Oil price crash: What it means for the renewables industry

On 20 June 2014, the price of crude oil stood at $115 a barrel. On 12 January 2015, the price has crashed to $48 a barrel, leading commentators - including Sir Richard Branson - to suggest clean energy will be damaged as suppliers abandon renewables in favour of cheap oil.

However, industry analysts have responded that oil price fluctuations, at worst, will have a minimal effect on renewables and, at best, could benefit the industry, which is bigger and more resilient than ever before.

Indeed, an overlooked storyline is that the mushrooming renewable energy industry is actually contributing to oil’s price plunge. Along with efficiency measures and shale gas, renewables have helped dampen demand for oil by about half a million barrels in the US alone since 2006.

As Bloomberg New Energy Finance (UNEF) analyst Michael Liebreich puts it: “The story should not be how falling oil prices will impact the shift to clean energy, it should be how the shift to clean energy is impacting the oil price.”

Why plunging oil prices are not bad news:

1) The renewables industry has now grown to the extent that it can compete with fossil fuel on price.

This table shows the breakeven points for electricity generation from renewables, compared with oil.

Taking European onshore wind as an example – it will be cheaper to generate electricity from those onshore wind turbines until the oil price falls to $14.6 a barrel. At the other end of the spectrum, with a barrel of oil currently worth $48, it is a much cheaper source of energy than Solar CSP in Europe.

The upshot is that solar PV and onshore wind are already cheaper sources of generation than oil, even with the current compressed prices. In addition, other renewable systems should continue to their lower generation costs with sufficient investment.

2) Continued investment in renewables is a relatively safe bet

As stock in oil and gas companies continues to plummet, insitutional investors need somewhere to move their money. Price stability and widespread Government support for renewables makes it attractive for investors.

Graph: Share value in the oil and gas sector

3) Continued Government support for renewables is also likely thanks to its stability.

RenewableUK spokesperson Rob Norris told Clean Energy Pipeline: “Plummeting oil prices show just how unpredictable the global cost of fossil fuels can be – and the UK has no control over that volatility. It is one of the reasons why it makes more sense to make the transition from fossil fuels to renewables. 

“When you plan and build a wind farm, you know exactly what the costs are upfront, and the fuel itself is free, so we are insulating ourselves against the seesawing of global commodity prices, providing energy security for the UK.”

However the Government still has a foot in the oil-and-gas camp, as George Osborne told the Sunday Times he is considering emergency tax cuts for companies drilling in the North Sea.

The price collapse has led to a sharp dip in profits for the industry, which employs 375,000 people and pays at least 60% tax.

4) Oil is not predominantly used to generate electricity.

In Britain, less than 1% of our electricity comes from oil, compared to around 25% from renewable sources. It is this type of ratio that could force oil companies to re-think their business strategy.

Former Solarcentury chairman Dr Jeremy Leggett told the Guardian that at least one major oil firm will ‘turn its back on fossil fuels in the near future’.

Will anyone be affected?

– Lower oil prices will challenge the biofuels sector, which competes directly with oil as a transport fuel.

– It could also harm burgeoning sales of electric cars and other low-emission vehicles. December figures for the US auto industry showed a spike in sales of gas-guzzling pick-up trucks and SUVs.

Brad Allen

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