If you’ve filled up your car lately, you surely will have noticed that gasoline is dirt cheap (in relative terms). In June 2014, WTI crude peaked at $115 a barrel. In mid-October 2015, it was about $49.
That’s an awesome drop, and it has many ramifications, among them its impact on investment in renewable energy sources.
Intuitively, one might think that such a low oil price would stimulate demand for oil products and undercut competitive, alternate technologies such as wind and solar power. That happened back in the 1980s, when oil prices slumped and renewable energy projects in the United States — which were spurred by the oil panics of the ’70s (remember the pictures of endless lines at gas stations that filled the evening news?) — died by the score due to underfunding, immature technologies, high costs and a general lack of interest.
But the world has changed. Back in 1973, oil accounted for about 25 percent of the world’s electricity generation. Today, less than 5 percent of all electricity is generated by oil. Consequently, wind and solar no longer are in direct competition with oil in most countries. Indeed, economies of scale, improvements in manufacturing and technology, and excess manufacturing capacity in wind and solar have led to a drop in the capital cost per megawatt for both technologies.
According to analysis by FTI Intelligence, the cost of onshore wind (in appropriately windy locations) is in the range of $45 to $75 per megawatt hour (“MWh”), without subsidies. That makes wind cheaper than gas (at $65 to $120/MWh), coal (in the range of $80 to $120/MWh) and nuclear (which, including decommissioning costs, is well over $100/MWh). In the United States, the average retail electricity price is nearly $130/MWh, and in the European Union, it’s $220/MWh. Given this, and last summer’s passage of the Clean Power Plan to reduce carbon emissions in the United States — which may well increase the total cost of fossil fuel generation technologies — wind and solar are becoming more competitive than ever.
In short, in a low oil price environment, the outlook for renewable energy generation is good. Indeed, even absent concerns over carbon emissions and climate change, the cost position of renewables is looking increasingly competitive on its own merits, even in the United States, which has some of the lowest commercial natural gas prices in the world, thanks to the explosion in shale gas production.
Accordingly, FTI Intelligence forecasts that wind installations globally should experience a 1 percent compound annual growth rate ("CAGR") between 2015 and 2019, accelerating to 6 percent CAGR between 2020 and 2024. Growth in solar photovoltaic installations is forecast to rise by a CAGR of 10 percent through 2020.
Onshore wind, one of the least expensive new technologies to build, is a prime candidate to replace aging carbon-intensive fossil technologies such as coal, as well as nuclear, where political pressure and popular wariness are forcing the shutdown of plants (especially in Germany and Japan).
Of course, if oil and gas prices eventually recover and rise, wind and solar will become even more competitive. In fact, whether oil and gas prices recover and climb or remain low, the future for wind and solar is bright — so bright, indeed, that you may want to invest in shades.
Robert Clover is a Director in FTI Consulting’s Economic and Financial Consulting Practice and is based in London.