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The Impact of Oil Prices on Renewable Energy

The Impact of Oil Prices on Renewable Energy

Introduction

Any energy that is derived from replenishable natural resources - solar, wind, rain, tides, geothermal heat and bio mass. The scope for renewable energy is huge since they can, in theory, cater to the global energy needs. A transformation to systems based on renewable energy is gaining ground especially as the costs decrease, while Oil & Gas prices oscillate. The growth in sales of solar and wind power systems is proof of the growing demand for renewable energy.

As per market data, fossil fuel and renewable energy prices are moving in different directions. The economic and policy systems required to facilitate expansion in markets for renewable energy systems have made rapid progress. Increasingly, financial markets are realizing the potential for growth in renewable and relevant new energy technologies.

Renewable energy systems are available on a small scale-decentralized concept that can be integrated with electricity distribution systems. Again, renewable systems on the basis of PV arrays, windmills, biomass or small hydropower can be manufactured on a large scale.

Renewable energy at present supplies around 20% of the global energy demand - mainly through biomass and hydropower.

Hydropower:

It is one of the most dominant forms of renewable energy - accounting for nearly 73% as per the Energy Information Administration (EIA). Over 150 nations generate hydroelectric power. It is generated by leveraging mechanical dynamics of flowing water by channelizing it through a pipe – penstock, which drives a generator to create electricity. Even, wave and tidal energy are included in this category. It derives energy based on the potential, kinetic, thermal and chemical energy of waves. Technologies such as barrages for tidal range, submarine turbines for tidal and ocean currents, heat exchangers for ocean thermal energy conversion, and various devices to channelize the energy of waves are used.

Solar Energy:

Solar cells also known as photovoltaic cells manufactured using silicon absorb the sunlight. The photovoltaic process is based on the transition and relocation of electrons to absorb the sunlight and generate electricity. Solar systems utilize mega mirrors to boil water or create high temperatures and produce steam to be used for starting a generator.

Small-scale photovoltaic (PV) systems installed on rooftops are increasingly being used while mega PV systems and concentrating solar power (CSP) systems account for the bulk of the electricity generating capability. The cost for rooftop PV systems has reduced significantly in the recent years due to better technology and innovative financial schemes.

In countries such as the US, tax rebates by many states can reduce the cost of a rooftop system. For e.g.: by the beginning of 2014, over 480,000 solar systems were installed in the US, over and above the existing 13,400 megawatts (MW). The solar sector in the US is investing nearly $15 billion in the economy yearly.

Wind Power:

Wind has the potential to be a source of clean energy internationally. It is an easy to use process, leveraging the kinetic energy of air in motion. Emphasising on environmental safety, production of electricity from huge wind turbines based on land (Onshore) or in sea- or freshwater (offshore) would be beneficial. Wind turbine translates the kinetic energy (motion) of wind into mechanical energy to produce electricity. The energy is supplied through a generator, translated into electrical energy, and then supplied into the grid for further transmission to a power generation unit.

The industrial expansion in Europe and the US heralded the decline in wind power generation. However, the oil crisis in 1970’s resulted in increased interest in wind energy technology. Western nations such as the US and Denmark established R&D programs to enhance wind turbine technology. Thus, by the 1980’s, wind energy became popular in the US and Europe, with the establishment of pioneering grid-connected wind turbines. Wind energy became the fastest growing technology by the 1990’s. The availability of mega turbines, effective manufacturing and proper establishment of wind machines have resulted in reducing costs of wind power.

Geothermal Power:

The process of concentrating heat underground and constructing energy that moves upwards in the form of heat. The heat that is extracted from geothermal reservoirs results in hot water/steam. It is harnessed and used to operate a steam turbine to generate electricity. Reservoirs that are hot and permeable by nature are known as hydrothermal reservoirs while reservoirs that are enhanced due to hydraulic stimulation are known as geothermal systems (EGS). The potential for geothermal energy is huge. According to researchers, 1% of the heat limited in the earth’s upper crust is equal to 500 times the energy available in the world Oil & Gas resources.

Hydrothermal power plants and thermal applications of geothermal energy are proven technologies while EGS projects are in the infancy stage.

Biomass:

Biomass was amongst the earliest energy source utilized by humans. It is a renewable organic matter which includes biological material generated from existing or recently existing life forms - wood, waste, and alcohol fuels. Utilizing various processes, the feedstocks can be used to generate electricity/heat along with gaseous liquid/solid fuels.

A wide array of bio energy technology is available and the technical advancement varies - small- and mega-scale boilers, domestic pellet-based heating systems, and ethanol production (sugar and starch).

