Lower Oil Prices, but More Renewables: What’s Going On?

Not that long ago, the plunge in oil prices that has occurred over the past year would have been to renewables what kryptonite was to Superman, as the Financial Times put it. This time, not so much.  Global clean-energy investments increased 17 percent in 2014, reaching $270 billion, reversing 2 years of declines, and equity investment rose 54 percent.

Global investment in renewable energy, by asset class
US$

SOURCE:  GLOBAL TRENDS IN RENEWABLE ENERGY INVESTMENT 2015, UNEP, BLOOMBERG NEW ENERGY FINANCE

And that’s not all. The US Energy Information Administration (EIA) estimates that between now and 2022, renewables will account for the majority of new power; by 2040, its market share will be 18 percent, up from 13 percent in 2014. Globally, 2014 saw a record 95 GW of new wind and solar, and the International Energy Agency (IEA) expects renewables to account for 25 percent of power generation in 2018, up from 20 percent in 2011. In 2014, non-hydro renewables energy accounted for almost half (48 percent) of net new power capacity.

SOURCE: IEA

?There are four main reasons why the link between oil prices and renewables appears to be weakening.

1.  They operate in different markets: Oil is predominantly used for transport—cars, trucks, planes. Very little of it is used for power; oil accounts for less than one percent of power generation in the United States and Canada, for example, and not much more in Europe. Globally, the figure is around 5 percent. Renewables, on the other hand, are used mostly to create electricity. 

In some markets, oil is linked to the price of gas, which is a major player in power production (27 percent in the United States and 18.6 percent in Europe). In effect, gas becomes the floor price for power, and in most markets, most renewables are still more expensive. So it is certainly possible that cheap gas can drive out or at least slow the growth of renewables. But that need not be crippling to renewables or bad for the environment.

To the extent that gas displaces coal, that’s good for the environment, and this is happening. In the United States, the use of coal for power generation has fallen from more than half in 2005 to 39 percent in 2014. That is a large part of the reason that greenhouse-gas related emissions actually fell over the same period.

In addition, because energy investment is long-term, changes in the spot price of gas will not in itself derail investment in other sources. As long as renewables keep getting cheaper (see next section), there is room for both.

2. The economics of renewables are improving. In 2007, when annual global investment in renewables peaked at $279 billion, 70 GW was installed. Seven years later, almost 40 percent more was installed (95GW), though investment was slightly lower ($270 billion). In that comparison lies the most important reason that renewables are holding their own, and then some, even as the oil price fell so drastically. To put it simply, renewables are getting cheaper all the time, and thus more competitive.

In the United States, for example, the National Renewable Energy Laboratory (NREL) estimated in 2014 that the cost of residential and commercial solar PV systems fell an average of six to seven percent a year (depending on size) from 1998– 2013, and by 12 to 15  from 2012–2013. The IEA, which has had a reputation of being highly skeptical of renewables, now estimates that the “levelized” cost of solar PV (total lifetime costs divided by total output) is at or near parity in many markets. 

As for wind, it is generally the cheapest non-hydro renewable; since 2009, its cost has fallen 58 percent, thanks to less-expensive materials and greater efficiency. As a result, wind is either at or near to being competitive, on a cost per watt basis, without subsidy, in a number of markets.

Crucially, there is no reason to believe that the economics of renewables are going to deteriorate—rather the opposite. In terms of production, for example, economies of scale can be expected to continue to drive down costs, and there is a lot of room for improvement on the service side.

Counterintuitively, there is even a way in which much lower oil/gas prices can actually help renewables. Many countries have subsidized the cost of fossil fuels through consumer subsidies; in 2012, the IEA estimated these cost governments $544 billion.As all subsidies do, these policies led to higher consumption than if people had to pay the market price. When prices crashed, a number of countries in Africa, as well as Egypt, India, Indonesia, Ukraine, and others, took the opportunity to cut these subsidies; China raised gas taxes, which has the same effect of dampening demand. When oil/gas prices increase, as they have already begun to do, renewables will be in an improved relative position.

