Renewables need not fear falling oil prices
“The use of solar energy has not been opened up because the oil industry does not own the sun,” said the US consumer advocate Ralph Nader and one-time presidential candidate back in 1980. Now, falling prices for both oil and solar panels may put his theory to the test.
Brent oil prices reached US$56 per barrel on Friday. By comparison, Acwa Power’s astonishingly low bid for the second phase of the Sheikh Mohammed bin Rashid solar park in Dubai would equate to a conventional power plant burning oil priced at less than $20 per barrel.
Renewable energy in the right locations – solar power in the Middle East, and onshore wind in north-west Europe, the United States’ Midwest or the Red Sea coast – has already won the cost competition with oil. So the falling oil price makes no difference to the uptake of renewable energy. Indeed, if a lower oil price spurs economic growth, it might even lead to more installation of renewable energy, in absolute if not relative terms.
Oil produces less than 5 per cent of electricity globally, a share that is rapidly falling. Even at current prices, oil is simply too expensive to burn for power – compared to coal and gas. Those other two fossil fuels are the real alternatives to renewable energy.
On New Year’s Eve, US gas prices fell below $3 per million British thermal units (Btu), the equivalent of less than $20 per barrel of oil – in the middle of winter. Liquefied natural gas, the main source of supply for Japan and South Korea, is also much cheaper than a year ago.
It might appear that gas and coal, the key power generation fuels, compete directly with renewable energy. But in the US, it is coal that has been squeezed out by the combination of the shale and renewables booms. Flexible gas power plants, that can increase output quickly when required, are good complements to variable wind and solar.
So the real impact of cheap oil and gas on the viability of renewable energy is psychological. During the boom up to 2008, it appeared to some that petroleum production was going into terminal decline. Some credulous governments built their energy policies on the shaky foundation of “peak oil” theories. Environmentalist groups such as Greenpeace peddled nonsensical forecasts in which fossil fuel prices rose forever despite diminishing demand.
Now, it is clear that we do not need renewable energy urgently to compensate for resource depletion, but the environmental need – to reduce greenhouse gas emissions – is more pressing than ever.
Instead of seeing falling fossil fuel prices as an excuse to cut back on renewables support, it may actually be an opportunity to make renewable targets more aggressive, without raising overall costs to consumers. But renewables subsidies need to be targeted away from deploying mature systems that are already commercial, and towards encouraging new technologies.
So what do renewable energy developers have to do to stay competitive in a world of falling fossil fuel prices? Continuing to bring down costs is the obvious key, especially for less favourable locations such as offshore wind, low-wind locations, and less sunny regions.
To make further inroads into fossil fuel markets, renewable energy needs to move into providing heat for homes and industrial processes, cooling and water desalination, either directly or via electricity.
Oil remains uniquely valuable in transport, which is why it still commands a premium price. There is as yet no realistic alternative to oil for aviation, and large-scale use of biofuels is environmentally problematic. The development of a truly competitive electric car would allow renewable energy ultimately to power ground transport.
Even without owning the sun, the oil and gas industry is laying down a new economic and psychological challenge. But, unlike after 1980, lower oil prices should not mean another lost decade for renewable energy.
Robin Mills is head of consulting at Manaar Energy, and author of The Myth of the Oil Crisis.
Follow The National’s Business section on Twitter
Published: January 4, 2015 04:00 AM