New technologies such as complex integrated gasification combined-cycle power plants and lignocelluloses-based transport fuels are being validated for commercial use while liquid biofuel production from algae and other biological conversion method are in advanced research stage. They can be used in various centralized and decentralized scenario. Though, bioenergy projects are based on regional fuel supply accessibility.

The utilization of bio mass varies from developing nations to developed nations. It accounts for a major share of energy use in developing nations. However, in developed nations the consumption of bio mass is negligible. Biomass has the capacity to be used in modern societies using the latest technology. Existing technology can convert biomass into environmental friendly and easy to use energy. Biomass is projected to play a key role in the future. The reason for that is not the depletion of fossil fuels, but the concern on the long term wellbeing of the environment. Again, if developing countries adopt modern agricultural techniques, the scope for biomass energy production would have been greatly enhanced.

Economics of Renewable Energy:

The progress of industrial civilizations has always been based on the advancements in energy transitions. During any economic expansion, energy consumption increases. Historic evidence suggests, as supply of biomass proved inadequate to meet global demand, nations transitioned to hydropower, coal, oil & gas and nuclear.

Thereby, every stage of economic progress has witnessed an energy transition from one key fuel source to another. Currently, fossil fuels - coal, oil and natural gas are the most prevailing source of energy in developed nations. However, according to experts, the next transition in energy sources is towards renewable energy. There are several reasons for the transition - environmental concerns, depleting fossil fuel supplies, pricing policy and technological modifications.

Global economy would in the long run move towards renewable energy since the availability of fuel fossils is limited. The economic benefit of renewable power projects has to be evaluated before establishing renewable energy projects.

Capital Costs:

They are the costs required to establish and maintain a plant during the life of the plant. To assess various technologies, capital costs are divided by the maximum power to determine the distinct capital costs. Solar energy is extremely capital extensive. However, nuclear power exceeds the cost of solar energy.

Operating Costs:

They include operations, maintenance and costs of fuel. The operating costs of renewable plants are less. According to some experts, renewable energy cannot deliver “base load” electric power. This is due to the false belief that only coal and nuclear power can cater to base load electricity demand.

However, renewable energy and its efficiency has developed to such an extent that they can easily replace the current fossil fuel based business models. Evidence suggests, residential solar PV over the life span can compete with retail electricity prices economically. Concentrated solar thermal power is gaining ground in the US and Europe. Advancements in renewable technology means solar PV systems have transitioned from being an extremely expensive technology to a cost effective technology.

Renewable energy is projected to make significant growths especially in the emerging economies:

➢ Brazil: 75% of electricity generated to be from renewable by 2030

➢ China: 15% of final energy to be generated from renewable (led by wind power) by 2020

➢ India: 20 GW of solar to be installed by 2020

International Policies and Procedures:

Europe is leading the global effort towards renewable energy. Having said that, the rest of the world is not far behind. EREC has collaborated with other stakeholders -IEA, IPCC, UNDP, UNEP, UNESCO, UNFCCC, UNIDO, the World Bank, to facilitate an increase in renewable energy.

Global energy policies are faced with the obstacle of enhancing energy efficiency. For e.g.: extremely energy efficient nations such as Japan are also looking at initiating measures to save energy. Turkey has established a wide array of strategic and legislative framework to encourage energy efficiency. The government has introduced a yearly energy week to increase public awareness.

Canada is continuously looking at improving the effectiveness of its commercial building codes. Across the globe, many nations are seeking cost-effective methods to increase the renewable energy usage. For instance, in the Netherlands, the government has established a subsidy system with a sliding component in which the premium changes with the prices. Norway and Sweden have launched a scheme that delivers a huge market for electricity certificates, thereby encouraging renewable generation. Though fossil fuels contribute to the bulk of the energy demand, the cost advantage fossil fuels had over renewable energy has been steadily reducing in the recent past. There is a push to enhance the critical policies that are needed for spearheading renewable energy investments, including solar.

Environmental Issues:

Currently, power plants are emitting huge amounts of carbon dioxide in the environment, resulting in global warming. However, things are going to change soon. The Environmental Protection Agency (EPA) in the US is establishing new rules/standards to significantly decrease carbon emissions from power plants.

The standards are also known as the Clean Power Plan - under the aegis of the clean air act.

The clean power plan draft was introduced in 2014 and it provided several detailed plans for reducing carbon emissions - building blocks. Renewable energy is also one of the building blocks. This in turn has resulted in an opportunity to accelerate the growth of renewable energy. The benefits of renewable energy are:

• Cut global warming emissions

• Create new jobs and industries

• Diversify the power supply

• Decrease dependence on coal and other fossil fuels

• Move towards a cleaner, healthier energy future

Any investment in renewable energy is an effective solution for decreasing carbon emissions. Thus, the clean power plan is a golden opportunity to chalk out a cleaner and safer energy in the long run.

