The low price of oil we have seen in the past months is not new and it is at times surprising the level of unexpected turmoil it has generated among markets, consumers, and even some analysts. The world has seen this and lower prices before. Even in the 90’s with prices at $20 bbl and particularly during more recent times when in 2008/09 the price fell from $128 bbl to less than $40 bbl, the industry has been able to adapt and has learned to become more efficient in its processes. It is certainly true that oil companies and crude exporting countries have seen better days, however a peak in the oil price has also made us think about Hubert’s theory of Peak Oil –the theory that states that when the oil reaches its higher price the resources will be at its peak to then decline until being emptied in the future. True or not, thinking about Peak Oil has made us to turn our heads towards the reality of the scarcity of the resource and the need to invest in other sources of energy including nuclear and renewable.
Even if we are used to see a general bear type of development on renewables, there are solid preoccupations about the negative impact in its growth given the current oil price. However, there are many factors that come into play when assessing how the crude oil will impact in the short, medium and long-term.
Furthermore, the analysis is different if we look at the impact it has in the consumption or the investment side of the business. This article will explore mainly the positive and negative effects that a low oil price implies for investors in the renewable energies sector as well as the opportunities it opens.
Renewables at a Glance
To understand the overall effect of recent fall in oil price amidst a slow world economy, it is necessary to first give a look to the global status of renewables compared to other sources of power. Overall, the behaviour of the sector has traditionally been slow, but it is still the fastest growing among other sources of energy. This growth has been supported by dropping production costs derived from new technologies and materials, and by increased storage capacity. The latter has been crucial for the advancement of solar and wind resources in particular given how intermittent –hence untrustworthy- they are.
The renewables sector itself has been sustained mainly by the 34 OECD countries who generate 70% of worldwide power generation, according to the Energy Information Administration of the USA (EIA). Given that only 6 of those countries have significant oil production (USA, Canada, Mexico, Norway, UK and Australia) it makes sense that the rest of these rich economies invest significant resources in other sources of energy regardless of the economic benefits that short and medium term variations in the oil price currently bring to their consumers.In 2012 renewable energy represented 21.7% of the total electrical power generated worldwide and the EIA estimated that overall power generation from renewable sources will see a growth of 2.9% in 2015. Of all the renewable sources of power, Hydropower is the more established and popular one, with 63.7% of global power generated in 2012 coming from it.
The progress of hydropower is dependent on many factors and is less fluctuating than other sources, hence it is worth analysing the impact of oil price in two other sources: wind and solar. On one hand, wind, is the second source of power generation in the world and has been enjoying falling costs; on the other hand, although the installed and projected capacity of solar power is not comparable to the previous ones, it is widely used by direct consumers and is the one with fastest falling costs for utility-scale construction. Both subsectors open opportunities for investors in the current economic situation worldwide.
Time to Invest in Wind Farms
Wind farms represent 2.7% of total world electricity generation, according to BP’s review on world energy. China leads the installed capacity of wind farms followed by Germany and the UK who are being quickly followed by India. Until 2013 generating capacity of wind power grew 12.4% and the EIA estimates that by 2016, wind will contribute 5% of the total electricity power in the world and that investments in on-shore and off-shore wind farms will grow 12% worldwide.
The investments on wind farms are typically cost intensive, and although once installed, overheads are minimal and the resource is free, upfront costs tend to slow down investors into jumping into it. The main costs of wind farms are the manufacturing, transporting and building of the turbines. However the recent fall in the oil price has made a significant impact in the projections of these investments, particularly for off-shore projects. While, technology costs may not reflect the fall in crude price due to contractual terms in the supply chain, transportation costs are denting the amount of upfront investment needed to transport and install the turbines. Ecotech Institute’s wind technology expert Walter Christmas explains that “Short-term savings on petroleum are drastically reducing the overall cost to invest in wind energy.”
The above means that the expected return of an average life of a wind farm (20-25 years) increases and this is attracting investors to sign contracts with utilities companies for prices cheaper than coal and gas.
