In a major new report, global investment bank Citigroup has defined the current battle between cheap oil, and renewables like wind and solar, to be so fundamental it will define the future of energy. But it says that while the slump in oil and associated gas prices may provide some road-humps for wind and solar, renewables will win out because of basic economics, as well as energy security and environment issues. And, Citigroup says, because renewables are the cheapest way to substitute coal-fired power. Oil is the single largest source of primary energy globally, and the seismic shifts in the oil market can send shockwaves through the world’s energy markets.
Citigroup says that two common statements have dominated recent dialogue: 1) that cheap oil will deal a serious blow to renewables, and 2) because oil and renewables rarely compete in the power sector, the impact will be minor. It says neither is strictly true. Citigroup believes the fall in the oil price is terminal – it says the days of triple figure oil prices are over – meaning the end to some high-risk, high-polluting oil ventures in marginal regions such as the Arctic, tar sands and deepwater. On the other hand, the long-term outlook for renewables remains bright. “Fundamental factors – increasing economic competitiveness, energy security, and environmental goals – all remain potent forces driving ever more rapid adoption of renewable energy globally.” Wind and solar costs have fallen dramatically, and these cost declines should continue. On an unsubsidised basis, wind farms are getting built at costs below $40/MWh in some regions. Recent solar auctions in the Middle East have produced prices below $60/MWh.
“The straightforward answer to whether cheap oil threatens renewables is no – at first glance, oil poses few direct threats to renewables.” Oil competes directly against renewables in only about 5 per cent of the market – those places where oil is used in generation – particularly the Middle East (Saudi Arabia uses oil for 55 per cent of its electricity needs, and the Middle east as a whole 36 per cent), and in the Caribbean (Jamaica 91 per cent). But, as we noted in this report about low solar costs, and the assessment by the National Bank of Abu Dhabi, oil can no longer compete with solar and wind in electricity economics.
“Even with greatly reduced oil prices in the $50-60/bbl range, more mature renewables like wind and solar have little trouble competing with new oil-fired generation in the Middle East,” Citigroup writes. See graph below.
“Indicatively, large-scale solar in the Middle East should be competitive with oil when oil is above around $30, and on-shore wind when oil is above $23. Technologies such as offshore wind and nuclear are comparatively more exposed.” Indeed, it is interesting to note that the world’s biggest oil producer, Saudi Aramco, is now installing solar at many of its installations to save on oil costs, and to allow more oil to be exported. (One good thing for the climate is that Gulf oil is not just cheaper than other supplies, it is also cleaner). Citigroup says it is also wrong to assume that falling oil prices mean falling gas prices in the US, and therefore headwinds for renewables. (It notes that the Obama administration has already outlined plans for 35 per cent wind by 2050, although it could actually be 41 per cent). Already, the plunging price of oil has caused half of the shale oil rigs in the US to be withdrawn, because shale oil is no longer economic at these low prices. In Texas, Citigroup notes, around one-quarter of the gas supply comes from “associated gas” – from the oil extraction. That means the demise of shale oil will also crimp supplies of gas, putting upward pressure on prices. Already, city utilities such as Georgetown in Texas and large corporate users such as Dow Chemical are choosing wind and solar over gas.
In Europe, the gas price is indexed to the oil price, and cheaper gas may make it more competitive against renewables. Still, Citigroup says it is very unlikely European renewable energy targets will be meaningfully threatened by lower gas prices, particularly given the strategic benefits of diversification away from oil-indexed imported gas. The same is true in Asia. Citigroup says the recent drop in LNG spot prices has made gas-fired generation newly competitive with large-scale solar, although solar remains cheaper than gas-fired power from oil-indexed LNG. “While cheaper gas looks like a challenge to renewables in the region, policy once again insulates renewables. Aggressive renewables policies in China and Japan are propelling growth in wind and solar investment. And in China, there is not much gas available in the power sector anyway. “Long term, renewables hold strong appeal as way for energy importing nations like Japan and Korea to diversify away energy price risk for LNG, coal, and oil. LNG is cheap now, but a power plant is a 40+ year asset. “Historically, Asian importers of LNG and coal have been willing to put up large sums of capital to ensure security of supply. Renewables may benefit from this ‘energy security’ demand.”
And it notes that most of the world’s LNG is sold on an oil-indexed basis, tying the expansion of global LNG projects to the price of oil. And lower oil prices threaten LNG projects over the next decade, many of which have already been plagued by cost overruns. Nearly half of the 600 mtpa of global LNG supply projected by 2030 is either “speculative” or “possible” – and these are projects that will come under pressure from lower oil prices. See graph below.
“With less LNG supply, the world has two main alternatives for power generation: coal and renewables. And renewables stand to benefit the most from any disappointment to LNG supplies.” As for the battle between diesel generation and distributed solar, the fall in oil prices may level the playing field a little, but this is by no means certain, as diesel is often heavily subsidised and the oil price drop may not be passed on to consumers. In any case, it hardly seems like a fair battle. Solar PV installation costs now range between $.08/Kwh and $.5/Kwh, depending on local conditions. Diesel costs will vary significantly due to tax regimes, subsidies, transport costs and other factors, but broadly speaking, diesel generation costs may range from $.3 to 3.00/kWh. “Distributed generation is a major answer to the estimated 1.3 billion people in the world who still lack access to electricity,” Citigroup says. “It may also represent one of solar’s biggest long-term opportunities”, it adds – although it notes that solar and diesel will likely work together until battery storage costs further remove the need for any diesel.
The two fastest growing big economies, China and India, have also recognised the cost falls in renewables, as well as their environmental benefits. India is aggressively targeting renewable energy growth and taxing coal to help fund clean energy. It aims for 100GW of solar, 60GW of wind, and 15GW of biomass and small hydro by 2022. Additionally the clean energy levy on coal has been raised twice, and now stands at 200 Rupiah per tonne. Growth of coal-fired power should still be robust in India, but renewables are poised to make major inroads. China is pursuing renewables in a “flat out” strategy that calls for 200GW of wind, 100GW of solar, and 350GW of hydro power targeted for 2020. Peak coal should happen soon, if it hasn’t already. Finally, improved prospects for progress at the Paris climate talks after 2014’s US-China climate announcement point to potential upside for renewables, Citigroup says. Any agreement would tend to be supportive of additional renewables investment. “Broad climate efforts will have to focus on reducing coal use in developing countries in some manner; the cheapest way to do this in many cases will be to substitute renewable energy for coal-fired power,” Citigroup says.