Oil and renewables don’t mix

Like other media outlets, Infrastructure Investor has dedicated considerable space reporting on falling oil prices over the last couple of months. That’s inevitable not only because the drop has been so sharp – from over $110 a barrel last June to below $50 two months ago – but also because it affects different sectors and markets in different ways.

However, it’s not only the media preoccupied with the topic. One analyst we spoke with said the price of oil is factored into practically every sector analysis their firm conducts.

This month, we take a look at whether and to what extent the drop in oil prices impacts renewable energy. In late January, Fitch cited oil price reversal as “a key factor” that is weighing against renewables’ competitiveness.

Many industry experts, however, disagree. A week after the ratings agency issued its note, Adam Sieminski, the head of the US Energy Information Administration (EIA), said he did not expect the drop in oil prices to have much of an impact on wind and solar energy.

Georgina Hayden, senior power and renewables analyst at Business Monitor International (BMI), agrees: “Our general view is still that it poses a limited threat and I think the consensus is coming around to that now.”

That is the general gist – but there are also nuances that need to be taken into account.

As another source pointed out, oil does not compete directly with renewable energy since oil is no longer a major component of power generation, while wind and solar are solely used for producing electricity.

“If you look at the US for example, oil has been a diminishing fuel source for power generation for the past four decades, now accounting for less than one percent of the electricity mix. It’s really very limited,” Hayden states.

And that’s where the nuance comes in. While oil no longer plays a dominant role in power generation in the US, the renewables sector in other countries and regions – such as Mexico, the Middle East and South America – which rely more on oil for energy production, may feel the pressure.

However, while the price of oil has dropped, so too has the cost of renewable energy. Newer and better technology has made renewables more efficient and therefore more cost competitive. According to one lawyer, certain projects have even reached grid parity. A drop in coal and gas prices would have more of an impact.

But even in the case of natural gas, the damage would be limited because while natural gas competes more directly with renewables, it also plays a complementary role, serving as a back-up fuel.

What hurts the renewable energy sector most is uncertainty, one of the other factors Fitch cited in its note as threatening investment in renewable energy.

A matter of policy

“Renewable energy markets are highly dependent on government policy and regulation; it’s not just the pricing. If governments remain supportive then it doesn’t really matter what other prices are doing,” Hayden points out.

But government policy has not always been clear or consistent. In the US, the sector is characterised by peaks and troughs in investment due to one- or two-year tax credits that go into effect, expire, and are sometimes reinstated retroactively. That was the case with the production tax credit which expired at the end of 2013. Congress reinstated it in mid-December retroactively, just two weeks before it would expire again.

Many experts who follow renewables claim it is a sector that enjoys bipartisan support. Yet, with Republicans taking control of Congress, there is already talk that lowering greenhouse emissions will no longer be a priority. Cheap oil might make that more likely.

Other markets don’t seem to fare much better with respect to clarity. In the UK, lawmakers have been sending mixed messages about the extent to which they will support renewables. That uncertainty is expected to continue at least until the May elections.

Europe, in general, has not been a stranger to uncertainty with cuts to subsidy schemes and feed-in tariffs having been imposed retroactively. According to Hayden, Germany is the strongest market in Europe – intent on expanding renewables, particularly wind and solar, and providing a clearer direction than other countries.

Hopefully, that certainty will find its way into the US and the market will not be as disappointed as the two characters in Samuel Beckett’s Waiting for Godot.