Scaling-up on Solar Parks
Solar parks typically account for a much smaller percentage of the power generation mix, however the sector of solar energy has been attracting the majority of all new investments in renewables. According to Renewable Energy Policy Network 53% of all investments on renewable energies in 2013 went to solar power. In particular, these flows of capital have been led towards China, Japan and the USA whose investments in solar parks grew by 36% from 2012 to 2013 according to BP’s estimates. Even more, the EIA expects a growth of investments in building utility-scale solar parks of 60% by 2016 in the US.
According to figures of BP’s sustainability report, the price of solar modules has fallen 80% since 2008. This has translated into a more attractive market for investors to produce and sell solar energy in a marketplace that had been majorly dominated by private households and smaller commercial users. Now private companies can generate meaningful amounts of solar energy, store it and sell it to the grid for a profitable Power Purchasing Agreement (PPA).
The potential growth of the subsector is exemplified by the application of new materials to panels, to avoid them being covered in sand dust in Desert areas. This is increasingly opening opportunities to use solar energy in regions where previously was not considered as a viable option such as in some of the Arab emirates.
Myths & Realities
Rethinking some of the most common myths that have spread recently also allows uncovering and outweighing the positive and negative impacts of the oil price in the renewables sector and perform a better analysis of its future. While there are also some realities to be considered in our scenario, it is important to understand them in its proper context. Briefly the paragraphs below will aim to quickly debunk and open some of these statements to thought.
Myth: The oil price will compete with renewables making it even more difficult for them to take-off.
Firstly, low oil price doesn’t compete directly in all energy markets. As an example, only 4% of all electricity produced in the world in 2012 came from crude oil; on the other hand, the share of electric cars is not remotely close to those fuelled by oil. This means the low price of crude doesn’t necessarily stagnate other sources of energy.
More importantly for this article, it means that investments in heavily oil based sectors have become less attractive for investors. Capitals and governments who are tied to energy security commitments are looking for new places to put their money into and perhaps it’s time that expensive off-shore wind farms and tidal projects get some advance. Additionally, related businesses in the supply chain will welcome a boost in capital and clients coming from outside the oil industry.
Reality: Investment in the oil industry and in renewables has fallen.
On the oil and gas industry, exploration and deep-water projects not only are the most expensive ones, but also they need a price of at least $60-$70 per barrel to be profitable, as stated by a Shell official during a presentation in London on March 2nd. On the side of renewables it is also true that since 2011 and until the last figures of 2013, investment has been falling. Part of this latter decline in investment on renewable sources is due to the fall in the costs of the sector itself, however it is also true that many European governments stopped subsidizing and promoting investments in the sector.
Myth: The intermittence of wind and solar energy make investors wary.
While it is true that the availability of these sources is not steady, it is also true that storage capacity is improving at a fast pace becoming cheaper to store large amounts of energy for use when needed most. Furthermore, expanding built capacity of wind farms and solar parks decreases the risk of shortage by widening the geographic areas where it is deployed. Moreover, the volatility of the oil price can be as high as that of some natural resources. Hence, the price of oil also makes financial markets wary of unpredictable changes in their capital allocation.
Conclusions for Lebanon
Looking at the “Renewable Energy Policy Network for the 21st Century” Lebanon has a good chance of achieving its 12% target of consumption of power from renewable sources by 2020. In 2013, the country produced 11.9% of its power from renewables – mainly for heating generation rather than electricity. This, which compared to the reported 19% world average in 2012, means that by 2020 the country could reach current global standards.
Expectations of a low crude price range between 1-3 years and even if no one can predict the course of price thereafter, investors on renewable energies are looking for PPA’s of 15-20 years. Hence, if the average time lapse to develop a wind or solar project is of two to three years, it makes financial sense to take advantage of the available capital and lower costs to develop future parks. Lebanon’s share of electricity generated from oil sources is amongst the highest in the world: 91.9% in 2014. Although the price of imported oil has relieved the economy recently, it is nonetheless relevant to use these savings and address these new opportunities that are opening in wind and solar sectors to become a more self-sustainable and stronger economy in the future.
Source: Responsible Business Magazine