What plummeting oil prices mean for renewable energy

The price of west Texas crude oil last week traded below $80 per barrel on the New York Mercantile Exchange for the first time in five years. Tuesday’s low of $75.84 per barrel was more than 25% below the prices of just this past summer.

Oil’s slippery price slope could get even slipperier as winter approaches. It’s simple supply-and-demand economics: a worldwide slowdown in demand for oil, combined with the ongoing expansion of global production, thanks largely to aggressive extraction from US shale-rock formations, has sent the price of crude oil tumbling like a stone.

Where the bottom is and when it will be reached, nobody really knows. Goldman Sachs, which last week raised the specter of oil market oversupply in a report, slashed its price forecast for next year to $70 per barrel. Research analysts at the investment bank said they expect prices to recover to $80 per barrel in 2016 and beyond – which would remain well below west Texas prices over the last five years.

Consumers can rejoice over this reprieve at the pump – even environmentally conscious consumers, since collapsing prices “will achieve a slowdown in US shale oil production”, wrote Goldman Sachs analysts. Like extraction of natural gas from shale formations, shale oil production also relies on the controversial drilling technique known as hydraulic fracturing, or “fracking”.

Little impact on renewable energy markets

But what about renewable energy markets? Will solar, wind and biomass buckle under the pressure of this low-priced petroleum glut?

Historically, lower fossil fuel prices have impacted renewable energy resources like kryptonite – for example in the 1980s and 1990s, when nascent solar, wind and geothermal markets in California keeled over as North America suddenly became awash in cheap oil and natural gas.

But energy markets dynamics have changed in the 21st century. In fact, when it comes to electricity, oil and renewables hardly mix at all anymore. That’s because diesel and other petroleum-based fuels account for only 5% of global power generation today, according to the International Energy Agency, compared to a full quarter piece of the pie in 1973. Diesel is even less relevant in US power markets, where it makes up only 1% of generation.

“As far as solar and wind go, the [impact] from lower oil prices is zero in North America and Europe, where power prices do not have any link to oil,” said Pavel Molchanov, a senior research analyst at Raymond James Financial, in an email.

In some emerging markets for wind and solar, however, such as the Middle East and North Africa, and even in a few established markets such as Japan, diesel does still play a bigger role in power supply – but not big enough to matter much considering current renewable energy prices, according to Molchanov.

“In the Middle East, and to a lesser extent post-Fukushima Japan, there is some relevance,” he said. But even at prices below today’s forecasts, “solar can compete effectively with diesel-fired generation”.

California-based SunPower, which is majority-owned by French oil giant Total SA, agrees. “The price of oil has almost nothing to do with future demand, even in [the Middle East],” Tom Werner, SunPower’s chief executive, told investment analysts during a conference call last week.

“We can price solar energy significantly below diesel-produced electricity,” he claimed. “You have to have substantially lower cost of barrel of oil to even come close to the numbers that you can hit with solar.”

‘Sunlight is essentially free’

Marc van Gerven, vice president of global strategic marketing at rival First Solar, said in an email that solar can provide a competitive advantage over diesel, coal or natural gas because fossil-fuel prices, even if low at this moment, have proven to be quite volatile over time.

“Fluctuations in oil prices have little impact on solar or many other renewable energy sources. This is partly why the economic proposition of solar is so compelling, unique and valuable,” he said. “For example, up to 50% of the cost of a fossil plant is the expense of the fuel over the life of the plant, while sunlight is essentially free.”

A recent energy cost analysis by Lazard not only backs up these views on oil’s diminutive impact on renewables. It goes further in calculating that the cost of energy from new utility-scale solar and wind power plants is increasingly competitive with more relevant conventional electricity fuels like coal, natural gas and nuclear power, even without subsidies in some markets.

One reason for this, the firm found, is that the average long-term cost of large-scale solar energy, for example, has dropped 20% just in the past year and nearly 80% in the last five years. Land-based wind energy costs have fallen by 15% in the last year, and by 60% in the past five years.

Garrett Hering is a San Francisco-based journalist covering energy, technology, business and the environment. His articles have appeared in California Energy Markets, the Seattle Post-Intelligencer, the Frankfurter Allgemeine Zeitung and elsewhere.

Join the community of sustainability professionals and experts. Become a GSB member to get more stories like this direct to your inbox