3. The global dynamics of energy are changing. Because renewables have been relatively expensive, historically most investment has come from developed countries; poorer ones felt they could not afford them. In addition, oil-rich countries, many of them in places well suited for solar, didn’t bother either because they could burn cheap oil. Swiftly, both of those assumptions are changing.

In 2013, China for the first time invested more in renewable energy than Europe, according to the UN, and is now the global market leader. In 2014, China installed 11 gigawatts of solar, and there are plans in the works for just as much this year.  Last year, China was the world’s biggest single investor in renewables ($83.3 billion), almost 40 percent more than in 2013; the United States was second ($38.3 billion) and Japan third. 

Then there is India. Prime Minister Narendra Modi wants to rely on solar in large part to bring power to the hundreds of millions of Indians who lack it. The goal is to install 170 gigawatts of clean energy by 2022. As a whole, developing countries accounted for just a bit less than half ($131.3 billion) of global investment in clean energy in 2014, and this figure rose much faster (36 percent) than spending in the richer world (up 3 percent).

A number of important countries in the Middle East are also getting serious about solar. A Saudi conglomerate recently purchased a major Spanish solar developer, Fotowatio Renewable Ventures. Egypt wants to increase renewables to 20 percent of capacity by 2020; and is nearing approval of a $3.5 billion, 2-gigawatt solar project with Bahrain’s Terra Sola Ventures. And Dubai’s state utility signed a deal late last year with a Saudi solar company for what could be the cheapest solar in the world—less than six cents per kilowatt hour.

 4. The science is improving: The biggest barrier to the widespread deployment of non-hydro renewables is that they cannot be stored for a rainy (or cloudy, or windless day). But there is good reason for optimism. Storage is getting better and cheaper, and investment in the area is rising. The price of storage has gone down 60 percent in the last decade, according to the Economist. If Tesla’s Gigafactory can come anywhere near its projections for efficiency in car batteries, that knowledge can also be adapted to uses in the power sector.

There are many, many smart minds working hard on this. The European Union is testing a project in Ireland in which a motorized flywheel can harness surplus energy from the grid, store it in turbines, and then release it on demand. The US Department of Energy’s famous innovation lab, the Advanced Research Projects Agency, is funding a dozen storage-related projects.  So are major companies in the United States, Europe, and Asia. IHS, an energy consultancy, estimates that storage installations will reach 40GW by 2017, and there are hundreds of projects in the works. It is not far-fetched to believe these efforts will discover a variety of cost-effective solutions.

Conclusion
The world is not running out of fossil fuels. There are enough known oil reserves for the next 53 years, and the rise of shale gas in the United States is an example of how innovation and technology can change the game. Coal is abundant.

So the case for renewables cannot be that they will keep the lights on as hydrocarbons thin out; this isn’t even a medium-term concern.  The better argument is that renewables are, by and large, cleaner than the alternatives, and they provide a welcome diversity to energy supply, and therefore enhance national energy security. Even this would not be enough, however, if they were expensive and/or unreliable. On both these dimensions, however, the sector is making great strides, and more can be expected.  

One way to think about it is that the cost of conventional fuels may go down. Or up. More likely, they will do both. Renewables, on the other hand, are going in one direction only: down. That’s an intriguing proposition in terms of creating an energy portfolio that can adapt to different conditions.

That said, a sense of proportion is necessary.  Not every bit of good news should be expanded, extrapolated, and hastened, as too often happens. Consider: the share of fossil fuels in primary energy consumption, a term that includes transport, didn’t budge a fraction between 2005 and 2014, sticking at 87 percent.

Big, complicated change is not easy, particularly when it comes to something as fundamental as energy. For developed countries, incorporating renewables into the existing electrical systems is proving difficult. For example, notes former Energy Secretary Chu, most of Germany’s wind power is in the north; to get it to industry in the south means building transmission capacity—and that runs into NIMBY politics. American utilities are fighting policies that force them to buy off-grid power at retail rates. Emerging markets that do not have an extensive power infrastructure in place will be able to skip these problems, but will have to deal with issues of access, finance, stability of supply, and the rising expectations of their citizens.

In short, will be a long-term transition—a matter of decades, not years. But the resiliency of the renewables sector in the face of much-lower oil and gas prices is a sign that it may just be on its way.