the capacity

of 38,950,000 kW.

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The below screenshot is a following result; two-axis, 41 GW mono-Si-HIP-205BA3 PV-module

from Sanyo, consisting of 200000002 units; its efficiency would be 17.4% and the solar collector area

would be around 235 km2; miscellaneous losses from soiling would be 5%; the efficiency, capacity, and

miscellaneous losses of the inverter would be 95%, 38,950,000 kW, and 0% respectively.

Considering that the solar collector area would be around 235 km2, the below is a hypothetical

blueprint of where the proposed PV- system will be constructed.

2.2 Financial Feasibility Assessment

34

RETScreen’s financial analysis accounts for the benefits of the electricity produced and the costs of

the PV power plant. These estimates are then used to show financial statistics, like net present value (NPV),

simple payback period (SPP), and internal rate of return (IRR) of the project.

The cost components are divided into initial cost, annual (operation and maintenance) cost. The initial

cost is further broken into: feasibility study, development, engineering, power system, and balance of

system & miscellaneous.

2.2.a. Initial Costs

The unit cost of the photovoltaic panels is estimated as $ 800 per panel for mono-So-HIP-205BA3

PV-module from Sanyo. Since the proposed PV system consists of 200000002 units, the total equipment

costs $ 160 billion. Due to unavailability of data, the study adopts estimate of the shares of the various cost

components from a previous study as follows: feasibility study (0.2%); development cost (0.2%);

engineering cost (0.2%); renewable energy equipments (71.4%); and balance of plant cost (28%). (El-

Shimy, 2009; Rehman et al., 2007; Hrayshat, 2009). The PV module costs will makeup the majority of the

costs of the system.Since these figures are merely estimates, extrapolating from previous studies, the

sensitivity analysis scenario discussed later will assume how the financial feasibility assessment changes

with the differing prices.

For this study, we estimated the cost of the renewable energy equipment, and apportioned other cost

components for the base-case scenario. Therefore, the feasibility study, development, and engineering

estimates would be $ 457.142 million respectively. The balance of system (BoS) costs are estimated to be

$62.628 billion. BOS costs include the tracking system, inverter, electrical components, and installation.

The total initial cost is predicted to be $228.571 billion.

2.2.b. Annual costs & Periodic Costs

Annual costs consist of operating and maintenance and periodic costs, such as replacing inverters.

Operating and maintenance costs are relatively small as PV systems are low maintenance. A 2005 report on

the performance of a 3.5 MW power plant in Arizona documented every maintenance cost for three years,

and found average annual cost to be 0.16% of total initial cost (Moore et al., 2005). Applying this 0.16%

cost assumption, the PV plant would have an estimated $365,714,285. Periodic costs are fairly low as PV

modules themselves are very durable and often come with 20 year guarantees. Inverters, however, have a

shorter lifetime and are estimated to cost approximately $2 million every 5 years for replacement for 10MW

(El-Shimy, 2009). Therefore, this study assumes 2,000,000 x 4,100 = $8.2 billion.

2.2.c. End-of-life costs (of Salvage value)

35

One other thing to be taken into consideration is the end-of-life costs for a PV system after

its life; a recent study examining the financial aspect of solar power project estimated that a PV

system would be worth 10% of its original value after 30 years (Komoto et al., 2009). Using this

assumption, we assume that the PV system’s salvage value to be approximately $22.857 billion. A

summary of the values to compute the expected cost for the 41 GWp PV power plant is shown below

in <Table 2>.

