Crashing hydrocarbon prices are helping consumers and hurting exporters, but won’t halt momentum for clean energy investment
By Ed King
Crashing oil prices are a “golden platter” for clean energy investors, the UN’s top climate official told governments in Abu Dhabi earlier this week.
Christiana Figueres struck a bullish note, urging officials to take advantage of the slump by slashing fossil fuel subsidies and investing in less volatile forms of energy like wind, solar and geothermal.
With oil flooding the world’s markets these are tough times for top hydrocarbon producers.
Prices hit a new low of US$27 a barrel on Monday – the lowest price since 2003. With Iran poised to pump 500,000 additional barrels a day, that could slump further.
The results for the industry have been savage. Major producers Brazil, Russia and Venezuela are in recession. Saudi Arabia is taking a chainsaw to public spending. Leading sector analysts at Mackenzie Wood reckon $400 billion of capital spending has been canned.
Oil cartel OPEC predicts higher cost drillers in the US and Canada will cut production by 600,000 barrels a day due to the 75% price fall since summer 2014. Arctic projects will likely remain on ice.
But is Figueres right? Simple economics suggest low oil prices spell disaster for nascent renewable energy technologies, making it easier for countries to stick with the status quo and ignore the recently signed Paris climate agreement.
Not so, argues Sarbjit Nahal, managing director of thematic investing at Bank of America Merrill Lynch, who points out that just 4% of oil is used for electricity worldwide.
“We think to a large degree it is psychological… that’s important to stress,” he tells Climate Home at a London event organised by the Aldersgate Group, a coalition of green-thinking businesses.
“It has had a short term impact on some renewable energy companies and their share price – solar took something of a dip last year – but still wind was one of the best performing asset classes in 2015, despite the fact we saw a significant decline in oil price.”
As oil costs fall, so too have renewable costs, says Nahal. He cites the ability of Gulf countries to produce solar power at 5 cents per kilowatt hour – competitive with oil even at $20 a barrel.
The International Energy Agency (IEA) offers a slightly different take, in a special climate and energy report issued in late 2015. It says lower oil prices will make some forms of renewables less attractive, especially biofuels and renewable heat.
The latter competes with natural gas, the price of which is – to a degree – linked with oil. This has made gas more competitive against coal in Asian markets, says the IEA.
Biofuels – a major plank in efforts to decarbonise transport fleets in the US, Brazil and China – were already in trouble when the oil prices was at $50, says Jonathan Kingsman, founder of sugar consultancy Kingsman.
“Despite good crops, it is difficult to make the economics of biofuels work in a low oil price environment. For its survival the sector will have to depend on political support through legally mandated demand,” he writes in the FT’s Commodities Note.
This week Danish biotechnology firm Novozymes warned the slump had delayed investment in the sector, cutting sales growth forecasts from 8-10% to 6-7% a year 2017-2020.
In a statement, it said this was down to “current depressed commodity prices and the uncertainties these entail for Bioenergy and growth in emerging markets.”
Low prices also affect the behaviour of motorists, PwC climate expert Jonathan Grant tells the Carbon Brief website.
“For consumers, cheaper petrol means drivers may be less concerned about fuel economy and driving longer journeys,” he says.
“As the performance and ‘cool’ factor of electric and hybrid vehicles on the market improves, the total cost economics of buying them becomes less of an issue. But with low oil prices people may still be less inclined to take this option.”
Bank of America’s Nahal says this will likely be a short-term impact due to falling car ownership levels in developed countries and tougher emission standards globally.
“We are seeing significant changes… fuel economy is getting better. Look at the US – last year the CAFE (corporate average fuel economy) standards were 34.9 miles per gallon (mpg) for passenger cars.
“By 2025, they will be increased to 56 mpg… that’s a 21 mpg gallon jump. China has more ambitious targets for 2020 and 2025, and in the US we’re also seeing younger people are no longer taking driving licences.
“In last 10 years the proportion of 19-year-olds taking licenses has dropped from 64% to 46%.”
Globally, investment in clean energy held up well through 2015, according to data published last week by Bloomberg New Energy Finance.
While oil prices slid, money for wind, solar and other cleaner energy systems rose 4% to $329 billion. China, India and the US enjoyed a significant rise.
“These figures are a stunning riposte to all those who expected clean energy investment to stall on falling oil and gas prices,” said Michael Liebreich, head of the BNEF advisory board.
Rachel Kyte, Ban Ki-moon’s special representative for the Sustainable Energy for All initiative, shares that optimistic outlook.
Money is not the major problem for the development of renewables in Africa, Asia and beyond – what is needed are good quality propositions for investors, she tells Climate Home.
“The proof of the pudding is South Africa last year… where there was more than $10 billion in domestic and foreign [clean energy] investment last year,” she says.
“90% of the INDCs [national climate plans submitted to the UN in 2015] have committed to renewable targets – there is stuff happening.”