As Brent crude oil prices hover at $57 and Henry Hub natural gas prices maintain at approximately $2.60 with the summer doldrums coming up, it is good time to be a consumer, industrial or other user of oil and gas. For some, renewable power seems to have lost its shine. Why bother getting solar on your rooftop or buying wind power from your utility when oil is so low?
At the same time, renewables continue to surge in the US and globally. 18.3 gigawatts of renewable should be built in 2015, outpacing even natural gas. 2015 is expected to be the lowest year for carbon emissions in the US since 1994. Why the seeming paradox? A few basic reasons:
1) Oil by and large is not used in power generation in the US. So declining oil prices don’t dampen the demand for solar or wind. Natural gas is used for power generation, but planning, licensing and building a combined cycle natural gas power plant is a long-term exercise. We will see an uptick in natural gas plants, but the fact that renewables and particularly distributed generation and residential solar are much more flexible, means they have an inherent advantage in the near term. In addition, community solar and wind and remote net metering reinforce the flexibility of renewable power by opening up ownership and usage of renewables to a much larger base.
2) Costs in the renewable sector continue to come down. The advent of solar loans, green bonds, yieldcos and other financing vehicles is driving down the soft costs of renewable power development, much in the same way that hard costs quickly came down in 2009-2011. The average residential power rate in the US was 12.1 cents in January according to the US Energy Information Agency, an increase for the first time since 2010. Renewables can beat this in many parts of the country.
3) Renewables are growing from a small starting base. Renewable generation for 2014 reached a high of 6.9% of all generation, 13.2% if you include hydroelectric power. This is a small base, but significant. Renewables are still rising at a 30+% clip per year.
4) Coal retirements are leaving a big hole in the market. More than 26 gigawatts of coal plants will likely come offline in 2015 due to age, natural gas costs and EPA regulations. This leaves a major opportunity in the US power generation sector for all other technologies, including renewable power. And the opportunity is not ending – another 30+ gigawatts of coal are expected to be retired before 2020.
The energy markets are integrated, but unless oil and gas stay in their current ranges for 2-3 years, there will be little impact on renewables. And even if all the pundits are wrong and oil does not go back to $80+/barrel and gas to $3.50+/mmbtu, continued cost improvements, market opportunity and inherent flexibility mean that solar, wind and other forms of renewables have a bright future.
Edward J Sappin is the CEO of Sappin Global Strategies, a New York firm building the next generation of energy companies and global innovators