What falling oil prices may mean for the future of renewable energy investment

Oil prices have plummeted in recent months, with the price of oil today hitting its lowest point for five years. That’s led to lots of speculation about the impact of falling oil prices on the world’s efforts to cut emissions by decarbonising the energy sector.

There’s little consensus. Some analysts argue that the falling oil price could end the world’s slow march towards zero carbon energy. Others say renewables are established enough to see out the storm.

There are good reasons for such uncertainty. The renewable energy industry’s fate rests on a number of factors that are very hard to predict.

We take you through the key elements of what’s likely to continue to be a major story in coming months.

Geography

The impact of falling oil prices on renewables varies in different parts of the world.

Renewables generate about a fifth of the UK’s electricity. Only 0.06 per cent comes from oil. It’s a similar story in the US, where oil generates about one per cent of electricity. Where oil and renewable electricity aren’t really competing, the falling oil price is unlikely to have a major impact, in the short term at least.

But that’s not the case everywhere in the world. Oil accounted for about 10 per cent of electricity production in Central and South America in 2012, and about 29 per cent in the Middle East. Here, renewables compete with oil as an electricity source. Renewables have historically been squeezed out of the generating mix when that’s the case.

Transport

Low-carbon fuels are likely to be hard hit in the transport sector, where oil and petrol continue to dominate.

In 2013, the transport sector used 53 per cent of the 90 million barrels of oil consumed each day, according to the International Energy Agency (IEA). Biofuels remain a very minor player, accounting for about 1.4 per cent of the world’s liquid fuel supply in 2013, the IEA’s stats show. That share is likely to fall as oil prices drop, analysts Energy Intelligence predict, particularly as biofuels rely on government support, which is waning in some parts of the world.

Will cheaper oil hit investment in renewables? By Rosamund Pearce for Carbon Brief.

Duration

Oil prices are notoriously volatile, and no one knows how long the price slide will last.

Some renewables, such as solar power, are increasingly cost competitive with fossil fuel energy. So a short slump shouldn’t have much impact, Energy Intelligence says. But other analysts say some renewables, such as onshore wind, aren’t that resilient, particularly if prices continue to slide.

Consumer advice service USwitch tells the Independent that renewable generators may require additional subsidies as the gap between the cost of fossil fuel power and renewable power gets bigger. That could be a problem in the UK, where the cost of supporting the country’s switch to a low-carbon energy system has come under intense scrutiny in recent years.

Falling oil prices could undermine the UK government’s argument that investing in renewable energy now will save consumers money in the long run. It could also lead the government to revise its fossil fuel price projections. Those form the basis of its energy sector modelling, and could lead it to alter its view on whether current low carbon energy policies are cost effective.

Investment risk

It’s not just renewables that are potentially threatened by low oil prices, however. Falling prices also threaten some fossil fuel industry investments.

Energy companies have turned to harder-to-reach sources of oil, such as the Arctic or the Canadian tar sands, as conventional wells dry up. The Carbon Tracker Initiative, a thinktank, suggests the oil price needs to be around $95 a barrel to make such risky investments worthwhile. That’s much higher than the current price of around $50 a barrel.

A low oil price could also disrupt the fracking industry. The North American shale boom led to a glut of new oil on the market, driving down prices. Saudi Arabia, OPEC’s leading player, could potentially cut its production to reduce supply and help the price rebound. But it’s not keen on doing this, as it would mean helping out its new and traditional economic rivals, such as the US, Russia and Iran.

Climate policies

One of the major drivers of renewables’ growth in recent decades has been policymakers’ recognition that countries need to curb emissions to tackle climate change. While the prospect of major climate action may not be enough to encourage continued investment on its own, it could help to secure the renewable industry’s long-term future.

The oil price slump presents an opportunity for countries to implement policies that bolster the world’s efforts to decarbonise, the IEA says. Now is the time to cut fossil fuel subsidies and implement a carbon tax, it argues, as the low oil price reduces the policies’ effect on consumers. Both policies would help cut emissions and keep renewables competitive in the long-run.

Renewable generators also argue that because sunlight and wind are free, they can help insulate countries from the kind of economic shocks the oil price shift has caused.

So while falling oil prices may threaten renewables in the short-term, climate policies have the potential to act as a counterweight, encouraging long-term, low carbon, investment.

Ongoing problem

The oil price interacts with the wider energy market in myriad and complex ways, and it may take some time for the full impact of the price slump to become clear.

Oil prices have been falling steadily for sixth months, with many analysts expecting the trend to continue through the first part of 2015. Carbon Brief will be keeping an eye on what it means for renewable energy investment and the world’s efforts to decarbonise as the story unfolds.

Main image: Oil pump jack.