Technological Advancements:

Top notch technological advancements have reshaped the landscape for renewable energy.

Some of the new technologies related to renewable energy are:

Paint on Solar Cells:

The development of thinner solar cells has enabled end users to embed them in remote locations. The cells are also good at conducting electricity.

Spherical Solar Cells:

The technology is cost effective, uses less material and consumes relatively less energy to reproduce.

Reflective Dishes:

The increase in usage of solar energy has increased the need for silicon. However, researchers have created a new technology - gallium arsenide to replace silicon in solar cells.

Leviathan Energy:

It is useful in enhancing the efficiency of a wind turbine without having to increase the turbine dimensions.

Tower Height:

The wind turbine can be used to deliver an optimal output by increasing the tower height. The technique can bolster the turbine efficiency by 20%.

Green Crude:

It is a path breaking discovery that would enable the creation of clean energy from algae. Algae is promising because not only is it renewable but also carbon neutral - it is capable of performing photosynthesis which means the carbon would be equal while it is created and burnt. In addition, it eliminates nitrogen from wastewater. Again, it is similar to fossil based crude; therefore, it can be utilized in the current refining infrastructure.

Future Projections:

According to International Energy Agency, policy paralysis and uncertainty in grid integration are resulting in slow progress in renewable energy deployment across the globe. However, clean energy capital investment is projected to increase to $1.61 trillion by 2020. The IEA’s 2014 medium-term projection for renewable energy generation estimates yearly 5.4% growth rates to total 7,310 TWh by 2020.

Non-OECD nations are expected to fuel the sector’s growth and projected to account for 70% of new power capability between 2013 and 2020 due to long term policies.

The demand for energy is increasing across the globe and is projected to move in the same direction through to 2035. At the same time, the global GDP is estimated to increase by 3.2% during the same period, while non-OECD nations (particularly India and China) would be averaging 4.4% annually. This would result in an increased demand for energy. The US Energy Information Administration is predicting a 50% spike in energy demand across the globe by 2035.

The EIA forecasts usage of renewable energy will more than double by 2035, as will nuclear off a lower mark, but we shall see far quicker growth of renewable energy than nuclear in the shorter term. There is a popular belief that the world has, or is about, to reach “Peak Oil”. This is the point in time when the maximum global petroleum extraction level is reached, after which the rate of production enters terminal decline. The US Energy Information Administration (EIA) estimates the utilization of renewable energy would increase 100% by 2035.

As per global data, “Electric power derived from renewable sources in Europe will achieve a compound annual growth rate (CAGR) of 8.6 percent in 2013-2020 and serve as one of the key drivers for an expected transformation of the local electricity system”.

Impact of Oil prices on renewable energy:

The fall in oil prices would have an impact on the growth of renewable energy in the short run. The prominent auction model for renewable energy is based upon a pre-determined price of power, which is executed through contracts. A bulk of renewable energy is supplied globally through PPAs or auction systems while in some cases being supported by subsidies. Since the subsidies are locked for a longer duration, the falling oil prices would mean the other forms of energy would become less expensive.

In 2014, global investments in renewable energy were $310 billion. In fact, the fall in oil prices highlights the stability in renewable energy prices and could facilitate low carbon growth if governments decrease fossil subsidies and promote investment in clean energy.

Geographical Location:

The impact of oil prices on renewable energy varies globally. For e.g.: in the UK, oil produces 0.06 % of the electricity, while in the US it produces about 1% of the electricity. However, in South America, 10% of the electricity production is due to oil and it is 29% in the Middle East. Hence, the trade off between renewable energy and oil vary across locations.

Duration:

There is great volatility in the oil market and it is difficult to estimate the duration of price fall. On the other hand, renewable like solar are very cost competitive with fossil fuel. Therefore, a fall in the short run should not have an impact.

Environmental Concerns:

It is one of the biggest drivers of renewable energy. The fall in oil prices provides an opportunity to nations to execute policies that boost the global economies plans to decarbonize.

Along with political assistance, renewable are secluded from market forces due to the constitution of the electricity sector. Several governments provide assistance to clean energy either through feed-in tariffs - fixed prices for power fed into the grid or through auctions to purchase a specific quantity of generating capability.

Industry experts are of the opinion, “falling oil prices would not affect renewable energy, and on the other hand it would bolster the sector’s growth”. One of the reasons being, mega renewable energy projects are planned in advance and not affected by the short term oil prices fluctuations. In fact, renewable energy sector would be able to provide stable pricing in the form of power purchase agreements.

Expert Opinion:

According to Flora Chang, an Energy Analyst at Bernstein Research "Inevitably, there will be some impact because we think the high oil price is a key driver [for] renewable energy, But cheap oil will likely only delay some projects, not derail renewable' advance, it will take share from oil and coal in the energy mix". She also said. "Solar is still cheaper than [fossil-fuel derived electricity]. It's just now that the difference is smaller”.

