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A paradigm shift in the cost of renewables?

Dubai, 3 May 2016

If a week is a long time in politics, then things tends to move at a more sedate pace in the field of utilities procurement although events over the past few days have the potential to turn the industry on its head in the GCC. If the results of the latest round of competitive tendering in Dubai are confirmed - for Phase III of the Mohammed bin Rashid Al Maktoum solar park - then the 3 cents per kWh offered by a consortium of Masdar, Abdul Latif Jameel and Fotowatio Renewable Ventures will be a world record low tariff. Industry commentators no longer have need to question the place of renewables in the future energy mix but may instead begin to question at what level of tariff the economic viability of delivering solar becomes impaired.

From a market perspective, consider this. Based on the information released to date, five tenderers submitted proposals. Five well respected and internationally successful consortia. The divergence between the most and least competitive was a 49% and there was a 21% variance between first and second place. To some extent, this is indicative of a regional market in utility scale solar photovoltaics that has yet to reach maturity.

But more generally, what does this mean? In March 2015, we commissioned our Financing the Future of Energy report from the University of Cambridge and PricewaterhouseCoopers. This told us that the then world record PV tariff – at the time just under six cents per kilowatt hour at the time – was the equivalent of generating power using oil at ten dollars per barrel or gas at five dollars per million BTU. I called PwC yesterday for an update and although the current tariffs are not related to their earlier work in a linear way and they are still crunching the numbers, they think that the equivalent values might come out at around five dollars for oil and between two and a half and three dollars for gas. At these levels, the debate around the economic competitiveness of solar is over.

Last year, our thinking was that cost is no longer a reason not to proceed with renewables. Now it appears to us that cost - low cost - is a positive motivation to promote more renewables, particularly photovoltaics at utility scale. That’s quite a shift in a short space of time. With Abu Dhabi having recently launched a solar project procurement, we’ll find out later this year if the trend for declining costs and increasing competitiveness is enduring.

Nathan Weatherstone, Head of Sustainable Business