Last week MbS and Softbank announced a joint plan to build 200,000 MW of solar

capacity in the Kingdom. One report adds massive battery installations, of unspecified
size. The announcement is in fact a repeat of a panel discussion in Riyadh in October
2017 about Neom, but that didn’t get much traction, hence the re-run.

A lot of very large numbers are being thrown around. It might be interesting to put
them into perspective.

Current fully installed capital cost for solar PV is around $2,800 per kW of nameplate
capacity. Solar usually yields around 14%-18% of its nameplate capacity as night,
cloud, varying angles of solar incidence over the day and atmospheric dust all reduce
insolation. The gulf is a good place for a solar plant – UAE is getting 19% yields at Al
Qudra. Saudi solar should yield about the same. You can get the yield up by mounting
the panels on rotating stands, but that increases both capex and opex, and does not
really justify its cost.

Solar capex costs are falling, but will not fall for ever. Panel costs are dropping
fastest, but other components (mounts, connections, transformers, control plant, grid
connections) are not. The MbS plan includes building large panel plants in Saudi, but
that is more about economic development than cost reduction. MbS is probably
assuming here a capex cost of $1,000 per kW, which looks a little optimistic (MbS is
nothing if not an optimist). We’d use a less optimistic capex cost of $1,800 per kW for
this discussion.

Why 200,000 MW? That much plant is likely to have a capex cost of $360bn. With a
guaranteed market in Saudi and a regulated price per kWh this could be geared up to a
level of maybe 70%, making the equity tranche $110bn.

MbS is talking about a project that will run from now to 2030. If the build were linear
that would require equity investment at $9bn per year, plus the cost of those panel
plants. The first step, announced last week, is apparently for $5bn, which would buy
1,800 MW. It was a little unclear whether the plan is that this $5bn is geared ($1bn
equity and $4bn of debt) or pure equity, but then all of the numbers in this latest MbS
emission are a bit unclear.

Now, let’s look at this idea in the context of Saudi power demand.

Saudi consumes around 300bn kWh of power each year. 200,000 MW of solar plant,
yielding 19%, would produce 316bn kWh (did someone in MbS’ office just do that
math and come up with the “dream”?). But what about the load picture?. Gulf load
curves typically have two peaks – one in summer afternoons when temperatures rise
to the high 40s, and aircon is going at full stretch, and the other in summer evenings,
with cooking and entertainment all running flat out, and aircon still working away in
the background.

Saudi’s current peak loads are around 62,000 MW. On a hot afternoon solar should
generate around 70% of nameplate, meaning that 100,000 MW of nameplate capacity
would carry all of Saudi’s load on a summer’s afternoon – Gulf solar fits the Gulf’s
daytime load curve pretty well.

Not so well at night, when solar yield drops to zero. The big announcement referred
enigmatically to power storage as a way of dealing with that. Saudi consumes 0.9bn
kWh of power in an average day. Around half of that is consumed at night (actually
between dusk and dawn, which means rather more than half of the day needs power
when solar yields are zero). If Saudi wanted to run its entire power industry on solar
PV it would need power storage capacity of around 0.5bn kWh (if it were cycled from
full to empty daily) or more realistically 0.7bn kWh on a shallower charge/discharge
cycle and with some redundancy built in.

Current best-of-class power storage costs are around $200 per kWh, which would
bring a 0.7bn kWh facility in at another $140bn. Storage costs will fall, and grid scale
storage doesn’t have to be based on Lithium, which might make storage cheaper one
day. Siemens, for example, is working on a system that stores heat in crushed rock at
600 degrees for later steam generation. Whichever way you look at it storage costs
will bring high capex.

Ignoring costs for the moment, a 0.7bn kWh storage asset would broadly allow a
200,000 MW solar build to carry Saudi’s all of power demand, with 100,000 MW
carrying the daytime load, and another 100,000 MW filling storage capacity for the
overnight load and those parts of the mornings and evenings where solar’s yield drops
a little short of demand. The two would interact to manage load peaks and troughs,
with the battery (or actually multiple batteries co-located with the solar plant) acting
as the load balancer.

If you were starting from scratch, and had almost infinite cash resources, that would
be a beautiful way to run a country’s power market.

Saudi is not starting from scratch. Conventional power plant – gas turbine and thermal
– has a 20-30 year economic life, and then another 20 years of physical life. Saudi
presently has some 65,000 MW of that plant built and in service. The solar plan as
announced would see much of that plant permanently idled part-way through its life
as solar builds made hydrocarbon plant redundant. With an original capex cost of
around $100bn, and an average depreciated value of around $50bn, that is a pretty
substantial write-off which someone is going to have to pay for. Saudi also has a
nuclear strategy – to build 17,000 MWe of plant by 2040.

MbS’s solar dream is insignificant for the global oil system. While Saudi presently
burns on average 700kbpd of liquids for power (nearly 1% of world demand), those
liquids are provided to Saudi power plants almost for free. The solar plan as described
would see that production being shut in. Even it wasn’t shut in, 700 kbpd spread over
ten years would have marginal effect on oil prices, if any.

MbS would probably point out that among solar’s appeal is the fact that the fuel is
free. True, but Saudi’s power industry currently uses oil which is also almost free:
when supplied to Saudi power plants at $8 per barrel an oily kWh of raw energy costs
only half a cent.
If we assume that MbS does not plan to invest 75% of his sovereign wealth fund in
building unprofitable solar plant, then the solar plan has to be profitable. For that to
happen Saudi has some way to travel in terms of power tariffs. These were increased
to 0.18 Riyals per kWh in December 2017 (for some consumers) – around 5 cents.
Netting back through distribution and transmission costs that price would barely give
solar investors breakeven (without mass power storage) and a large loss with mass
power storage. Saudi tariffs need to run closer to 15 cents per kWh to make a
PV/storage combo profitable enough to support all that debt and create a virtuous
cycle of re-investable profits for continued expansion.

So what is actually going to happen? Probably something like this. The first step (that
$5bn/1800 MW build) will happen pretty quickly. Solar power costs will then be used
as the popular justification for rising power tariffs (“it saves our oil for export, and
protects our environment”), but the tariff gradient cannot be too steep as consumers
are highly sensitive to power costs. Tariff increases of 10% per year would take tariffs
to 15 cents in around a decade.

As Saudi solar yields are proved at around 19% and as tariffs rise, solar builds will
begin to deliver reasonable ROIs, and will become the source of choice to meet both
demand growth and replacement of end-of-life gas and oil plant. About 1,500 MW of
hydrocarbon plant falls off the Saudi plant list each year due to age and infirmity, and
loads will grow at around 1,000 MW each year, creating plenty of room for new solar,
which will arrive at a rate of around 4,000 MW per year (nameplate). Mass power
storage will follow much later, though we will probably see a few small over-hyped
installations sooner.

By 2030 Saudi will have around 50,000 MW (nameplate) of solar PV plant delivering
a little less than half of the average daytime load. 50,000 MW of gas and oil plant will
carry the rest of the daytime load, operating at around 70% of capacity, and most of
the night-time load, operating at nearly full capacity. Some mass-storage plant will fill
in around the edges, and Saudi’s new fission plant will be on load for the first time. In
the hydrocarbon part of the market gas will be the dominant fuel. Power tariffs will be
up around 15 cents per kWh, and the Saudi power market will be worth a billion
dollars a week. Around $100bn will have been invested in solar plant.

So, if not quite the Amazing MbS mega-plan, still a large-scale transformation of the
Saudi power market.