As per Adam Sieminski from the US Energy Information Administration, “oil was not in head-on competition with renewable when it came to electricity generation - and that government policies would help shield the clean energy industries”. A lot of the demand that is coming for wind and solar additions in the US is supported through tax incentives and state energy programmes that requires a certain percentage of electricity to come from renewable”. He further stated, “I think that in the near-term the drop in oil prices is not really going to have much of an impact on wind and solar installations”.

Some Energy Analysts believe, there are critical differences between renewable energy and oil. For instance, renewable such as solar energy are predominantly used for producing electricity (utilities, corporations), while oil is more connected to transportation requirements.

According to Larry Berman, Chief Investment Officer and Co-Founder of ETF Capital Management, “Valuations are certainly attractive, but this would be a space for long-term investors, “Given what’s going on with energy prices, I think you have to look a decade out. But we’re going to continue to need renewable energy and that’s not going to change because oil is cheaper.”

IRENA’s new Renewable Power Generation Costs report has stated that “renewable energy is able to compete in the global market. For those without access to electricity, renewable energy is still the most cost effective source of energy”.

A new report by the International Renewable Energy Agency says “the cost of generating renewable energy is now equal to or below the cost of fossil fuels in many parts of the world, and will remain financially competitive even if oil prices remain low”.

According to Bloomberg New Energy Finance, during the period of falling oil prices, renewable energy investments increased by 16% in 2014, reaching US $310 billion - the first growth registered since 2011. The oil crisis has also brought to the forefront another advantage of renewable energy in comparison to fossil fuel: in the long run prices of low carbon energy are relatively stable and not expected to oscillate in the same way as oil.

Along with the increasing concern on climate change, key stakeholders related to energy are establishing a wide range of legislations and mandatory objectives to ensure regular investments in the low carbon energy industry.

Renewable UK 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 renewable. 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”.

The United Nations climate chief Christiana Figueres said at the climate conference in Lima, Peru, in late 2014 that “unstable oil prices are exactly one of the main reasons that makes renewable energy, which has a predictable cost of fuel, comparatively appealing”.

As per reports released by the International Energy Agency “Nearly 60% of the $5t trillion investment would be in renewable energy over the next 10 years”. This has boosted the regional and national incentive policies for renewable energy across the globe, thereby protecting the sector from oil price crashes. Again, low oil prices in the long run would result in subsidies - the government support in China has resulted in the nation becoming the largest market for wind and solar energy.

“If oil stays at current prices or weakens through the first half of next year, the impact on new energy would be massive,” said Lin Boqiang, director of the Energy Economics Research Center at Xiamen University, speaking of the situation in China. “Weakening oil prices would hamper the competitiveness of new energy. The government has to subsidize the new energy industry to support its development”.

“We’re all old enough to know that oil prices go up and down. The fact that oil is so unpredictable is one of the reasons why we must move to renewable energy, which has a completely predictable cost of zero for fuel” said Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change.

In Washington, the State Department official - Todd Stern, who speaks for President Barack Obama on climate, said a “low-carbon future is essential for the U.S. and that the policy won’t be revised due to oil prices. So far, declining oil prices haven’t affected what countries say they are willing to do.” He further stated “The need from the point of view of climate, health and energy security all point toward the imperative for transforming our economies from high to low carbon, that transformation is the solution side of climate change”.

In Brussels, the IEA, which was formed to advise industrial nations on energy policy after the first oil shock in 1973, said governments must remain focused on cutting carbon dioxide emissions blamed for damaging the climate.

“What is important is not to be lulled into a false sense of security,” Maria van der Hoeven, the Executive Director of the IEA, said at a briefing in Brussels. “Fossil fuels will be a very important part of our energy supply. It’s important not to be too obsessed with lower oil prices”.

Investments in green energy are progressing very fast. The industry received $175 billion in the first 9 months of 2014 as per Bloomberg New Energy Finance. As per IEA estimates, $2.95 trillion may be invested by 2040 in renewable energy.

“There is absolutely no guarantee that oil prices will continue at this level,” said Taro Saito, Director of economic research at the NLI Research Institute in Tokyo. “So of course from the point of view of those who are pushing renewable energy, there is no reason to suddenly give up”.

“Cheaper oil doesn’t have a straightforward impact on the political debate. It lessens the argument that there are going to be huge costs in the transition to cleaner energy. We’re actually starting into that transition, and it has reduced costs”, said Alden Meyer, who follows climate policy for Washington-based Union of Concerned Scientists, Meyer said. “”.

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- Jess Potts
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OilFinity
Published on:
March 23, 2015
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