Energy Economics: Cheap Oil Will Not Stop Renewables

There is a powerful economic argument that can be made to suggest that renewable energy will not be sidelined by oil’s price declines. While it is true that renewable energy stock has decreased in value due to falling oil prices, this is a temporary phenomenon.

The cost of oil is roughly half of what it was seven months ago and according to traditional market principles this will mean a surge in oil demand and a decline in demand for the more expensive alternatives. However, when we metaphorically drill down a bit further we realize that electricity accounts for much of the increased energy demand. Although electricity demand is increasing along with the cost this will not increase the demand for oil. Even at less than $50 per barrel oil is still too expensive to be the primary source of electricity generation. This is why electricity is primarily generated by natural gas, hydro, and nuclear power.

In a Guardian interview Amory Lovins said, “The unsubsidized cost of electricity from the most
cost-effective new onshore wind projects beats all other forms of generation. Solar PV modules have dropped in price by about 80% since 2008, while LED lights are 85% cheaper than five years ago. The integration of various clean technologies, like electric cars, batteries and solar panels, are mutually reinforcing the drive towards competitiveness.”

Gas may still drive most of our cars but wind and solar energy will increasingly power our electrical grid as the price of renewables continues to decline. Solar will soon be less expensive than oil and eventually it will be cheaper than even the least expensive fossil fuels. Although solar is currently less than 1 percent of the electricity market, the increasing price of electricity and the declining price of solar is expected to make the sun the world’s biggest supplier of energy by 2050 according to the International Energy Agency (IEA).

This new reality is prompting people like Bloomberg’s lead solar analyst to say, “You couldn’t kill solar now if you wanted to.”

Like solar power, wind energy is also an unstoppable force. According to Ecotech Institute Wind Energy Technology Instructor Walter Christmas, “Short-term savings on petroleum are drastically reducing the overall cost to invest in wind energy. This is dramatically improving the profit margins and attracting investment at a faster rate than usual. This lowered cost allows wind energy to compete directly with coal and natural gas as a source of electrical generation. As the cost per kilowatt-hour of wind energy continues to decline, we have seen contracts signed between utilities and wind energy power producers that are cheaper than coal and natural gas. Remember… once a wind farm is built, the fuel is free!”

Oil prices will inevitably rebound, but that should not be taken to suggest that the era of fossil fuels is not coming to an end. Whether we are talking about the high price of oil or rapid declines oil’s volatility is bad for business. While the price of oil is volatile the price of renewables is predictable and steadily declining.

Fueling an economy with renewable energy is no longer Pollyanna science fiction, clean energy is being used to power major portions of some very significant economies. Germany is a renewable energy leader that is already getting around one quarter of its electricity from renewables and Denmark recently broke its own record by getting almost 40 percent of its energy from the wind. These two nations, along with many others, prove that it is possible to rely on renewable energy. Other nations like Scotland are leading the way with ambitious plans to export renewable energy (wind power) as a lucrative source of revenue.

People increasingly understand the need to manage climate change and that is driving a growing political momentum. In the near future we will see a regulatory environment that will drive up the cost of fossil fuels while favoring renewables. With the price of oil so low now is a perfect time to introduce a regulatory regime that includes some form of carbon pricing.

With a recent Economist headline reading “Seize the day” and an accompanying editorial saying that this is a “once-in-a-generation opportunity” the issue of reassessing our relationship to fossil fuels has never been more prescient.

If we are to manage climate change we simply have no other option than to wean ourselves off of fossil fuels and embrace renewable energy in earnest.

This overwhelming logic is borne out in the data and the bean counters are taking notice alongside everyone else. According to data compiled by BNEF, global investment in clean energy increased by $310 billion last year, this represents a 16 percent increase over the year before. Investors still have confidence in renewables and so should we, regardless of the price of oil.

As explained by CNBC’s Leslie Shaffer, “Suddenly cheap oil prices may spur economic re-calculations across the board, but many analysts are sticking with a still-sunny outlook for renewable energy take up.”