Cheap Oil vs Clean Energy: A Strong Environmental Trade-Off

The combination of robust world crude oil supply growth and weak global demand has contributed to rising global inventories and falling crude oil prices. The obvious winners of a lower oil price are oil importers and energy intensive sectors but a speculation that cheaper fossil fuels would mean a serious setback for renewables has been rife. Considering the latest data, however, it seems renewables are still going strong and it is the fossil fuel industry that is running into both short and long-term difficulties. For the first time in history, the five top sources of newly installed electricity in Europe were renewables, with hydropower, biomass and thermosolar (CSP) following wind and PV with the Global solar PV demand is forecast to grow by up to 25% in 2015.

At the end of 2009, the world's cumulative installed PV capacity was more than 23 GW. One year later it was 40.3 GW and at the end of 2011 it was 70.5 GW. In 2012, the 100 GW mark was reached and by 2013, almost 138.9 GW of PV had been installed globally --an amount capable of producing at least 160 terawatt hours (TWh) of electricity every year. This energy volume is sufficient to cover the annual power supply needs of over 45 million European households. This is also the equivalent of the electricity produced by 32 large coal power plants.

Levelized Cost of Energy

The weighted average LCOE of utility-scale solar PV in China and North America - the world's two largest power-consuming markets -- and in South America, has also now fallen into the range of fossil fuel-fired electricity costs. For utility-scale solar PV projects installed in 2013 and 2014, the weighted average LCOE by region ranged from a low of around USD 0.11 to USD 0.12/kWh (in South and North America, respectively) to over USD 0.31/kWh (in Central America and the Caribbean). But for individual projects, the range of costs is much wider. In various countries with good solar resources, projects are now being built with an LCOE of USD 0.08/kWh, while a recent tender in Dubai, in the United Arab Emirates, resulted in a successful bid for a solar PV power purchase agreement (PPA) for just USD 0.06/kWh, without financial support. Where good resources exist and low-cost financing is available, utility-scale solar PV projects that are now being built (e.g., in Dubai, Chile and other parts of the world) will provide electricity at a lower cost than fossil fuels, without any financial support. PV's growing competitiveness holds just as true in regions where indigenous fossil fuels are abundant.

Falling costs make renewables increasingly competitive and the best onshore wind projects now match or even undercut electricity generated from fossil fuels (even without subsidy) and cost of utility scale solar power has halved since 2010. While renewables are on the up, fossil fuels have increasingly come under pressure. In the short term, the oil price slide has forced companies to slash their exploration and production spending, shedding staff and cancelling projects as they become unprofitable. The long term may look bleak, too.

Investment Appetite

Overall, investment in clean energy worldwide jumped by 16% in 2014 to $310 billion, just 2% shy of the all-time high in 2011, as Bloomberg New Energy Finance reports. Investments in Renewable Energy include private technology development, equipment manufacturing, project finance and M&A activity. Clean energy is the largest sector which from 2007 to 2012 reached $2.6 trillion in investments and commitments. Against the backdrop of a slowing world economy, this is certainly impressive.

Only in the solar sector, the total global corporate funding, including venture capital/private equity (VC), debt financing, and public market financing raised by public companies, almost doubled with $6.4 billion in Q1 2015, compared to $3.4 billion in Q4 2014. A total of 33 VCs invested in Q1 2015. Solar downstream companies continued to attract most of the VC funding with $112 million in 12 deals. Public market financing came to $1.3 billion compared to $1.6 billion in Q4 2014. Debt financing increased substantially this quarter with almost $5 billion, compared to $1.5 billion in Q4 2014. This was a record quarter for residential and commercial solar funds with $1.9 billion raised in 10 deals, the highest amount in a quarter. Of this total, $200 million went to a loan fund while the rest went to third-party lease or PPA funds.

The economic case for renewables remains strong, as does the environmental. Oil price turmoil shouldn't be allowed to overshadow the bigger issue at stake that 2014 was globally the hottest year on record.

Oil Prices & OPEC

OPEC members have been increasingly worried about the low prices for oil and they will protect their own interest since OPEC realizes that $39.50 was the peak of 1980 and 1990--also the top of the previous secular cycle in crude oil. Several OPEC and non-OPEC oil producers rely heavily on oil revenues to finance their fiscal budgets. Over the near-term, for oil exporting governments, falling revenue will not be fully offset by reduced expenditures. This will cause major oil exporters to run either smaller budget surpluses or bigger budget deficits. Some producers have already started adjusting their upcoming budgets to reflect the crude oil price decline. If crude oil prices continue to fall or are sustained at a lower level, then oil-dependent producers will have to make tough policy decisions. This could potentially lead to austerity programs and fuel subsidy cuts that could spark social unrest, leaving some countries vulnerable to supply disruptions if protestors target oil infrastructure. Potential new supply disruptions are a real possibility in a lower-than-expected price climate and present an uncertainty in the world oil supply forecast.

With WTI crude settled below $39 on Aug. 24, for the first time since Feb. 2009 price levels are not sustainable for oil producers, and any price below $39.50 is of secondary importance. If you don't believe Saudi Arabia will cut production any time soon, not even at $20, then they are waiting for U.S. production to decline much further, and that might not happen until next spring. If U.S. production will eventually decline the damage to Saudi Arabia from [the low oil prices] will be at least as damaging as it seems to U.S. producers. ConocoPhillips announced that it will reduce its global workforce by about 10%, blaming the impact of lower oil prices

Oil prices will move higher if Saudi Arabia makes a sacrifice and cuts its own production--and that would benefit every other producing nation but obviously, market share continues to be Saudi Arabia's main concern--and not even $40 oil prices will make it give into peer pressure to cut production. Instead output from the Saudi Arabia climbed to about 10.45 million barrels a day in July from 10.1 million in April, according to an estimate from Platts, even though West Texas Intermediate and Brent oil prices are down roughly 15% year to date on the back of a global supply glut.

However, the decline in energy prices is also likely to ease the global fiscal stance. In the aggregate, the swing from oil producers to consumers is quite large. A $20 per barrel decline in global oil prices results in an income transfer of about $670 billion per year from producers to consumers or alternatively according to the IMF, a USD 10 per barrel fall in prices translates into 0.5% additional growth. The sharp decline in energy prices will bring positive development for both the U.S. and the global economy since the U.S. still is a net importer of energy, it will be supportive to the global growth outlook by pulling down inflation in many countries. While that may not immediately help generate economic growth, it will in the future, by reducing the required deleveraging

Closing the above analysis it is worthwhile to mention that the worldwide population has stayed fairly consistent throughout time. This is because our only source of energy was the sun. Before we tapped into fossil fuels the sun's energy alone could never sustain a population of more than 500 million to 750 million people. During the Industrial revolution, the number of people on Earth roughly doubled, reaching 1 billion around 1950. The real spike started when we struck black gold. World population growth and income will continue to rise, increasing the demand on primary energy supplies. Meeting this demand will be driven by fuel availability, technology efficiency and environmental sustainability. But in today's world, a smart, informed local public will increasingly have the final say in what is both politically affordable and sustainable.