On Friday, Brent crude fell below $50 per barrel during intraday trading—the lowest price in over five years. Crude oil futures have decreased more than 50% since June. Oil prices are at a seventh consecutive weekly low. So what does this mean for the energy space?
Whenever conventional energy is cheap, commentators tend to predict a corresponding drop in investments in the clean energy space. This view is a pure supply-demand problem: all else equal, no one is going to want to pay for more expensive clean energy generation vs cheaper traditional generation sources like oil and gas. Energy production epitomizes the tragedy of the commons dilemma.
Luckily for us—and future generations—energy production is not a simple supply and demand function. States are heavily involved in creating the optimal energy mix, providing subsidies and various incentives to hit country-specific generation targets. Falling oil won’t slow down renewables investments because clean energy investment has never been a function of supply and demand or a pure market mechanism; it’s always been a child of political intervention.
The US and China are two leaders in the increasingly global commitment to clean energy development. Last November, the two countries shocked the world with their joint announcement on climate change and clean energy cooperation. The US pledged to cut net greenhouse gas (GHG) emissions 26-28% below 2005 levels by 2025, while China announced plans to peak CO2 emissions by 2030 at latest and to increase non-fossil fuel energy to ~20% of the energy mix.
To achieve these targets, the US and China will have to maintain or exceed current investment in the renewables space through 2030. Currently, US and Chinese annual investment in clean energy is approximately $100 billion and $145 billion USD each. Projections show the US renewables share in the overall energy mix growing from ~8% in 2010 to ~11% in 2030, at a 20 year CAGR of 1.5%. China’s investment in clean energy is much more aggressive, with base case scenarios showing its renewables share doubling from ~13% in 2010 to ~26% in 2030, at a 20 year CAGR of 3.5%.
On the regulatory side, the US and China will need to aggressively incentivize both production and investment in new technologies to achieve long-term economies of scale and to become independently economically viable. The US recently extended the current PTC program through year end 2014 to support qualifying projects that begin construction before the deadline. The ITC program is currently due to expire for projects placed in service post year end 2016. Meanwhile, the US federal government is also working to streamline regulatory approval processes (such as those for hydro and offshore wind) in order to minimize uncertainty for developers.
Similarly, China’s recent Five Year Plans (FYPs) prioritize the development of clean energy technologies and provide short-term targets and goals for R&D and innovation activities in the space. Key areas for development include the domestic wind industry across the entire value chain and solar PV. China is also working on developing national carbon-emission trading pilot projects and working towards banning the use of coal by 2020.
Just like any economic crisis, there will be winners and losers in the oil shock of 2014-2015. On a macro level, I expect a transfer of income from oil producers to consumers, with oil-importing countries like the US and China being the largest beneficiaries. Therefore, contrary to popular belief, falling oil isn’t a speed bump for the renewables industry. We’re in the fast lane now.