Will the falling price of oil boost the renewable energy market?

David Viner

Green energy initiatives need to focus on least cost rather than particular technology solutions to maintain momentum, says Mott MacDonald's David Viner.

International climate change negotiators gather in Geneva this week for United Nations Framework Convention on Climate Change talks, aiming to make progress on a draft global climate deal. Many politicians and analysts remain more cautious than optimistic for signing a breakthrough deal at COP 21 in Paris. It appears that the current slump in oil price adds to the pessimism of those campaigning to lower GHG emissions and promote renewables. The question is does the cheap oil really stop us trying to save the planet for our grandchildren?

"The death of the renewables market has been declared somewhat prematurely. On the contrary, it gives a context for making the ‘go green’ message from the international climate change leadership in Geneva the strongest it has ever been"

There have been a plethora of reports, media articles and general speculation about the potential impacts of the falling in the price of oil, from around $110 to its current level of around $50 per barrel. Those reports do not agree: the impacts, causes and solutions vary offering a range of educated guesses, “none of which will be correct”, as a friend with decades of oil and gas sector experience predicted recently.

There is one consensus: this collapse is in part a result of un-constrained production by the Saudi Arabia and the impacts of shale gas production in the US on both their import and export markets. The reasons for this level of production is almost certainly politically driven. Gas prices have been in decline in the US over the last year and with the falling oil price ultimately affecting the viability of gas produced from shale there could be an impact on US electricity prices, since 27% of US power is generated from natural gas. Any reductions in gas-fired power could not be compensated for by renewables, which account for only 6% of total US power production.

Assuming that the oil price will plateau or continue to fall, how severe will be the impact be on renewable uptake? Strong green energy policy and financial incentives account for the rapid market development: estimates suggest that the oil price has to dip as low as $15 for onshore wind and $30 for solar for the technologies to be uncompetitive under current feed-in-tariffs. Even the most pessimistic oil forecasters do not suggest it could go that low.

It makes it clear that the biggest threat to renewable uptake is not the slump in the oil price but the change in political leadership, ideology and a reduction or cessation of the feed-in tariffs, especially in an environment of continuing austerity in much of Europe and elsewhere. This is quite possible in the face of public and political pressure for more affordable energy as the price gap between fossil fuels and renewal energies widens.

The volatility of the oil price is detrimental to economic planning and security – renewables provide an option to decouple the economic performance of a country, business or a household from the vagaries of the artificial behaviour of the commodity markets. In addition, domestically produced renewables can decrease the requirement for imported hydrocarbons, enhance energy security through fuel substitution and create new high value industries. Both of these need appropriate management to deliver on their promises and resilience of the electricity system needs to be improved for it to succeed.

Energy efficiency of course provides reduced emissions, greater energy security through using less energy and usually large public benefits through cost reductions.   It is a key part of a sustainable energy strategy but has consistently failed to capture serious attention from governments. For example, a 5-10% reduction in gas consumption through improved efficiency could be the fastest and most sustainable way to “new gas,” thus offsetting requirements for imports and further encouraging take-up of renewables, yet this option is far less attractive to political leaders.   A low oil price will put pressure on energy efficiency, meaning it will need more focus.

The death of the renewables market has been declared somewhat prematurely. On the contrary, it gives a context for making the ‘go green’ message from the international climate change leadership in Geneva the strongest it has ever been with economic, environmental and political arguments making a compelling case.  However the emphasis needs to be on reducing emissions at least cost rather than on particular technological solutions. It also calls for a more strategic response rather than knee-jerk reactions to a transient oil price.