About two weeks back, the OPEC (Organization of the Petroleum Exporting Countries) oil producers’ cartel decided not to cut output at its meeting in Vienna. Since then, oil prices have plummeted to a record five-year low.
Saudi Arabia, the world’s largest oil exporter and OPEC’s most influential member could potentially support global oil prices by cutting back its own production, but so far there has been no sign of this. The primary reason is said to be to put the US’s flourishing shale oil and gas industry on the back foot.
All the oil politics aside, the oil consumers have been only too happy to save their oil dollars. While the drop may force many analysts back to their spreadsheets, the outlook for growth of solar (and other renewables as well) is still very much positive.
How Will Power Projects Be Affected?
If at all, the oil price reduction can only affect solar projects which are at the feasibility stage. The projects which are already online or under execution are practically oil independent.
Also, looking at electricity generation around the world, it is coal and not oil that is the major competitor to solar power. To compare more accurately, one may need to look at prices of solar vs coal-oil mix in different countries. But with solar power already being cheaper than new projects at utility scale, the current situation might just mean that the difference between clean and dirty power has reduced a bit, in the short term.
“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,” urged Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change at the opening of the COP20 climate conference in Peru.
In October 2014, Deutsche Bank issued a report stating that solar will reach grid parity in 36 of 50 US states by 2016. Solar has already reached parity in 10 states that currently account for 90% of solar electricity generation. Moreover, the bank estimates that further installed capacity will grow as much as 6 fold in the next 3–4 years.
What About Non-Power Projects?
Non-power applications where oil and solar compete would include both transportation and water heating. For the average consumer, falling oil prices will lead to lower transportation costs, which would translate to savings on other goods as well. But then what about Tesla? Well, Tesla would hardly be worried. Volatility in oil and “stability” in solar and electricity in general would sound more like music to EV enthusiasts.
Solar water heaters are also not expected to lose much in the wake of low oil prices. Quite similar to the case of power generation, even in the case of water heating, only the projects which are waiting for a yes/no call may be affected in the short term, but how much are solar water heaters actually competing with oil?
Will Lower Oil Prices Lower The Production Cost Of New Solar Panels?
Over-optimism notwithstanding, there is hardly any chance of the cost of solar panels falling due to lower oil prices! According to this Greenpeace report, the energy consumption of the industry chain from polysilicon to solar PV system is 1.032~1.658kWh per Wp (excludes energy for metallurgical grade silicon). That should probably amount to about 15 cents per kWh.
So, changes in fuel prices would directly affect only this component. One can probably guesstimate that a 10% change in energy price would lead to a 2.5% change in the panel price (at utility-scale price). Once again, everything boils down to the contribution of oil in the energy mix.
As most of the panels come from China, it is coal which is going to most dictate the cost of energy that gets consumed. Even in the US, oil prices will have little or no effect compared to trade tariffs.
With SunEdison working hard on its high-pressure fluidized bed reactor technology (HP-FBR), high-purity polysilicon can be produced with 90% energy savings.
The Larger Picture
With the media circuit still abuzz with reporting from Lima, one would appreciate that resolving and averting climate change issues has been at the heart of the solar (and other renewables) push. The fact that it makes economic sense is simply an added bonus.
“We believe solar fundamentals are driven mostly by government policies and natural gas prices in most major markets and see almost no impact on near term demand environment as a result of recent oil price volatility. We expect demand in markets such as US, India, China to accelerate from 2015,” said Vishal Shah, Deutsche Bank analyst
On the other side, the forecasts for the companies involved in oil exploration and production is rather gloomy. A post from AllianceBernstein observes, since 2000, oil companies have invested some $1.5 trillion into operations — mostly exploration and production — and it’s hard to find a historical example of so much money chasing an opportunity that is constantly dwindling that ended well!