<Table 2> Initial, periodic, annual, and end-of-life cost for the PV power system

Type of Cost $ USD % of Initial Costs

Feasibility Study $457,142,857 0.2%

Development $457,142,857 0.2%

Engineering $457,142,857 0.2%

Equipment $160,023,000,203 71.4%

Balance of System Costs (BOS Costs) $62,628,571,428 28.0%

Total Initial Costs $224,023,000,202 100.00%

Inverter Replacement Costs $8,200,000,000 Every 5 years

Operation and Maintenance $365,714,285 Annually

End-of-Life Costs (Salvage Value) $22,402,300,020 10%

2.2.d. Incentives and Grants

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Since Saudi Arabia announced on 2012 that it would allocate $109 billion for the development of

renewable energy and plans to introduce utility-scale solar energy into the Nation’s power system, the input

value for the ‘Incentives and Grants’ will be $109 billion.

2.2.e. Electricity export rate ($/MWh)

The annual production cost of PV-generated electricity entering the grid is calculated by

multiplying the electricity export rate by the net energy production from the PV plant. The electricity export

rate is the price paid by the utility for electricity from the PV plant that is dispatched to the power grid to

serve electricity needs in Saudi Arabia. This rate is assumed to be equivalent to the conventional cost of

electricity production, which is estimated in Saudi Arabia to be 26 halalah (equivalent to US $0.069) per

kWh (SEC). In terms of the segmentation of electricity consumption in Saudi Arabia, around 50 % comes

from the residential section, while the remaining is split among industry, commercial sector and

governmental agencies (21%, 15% and 12% respectively). As will be seen in the later section, the annual

electricity production from the proposed PV system will be around 124,271,432 MWh (= 123 billion GWh).

This figure will be about 20% to 40 % of total electricity consumption by 2032. Therefore, the assumption

that the whole electricity produced from the PV system will be sold to the industry, commercial and

governmental sections at highest price is reasonable. Moreover, since the Saudi Arabia uses Time of Use

(TOU) tariff system for measuring the cost of electricity consumption, we will assume that the price of

electricity will remain the same throughout the project life, meaning that the electricity export escalation

rate is 0%.

2.2.f. Inflation Rate

37

There are many estimates for the forecasts of inflation rates for Saudi Arabia ranging from 2.5 - 3%. The

projection below is one of many examples from IMF, and it forecasts the inflation to be 2.85%13. For this

model, we will simply use the inflation rate of 2.7% in 2014 (World Bank) for simplicity.

2.2.g. Discount Rate

Due to the unavailability of data for the discount rate, this model will assume the input values as

were estimated in other previous studies (El-Shimy, 2009; Rehman et al., 2007; Hrayshat, 2009). For this

model, the discount rate will be 5%.

2.2.h. Project Life

According to Renewable Power Generation Costs in 2014 by international renewable energy

agency, the economic life for the solar PV is 25 years; moreover, other previous studies adopt the project

life as 25 years (El-Shimy, 2009; Rehman et al., 2007; Hrayshat, 2009). Therefore, this model will assume

the project life to be 25 years.

2.2.i. Income from GHG Emissions Reduction Credit Trading

RETScreen also can account for the monetary value of GHG emission reductions. However, our

baseline assumption is that these external benefits will not be included, as Saudi Arabia currently has no

monetary incentives in place for GHG emissions reduction. Thus, this proposed PV project is assumed to

receive no GHG emissions credits; however, one sensitivity analysis scenario discussed later assumes GHG

emissions credits are received for the plant.

13 Forecast of Inflation Rate in Saudi Arabia from ‘STATISTA’- inflation forecast http://www.statista.com/statistics/268062/inflation-in-saudi-arabia/

38

The inflation rate, discount rates, and other financial indicators are shown below.

2.3 GHG Emissions Analysis

GHG emissions analysis helps the user estimate the greenhouse gas emission reduction (mitigation)

potential of a proposed clean energy project. To calculate GHG emissions reductions, the net amount of

annual energy produced from the 41 GW power plant is assumed to represent an equivalent amount of

conventional electricity that no longer needs to be produced. The base case electricity system is calculated

by inputs of the electricity source mixture by fuel type, GHG emission factor, and baseline transmissions

and distribution (T&D) losses. GHG emission factors is defined as the mass of greenhouse gas emitted per

unit of energy produced. Losses from transmissions and distribution are reported to be 2% and 8%,

respectively, all of which add up to 10% for the T&D losses (Miller, 2009).

