Is The Price Of Oil Impacting Renewable Energy?

As this series of articles has previously demonstrated, there doesn't appear to be an industry in the world that isn't immune to the effects of the recent decline in crude oil prices. The step from a glut of cheap oil to a collapse in the renewable energy market therefore doesn't seem to be a particularly large one, and is one that was previously encountered in the '80s and '90s when a similar decline in oil prices almost led to an abandonment of alternative energy altogether. However, the technologies involved have made significant advancements in the last 20-30 years, so does this mean that this time renewable energy can fight back?

There is, contrary to popular opinion, very little direct correlation between the price of oil and the price of electricity with only about 5 percent of the world's power being produced directly from oil-based fuels. As a result, oil and renewable energy are not direct competitors. However, the price of natural gas in many parts of the world is either linked to, or moves in concert with, oil prices (after all, a large portion of gas is simply a by-product from oil wells). This has generally meant that the price of electricity has fallen, albeit not by as much, when oil prices decline. Based on prior experience, this could mean that renewable energy, which is often thought of as an "expensive alternative", could stop being a viable option. But will it?

Solar and wind power are no longer unproven technologies, and are fast becoming cost-competitive with coal, oil, and even gas, so we are unlikely to see a swathe of bankruptcies or even a significant curtailment in investment in those arenas. Biofuels may be a different matter, with the price of a power station burning biofuel being the same (if not more) than a gas-fired power station. Where prices of biofuel are, as is currently the case, higher than the equivalent in oil or gas (and with public perception turning against them as being "green"), it may be that biofuel projects are either put on hold or mothballed altogether.

Recent European Commission guidelines which require European countries to phase out "fixed" subsidies (i.e. subsidies which top up the market price of electricity by a certain amount per MWh) are likely to bring fresh political pressure to bear on governments who may have agreed to future electricity prices with renewable energy suppliers based on last year's electricity prices – prices which may now seem very high indeed. However, the competitive bidding procedures that will need to be phased in will mean that those governments can point to market forces as coming into play to drive down any future subsidies. In fact, if the recent solar power auction in the UK is any indication, suppliers and sponsors are willing to bid very low indeed to ensure their project gets to market. In the United States, the expiration of the production tax credit and the uncertain future of the investment tax credit are likely to push renewable energy prices in the U.S. higher in the coming years.

The loss of subsidies combined with depressed oil and natural gas prices will almost certainly squeeze the renewable energy industry and may result in some participants deciding to exit the industry. However, coming on the heels of a significant period of subsidization across the globe, the industry is now much better positioned to survive the squeeze. The continued desire for renewable energy as an alternative to fossil fuels will assist the industry in riding through this challenging period and although the equity returns will not be as high as they have been in years past, the returns will be enough to justify continued investments in renewable energy.