By Angus McDowall and Reem Shamseddine
RIYADH/DAMMAM, May 23 (Reuters) - Saudi Arabia, the world's top oil exporter, may finally be getting serious about overcoming the technical and financial hurdles for tapping its other main resource: sunshine.
Thousands of solar power panels have sprung up across Europe over the past few years, thanks to generous subsidies that make the technology an attractive alternative to conventional energy.
Saudi Arabia too, wants to generate much more solar power as it lacks coal or enough natural gas output to meet rapidly rising power demand.
Doing so would allow it to slash the volume of oil it burns in power plants bankrolled by billions of dollars worth of saved oil earnings.
"At world market prices, solar is competitive if you use crude oil to generate electricity," said Maher al-Odan, a senior consultant at King Abdullah City for Atomic and Renewable Research (KA-CARE) which was set up to plan Saudi Arabia's energy mix.
Saudi Arabia has said it wants to become a major solar producer before, but its investments amount to much less than 50 megawatts versus several countries which have added thousands of megawatts a year.
This month, KA-CARE set forth a much more ambitious plan, recommending that the kingdom aim to get more than a third of its peak-load power supply, or about 41 gigawatts (GW), from the sun within two decades at an estimated cost well over $100 billion.
Making the plan work economically rests on three assumptions: that technology improvements will cut costs, that a domestic solar industry will emerge and create jobs for a booming population, and that many billions of dollars worth of exportable oil will be saved.
An average of 700,000 barrels a day of crude were used in Saudi power stations during the peak air-conditioning demand period from May to September last year, according to official data supplied to the Joint Organisations Data Initiative (JODI).
Although a rise in gas production should temper crude burning this summer, it will likely rise substantially in years ahead unless alternatives are found, and fast.
"Domestic oil consumption is rising very rapidly and you get far more value for oil if it's exported than if it's consumed domestically," said Paul Gamble, chief economist at Jadwa Research in Riyadh.
KA-CARE said the first two solar plants, with combined capacity of 3 GW, might be put to tender in the first quarter of next year.
One of these will use concentrated solar power (CSP), which Riyadh says could supply an eventual 25 GW of the total 41 GW of planned solar capacity.
The other will use photovoltaic (PV), the technology expected to meet the rest of the overall goal.
CSP is relatively new and much more expensive than PV. But unlike PV, it can store solar energy for several hours, which is a big advantage in a country where air conditioning demand remains high in summer long after the sun has gone down.
Both technologies will suffer efficiency losses in Saudi Arabia's harsh, arid conditions, but long periods of intense sunshine should help compensate.
"High temperatures in situations with high direct solar irradiation can have a significant impact on the maximum possible power output," according to GFZ Potsdam, Germany's national research centre for Earth Sciences.
Another problem could stem from desert dust that can reduce solar energy by 10-20 percent in efficiency, according to King Fahd University of Petroleum & Minerals.
"We have losses due to high temperatures and so on," KA-CARE's Odan said in an interview, comparing the likely performance of solar power in Saudi Arabia with that of Germany, the world's leading solar power.
"But what we gain from high radiation (from increased sunshine) more than compensates for the loss of efficiency."
Paddy Padmanathan, chief executive of Acwa Power, which has developed eight fossil fuel power plants in Saudi Arabia and is bidding to build a large CSP plant in Morocco, said solar should be competitive for peak-time supply against gas and oil.
He said that at Saudi Arabia's heavily subsidized gas price of $0.75 per million British thermal units (mmbtu), utilities could provide electricity at a cost of 7.5 halalas ($0.02) per kilowatt hour (kWh).
However, if the gas was valued at $6 per mmbtu, closer to world market prices, the cost of electricity would rise to 34 halalas/kWh.
Yet oil-fired power costs around 12.5 halalas/kWh at the Saudi oil supply price of $4.40 a barrel, rising to 60 halalas/kWh with oil valued closer to world levels at $80 a barrel.
By comparison, PV could deliver electricity for 45 halalas/kWh and CSP for 70 halalas.
While those prices are uncompetitive against artificially low gas prices in Saudi Arabia, he said solar power should work out cheaper when the cost of keeping large oil and gas plants on standby for delivering peak-load power are factored in.
"It makes economic sense as a kilowatt hour produced from solar will be cheaper than that produced through traditional electricity production," said Christopher Burghardt, managing director at First Solar, which is opening a Gulf office.
But some industry experts say that while a recent slide in PV costs makes the maturing technology attractive, CSP costs need to fall further to guarantee swift payback on the Saudi investment plan.
"PV is highly competitive now against oil and against the higher cost gas the Saudis have available," Robin Mills, head of Manaar Energy Consulting, said.
"For CSP, would it be competitive against oil valued against international prices? I think it would be marginal," said Mills, who has published studies on the commercial viability of solar power in the Middle East.
KA-CARE's Odan said he anticipated the cost of CSP in particular would drop as the technology evolves and the market grows but Mills said there is more downside on PV costs.
Because Saudi Arabia wants to keep consumer electricity prices very low, solar power investments will need hefty state support.
But the economic benefits of saving hundreds of thousands of barrels a day of oil, the country's largest export earner, supports the economic case.
"We know well that the cost of generating power from these sources will be higher and we did a model that will help us bridge the gap," said Khalid al-Sulaiman, vice president for renewables at KA-CARE.
"You call it subsidies. I don't call it subsidies and many countries don't call it subsidies. They are incentives for the sector."
KA-CARE expects the aim of developing an indigenous solar industry to increase costs.
Yet this offers the benefit of hi-tech job creation and the prospect for developing new solar technologies in the country.
To that end, the kingdom will require bidders for big solar projects to offer jobs to Saudi nationals and technology transfers.
KA-CARE plans to pick the best technology currently available around the world and develop it further and sees most scope for this in the comparatively immature CSP market.
"They factor in an assumption about domestic value creation to the local economy from the creation of a new industry, and also for the export of new technology," said Gamble.
"I think to justify that level of money you would need to make some assumptions that both those factors would be significant." (Additional reporting by Henning Gloystein and Maha El Dahan, editing by Daniel Fineren and Jason Neely)