RETScreen compares this baseline GHG emissions case with the proposed new electricity

system, which has integrated the 41 GW power plant into the electricity grid. The PV plant is 100%

powered by solar radiation and emits no GHGs. The transmission and distribution (T&D) losses for

the proposed new electricity system are assumed to be 10% as well.

3. RETScreen Results

3.1 Projected Energy Production

The proposed power plant is projected to produce approximately 102,090,306 MWh ( = 102 billion

kWh) annually of (alternating current) electricity available for export to the electricity grid. This number

takes into account losses from sand and dust, as well as the effects of inverter efficiency and outside

temperatures on performance of the PV system. Total net electricity consumption in Saudi Arabia in 2014

was 240 billion kWh (CIA, 2010). Thus, this plant could meet the needs of about half of total domestic

electricity consumption. Moreover, total net electricity consumption in 2032 will be ranging from 430

billion to 720 billion kWh; given this information, the 41 GW power plant would account for 15-25% of

total electricity consumption by 2032. The power plant capacity factor represents the ratio of actual energy

39

output compared with the plant’s optimal nameplate capacity. The PV power plant capacity factor is

estimated to be 28.4%. The peak electricity export occurs in the month of June, when production is 9,453

billion kWh.

3.2 Financial Analysis Results

40

RETScreen calculates numerous financial indicators, enabling comparisons among other investment

projects and reflection on the economic feasibility of any project. The main financial indicators are reported

further discussed in the following paragraphs.

In NPV analysis, the present value of all cash inflows is compared with the present value of all cash

outflows associated with an investment project. The difference between the present values of these cash

flows, called the NPV, determines whether the project is generally an acceptable investment or not. Positive

NPV values are an indicator of a potentially feasible project.  The NPV for this project is shown in below.

This shows the calculations for the net present value of the PV project.

The NPV for the PV plant with a 25-year assumed lifetime is - $ 65.334 billion. Equation shows

that components of the NPV equation. The energy production cost measures the total cost for producing one

kWh of electricity and is estimated to be $114.41/MWh. The net benefit-cost (BC) ratio compares the cost

of the project’s equity to the benefits of all income over the 25-year lifetime in present value. The net BC

ratio is projected to be 0.71. Ratios larger than 1 are desired for projects, as the benefits would be greater

than the costs. Annual life cycle savings (ALCS) represents the yearly benefit of the PV plant, taking into

account net present value, project lifetime, and the discount rate. The ALCS for the project is projected to be

-$ 4,635 billion annually. The simple payback period indicates how many years it takes to recoup the initial

and annual costs given positive annual income from the PV system. This PV power plant has a payback

period of 17.2 years.

The results summarized in Table 12 do not include estimates of GHG emission reduction benefits.

The current negative NPV demonstrates that without including the benefits of reduced GHG and air

pollutant emissions, solar power is not economically feasible. However, the conclusion may be different if

the income from GHG emissions reduction credit is taken into account.

41

42

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3.3 GHG Emissions Reductions

For the base case electricity system (baseline), the GHG emissions factor for Saudi Arabia,

excluding T&D losses, is calculated to be 0.737 tons of CO2 per MWh per year.

When T&D losses are accounted for, the factor increases to 0.819 tons of CO2 per MWh. For the

base case system GHG summary (baseline), GHG emission is calculated to be 83,576,036 tons of CO2/yr.

This emissions rate is compared with the proposed PV power plant, which has a GHG emissions

zero factor of zero. However, T&D losses are taken into account, whereby GHG emission is calculated to be

8,357,603 tons CO2/yr

The model estimates that the PV plant will reduce GHG emissions by 75,218,432 tons of CO2

annually. Assuming a 25-year lifetime for the plant, approximately 1,880,460,814 tons of CO2 emissions

will be avoided as the PV power plant replaces the need of some electricity from the existing power grid.

