Is the oil price slump a boon for solar?

A series of pivotal events have shaken global energy markets in recent days, potentially clearing the way for renewables to steal a march on their finite cousins.

Last Friday, the price of oil fell for the second day in a row, sending the cost of crude down to $63.72 per barrel – a five-year low and a 50% plunge in the space of six months. Opec – the Organization of the Petroleum Exporting Countries – duly announced that it will not cut oil production, opting instead to maintain the cartel’s existing output levels in a move that experts suggest highlights just how strapped for cash many of these oil-dependent countries are.

The news of cheaper oil was greeted with cheer by some parts of society. Cheaper petrol at the pumps, leading to cheaper transportation costs, leading to cheaper goods was viewed as something akin to a mini early Christmas present by various media cheerleaders.

But scratch a little deeper and a pattern begins to emerge – a pattern of instability, volatility and risk in the fossil fuel camp; and a pattern of confidence, growth and positivity in the renewables sector.

Some analysts had suggested that cheaper oil could initially cause problems for the solar industry. With utilities able – but not guaranteed – to pass on gains to the consumer, the thirst for renewable energy could wane, analysts warned. "Such a scenario could destroy value on existing renewable energy projects and make it difficult to raise financing for future projects," Peter Atherton, utility analyst at Liberum Capital, told the Guardian.

However, Deutsche Bank energy analyst Vishal Shah yesterday released a report that suggested there would be "limited/no impact from recent oil price weakness" on the solar industry, with PPA prices in the U.S. immune from oil fluctuations. In China, Shah added, government appetite to tackle air pollution also protects the solar industry from external volatility, while the U.S. residential solar market is even more insulated from external forces, which spells good news for companies like Solar City.

In Japan, energy advisor to the government and senior fellow at Mitsui Global Strategic Studies Institute Takashi Hongo told Bloomberg that "renewables are supported by policies, and that is not something that will be amended quickly just because oil prices fall," suggesting there will be hardly any negative impact to the solar industry.

A warning shot was fired from Lin Boqiang, director of the Energy Economics Research Center at China’s Xiamen University, however. "If oil stays at current prices or weakens through the first half of next year, the impact on new energy would be massive," Boqiang told Bloomberg. "Weakening oil prices would hamper the competitiveness of new energy."

Yet despite a handful of pessimistic voices, the majority of renewable insiders have taken a more optimistic view, arguing that oil’s tumultuous week will only serve to strengthen governments’, utilities’ and consumers’ resolve to embrace a more stable energy alternative.

"The fact that oil is so unpredictable is one of the reasons why we must move to renewable energy, which has a completely predictable cost of zero for fuel," urged Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change at the opening of the COP20 climate conference in Peru.

A changing tide

Following oil’s dramatic price fall last week, this week began with two seismic announcements that could hammer a further nail into the fossil fuel coffin. First, German utility E.ON announced that it is to pivot away from fossil fuels by 2016, pouring the majority of its resources into the development of renewable energy sources.

Then, a day later, the Bank of England (BOE) wrote a letter to the U.K. government’s Environment Audit Committee announcing that it is to formally begin examining the risks fossil fuel companies pose to financial stability.

BOE governor Mark Carney expressed his concern that much of the world’s proven coal, oil and gas reserves may be "unburnable" if the world is to keep global warming within safe limits.

"In light of discussions with officials, we will be deepening and widening our inquiry into the topic," wrote Carney. "I expect the Financial Policy Committee to also consider this issue as part of its regular horizon-scanning work on financial stability risks."

That risk is predicated on the widely-held belief among scientists that further burning of fossil fuels risks driving up the global temperature by a further 2C by 2050 – at which point catastrophic and irreversible climate damage will occur.

The U.K.’s chairwoman of the Environmental Audit Committee, Joan Walley, has welcomed the BOE’s public commitment to questioning the role of fossil fuels in the economy, stating: "Policymakers and now central banks are waking up to the fact that much of the world’s oil, coal and gas reserves will have to remain in the ground unless carbon capture and storage technologies can be developed more rapidly."

In light of the BOE’s announcement, Nicholas Stern – former chief economist at the World Bank and member of the House of Lords – told Bloomberg: "The world is likely to strengthen its resolve on climate change. Investment in fossil fuels should be seen as a rather risky activity."

Jeremy Leggett, founder of U.K. solar company Solarcentury and renowned advisor on energy and climate change, told pv magazine via Twitter that the world is indeed at a turning point. "I think 2015 will be a turnaround year from carbon to solar," he said.

Solar’s moment to shine

In a seemingly perfect storm, the European Photovoltaic Industry Association (EPIA), in conjunction with the Global Wind Energy Council (GWEC) will highlighted the transformative potential of both solar and wind at a presentation at on December 10.

According to the associations, solar and wind will mitigate the effect of 3.8 billion tons of C02 annually by 2030 as large-scale deployment of both technologies continues apace. With green energy set to receive more than 60% of the estimated $5 trillion that will be invested in new power plant projects over the next ten years, solar power can really begin to shine.

In recent years, solar and other renewable energy sources have become increasingly insulated from the volatility of the oil market. According to the International Energy Agency (IEA), petroleum-based fuels provide just 5% of global power generation today.

The rise in fracking in the U.S. has diminished its influence further, leaving solar markets in North America and Europe at little risk from oil price shocks. Tom Werner, SunPower’s chief executive, recently remarked in an analyst call that "the price of oil has almost nothing to do with future solar demand, even in the Middle East".

He continued: "We can price solar energy significantly below diesel-produced electricity. You have to have substantially lower cost of barrel of oil to even come close to the numbers that you can hit with solar."

Richard Mallinson, lead analyst in energy policy and international affairs at Energy Aspects, agrees with Werner. "The direct impact of the fall in oil prices on the solar industry, at least in Europe, is limited given liquid fuels contribute only a small fraction of thermal power generation," he told pv magazine. "While historically continental gas supply contracts have been oil indexed, many of these have renegotiated to a hub basis in recent years, so there is less correlation between movements in oil prices and gas prices."

Mallinson added, however, that a fall in oil prices is not necessarily going to lead to greater investment in solar generation or other forms of renewables per se, stating: "Much more significant are the future of the nuclear sector, concerns about dependence on Russian gas supplies, and European emissions policies."

Bloomberg New Energy Finance’s (BNEF) head of solar insight Jenny Chase told pv magazine that although it is "irrational" to link the price of oil to solar demand, "investors can be irrational".

"At the margin, cheaper oil means slightly cheaper diesel, so off grid solar displacing diesel will become very slightly less attractive," Chase said, but added that transport costs are usually the biggest burden to bear in remote locations.

Transport remains one area where oil’s dominance remains largely unchallenged. From planes to automobiles, petroleum is king, but even that demographic is changing. Electric Vehicle pioneer Tesla has begun to make serious inroads into the consciousness of eco-conscious motorists.

Skeptics have warned that cheaper fuel may puncture Tesla’s growth, and it is true that lower-priced gasoline is likely to slow the transition to an electric vehicle future, but experts are equally bullish in their belief that the continued volatility of oil prices – which go up as well as down – will ultimately work in Tesla’s favor.

"Volatility sells Teslas," wrote Wolfe Research analyst Paul Sankey last week.

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