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4. RETScreen Sensitivity Analysis

4.1 Global Solar Radiation

The current global solar radiation (GSR) values reflect the 22-year averaged insolation data

from NASA. However, if we use the data from the worldwide ground-based meteorological data from

the RETScreen weather database, which has higher average GSR values, then RETScreen predicts a

more favorable situation. The difference in GSR values are likely due to the fact that the locations of

GSR records are slightly different. If these records were used,. The annual electricity production is

estimated to increase to 124 billion kWh per year. Given the increase in projected energy production,

electricity production costs decrease to $93.99/kWh, and NPV decrease to $-43.764 billion. These

changes show that site specific GSR values are important to accurately predict energy production

potential at any location.

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4.2 Losses Due to Sand and Dust

There is a wide range of possible percentage losses in the energy production due to sand and dust on

the PV panel. The value for miscellaneous losses was changed from its original value of 5% to 2% and 10%

in order to examine effects on resulting values. If the PV panel had losses of 2 percent due to sand and dust,

the resulting energy production would increase to 105 billion kWh per year, with a capacity factor of 29.3%.

The NPV would decrease to - $62.199 billion and electricity production cost decreases to $110.91/kWh.

Conversely, if PV losses were projected to be 10 percent, the energy production would be 96 billion kWh,

with a capacity factor of 26.9%. The NPV would increase to $-70.560 billion and electricity production cost

increases to $120.76/kWh.

4.3 Initial Costs

The initial cost of the project may also vary. Total installed costs for solar PV systems have fallen

rapidly since 2008 as a result of significant overcapacity in module manufacturing and cut-throat

competition (International Energy Agency, 2009). Assuming that the price of PV module will decrease

significantly, the NPV will be approximately reach a break-even point (close to zero), if the initial cost

decreases by 29.1643106%. The resulting initial cost will be $158.688 billion.

4.4. Income from GHG Emissions Reduction Credit Trading

It is currently assumed that the PV project receives no benefit from GHG emissions reduction, with

GHG emissions reduction credits valued at $0/ ton CO2 eq. However, financial indicators would improve

when GHG credits trading is included. Carbon trading schemes attempt to internalize the externalities of

GHG emissions by putting a price on emitting CO2. Clean energy projects in Saudi Arabia are eligible for

Clean Development Mechanism (CDM) funding. The CDM was established under the Kyoto Protocol as a

way for developed countries to fund GHG emissions reductions projects in other countries, where projects

are potentially less expensive. The carbon prices observed vary significantly, from less than $1/tCO 2 to

$130/tCO2. The majority of emissions (85 percent) are priced at less than $10/tCO2. (World Bank, 2015).

Thus, a RETScreen analysis was conducted that assumes that the PV plant would receive GHG

emissions credits of $10/ton, with a 5% escalation rate for 25 years. The benefit from this income has

46

$752,184,325 annually; however, this benefit is not enough to make the project profitable with the NPV

only decreasing to $-46.530 billion. In order for the NPV to reach its break-even point, GHG reduction

credit rate should be increased by 247.44%, whereby its rate becomes $34.7410/tCO2.

4.5. Electricity export rate

In order for the NPV to reach its break-even point,electricity export rate should be increased by

65.808%, whereby its rate becomes $114.41/MWh.

5. Remarks

According to the RETScreen Software, the energy production potential for large scale PV power

plants in Saudi Arabia is extremely high, with a capacity factor of 28.4%. A 41 GW power plant close to

Bisha city is predicted to generate 102 billion kWh of electricity each year. However, large-scale PV power

plants are currently not profitable, with an estimated NPV of -$65.334 billion for a 41 GW facility. We 47

believe this negative NPV demonstrates why Saudi Arabia delayed its announced policy of developing $109

billion worth of solar investment to build up 41 GW of solar power by 2032.

The financial feasibility of the project is highly dependent on 1) the initial cost of the PV system, 2)

the electricity rate the PV plant will receive for power delivered to the grid, and 3) the GHG emissions

credits rate. The current expected price of $69/MWh is too low to generate enough profits for the project to

be viable. In order to for NPV to reach a break-even point, the electricity export rate would have to be

$45.41/MWh greater. Thus, the PV project would be profitable if a feed-in-tariff were established that

would guarantee a purchase price of the electricity generated.

The initial costs of constructing a 41 GW of solar power are too expensive at this rate. From the

sensitivity analysis, it is found that the initial costs has to be lower by 29.1643106% for the NPV to reach its

break-even point, whereby the resulting initial cost will be $158.688 billion. This implication is nonetheless

not impractical, as the emergence of Chinese market for PV module keeps driving the price down. It could

be inferred that Saudi Arabia delayed its investment, so that the price of PV module keeps decreasing to a

level that the initial costs will not partake the significant portion of the $109 billion subsidy.

Moreover, the GHG emissions credit rate is not high enough. That is, the benefit from this income

is not high enough to offset the benefit of developing a renewable energy capacity. From the sensitivity

analysis, it is found that GHG reduction credit rate should be increased by 247.44% - its rate becoming

$34.7410/tCO2, in order for this project to be financially feasible.

Additional research is highly recommended, as there are limitations to the RETScreen model.

This analysis examined the feasibility of only PV energy and no other renewable energy source such

as wind, concentrated solar, and geothermal. In addition, RETScreen requires fixed values for inputs

while a range of possible values could be more appropriate in cases where uncertainty exists such as

imputing GSR values, the electricity export rate, and initial costs values. Such uncertainty has to be

accounted for, when evaluating such renewable energy policy as that of Saudi Arabia, since the

magnitude of utility-sized project is significantly greater than either the residential-sized or

commercial-sized projects.

V. ConclusionThroughout the course of this paper, we highlighted that Saudi Arabia certainly has the

potential to make the transition to renewable energy. The kingdom has abundant conventional energy

source (at least for the time being) and renewable energy source, namely petroleum and sun radiation,

respectively. The government clearly understands the need for renewable energy development,

acknowledges that their oil dependence is too high, digging deeper into their limited oil reserves, and

thus proclaimed in 2012 an ambitious goal of developing 54GW of energy from renewable sources.

Without doubt, such efforts are greatly welcomed and applauded. Renewable energy is the future and

must be developed to its full potential. 48

However, we take a step further to examine if the current economic environment is a

profitable time for such a transition. The profitability analysis identifies that even with today’s lower

oil prices, if PV penetration rates reach 12%, it is a profitable transition for Saudi Arabia. Further

considering the fact that today’s low oil prices are mostly consequences of a political and deliberate

measure by Saudi Arabia to crowd out higher-cost producers of oil, and that oil prices will rebound to

higher levels in the following years, we believe there are greater opportunities to gain profits by

addressing the inefficiency of oil subsidies and increasing exports. The cost-benefit analysis is

targeted to examine the validity of the government’s policy. Using the RETScreen software, we take

multiple factors and variables into account to determine the NPV of the policy. The results show a

negative NPV, which can be an explanation for the 8-year delay in meeting its goals. By no means

does this imply that Saudi Arabia should not make the transition to renewable energy; the results

merely signify that under the given assumptions and current state of technological and economic

environment, reaching the goal of developing 41GW of solar energy by 2032 comes at greater costs

than benefits. Renewable energy development is the ultimate goal but our analysis shows that now is a

costly time for the transition. Nevertheless, that cost may not simply be a one-time “expense”, but a

worthwhile expenditure, an investment for the future. The interpretation remains at each country’s

discretion and is a further valid study. In so far as Saudi Arabia, we conclude that renewable energy

transition is a feasible but yet to be an entirely profitable agenda.

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