Renewable Energy Will Win the Battle Against Fossil Fuels

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Friday, February 6th, 2015
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Given the recent decline of global oil prices, now to below US $50, one can be forgiven for wondering whether renewables-based electricity might lose the battle against fossil fuels.

Of course, whether oil derivatives compete directly with electricity generated from renewables is a moot point. The global coal price has also been trending downward recently, as have natural gas and LNG prices.

However I expect, as do many commentators and oil market experts, that the current decline in oil prices will be short lived. The fundamentals of supply and demand indicate significant upward pressure on oil prices in the long term due the dwindling reserves of easily (cheaply) extractable oil. It is important to note that the current decline is in the spot price. That is, the price for the delivery of crude in the next month. The contracts prices for longer term deliveries are increasingly higher the further forward one goes. For example, on the New York Stock Exchange’s commodities exchange, ICE, the contract for oil delivered in 2020 is around US $70.

So, what does all this have to do with Renewable Technologies? There is some talk that the drop in oil price signals bad news for renewables. Under closer examination, this turns out to be an unreasonable argument. Here’s why: firstly, the oil price drop is in a volatile short-term market, i.e. the market for near term spot delivery.

The price changes every day entirely on the basis of changes in supply and demand and traders expectations. Currently the Saudi Arabian production is not responding to drops in supply. This is significant as the Saudis are still the largest single producer for crude and are possibly applying this strategy to either force higher cost competitors, such as US and Canadian producers of unconventional oil (tar-sands oil and shale oil) out of business or, as former US Energy Secretary Steve Chiu suggested in his Canberra Press Club address last month, to test where their pain points actually are in order to deduce their cost of production.

On the other hand, the costs of renewable technologies continue to decline as manufacturers learn how to produce and install them more efficiently. This is analysed in depth in the recently released International Renewable Energy Agency (IRENA) report entitled Renewable Power Generation Costs in 2014.

The report sets out the results of a comprehensive survey of several key renewable energy technologies and how they have changed over the past five years. The technologies analysed are wind; solar PV; concentrating solar power (CSP), better known in Australia as solar thermal; hydroelectric power; biomass; and geothermal.

Their findings clearly reflect what we have observed already in some cases, where solar PV costs has declined substantially. This can be seen in the first figure. This figure shows the cost of solar PV in several key countries where the uptake of solar has been substantial, showing Australia now has the second cheapest cost residential solar after china. IRENA tells us that since 2008, on a global basis, residential solar has fallen by as much as 64 per cent, fully installed, while Utility Scale PV (arranged in large fields of solar panels and connected to the grid like a coal power station) fell by about 50 per cent. In fact, the most competitive utility scale solar installations to date require a price of only eight cents US per kilowattt/hour. That is only a little higher than new wind as well as a new build coal fired power station in Australia.

IRENA projects that these costs will continue to decline as the technological learning process is still continuing. The projection of technology cost decreases is a well-established field in economics supported by ample empirical data. We know that for every doubling of cumulative production of PV, costs will drop around 20 per cent. This is substantial given that there is still a lot of untapped potential around the world for solar PB to be installed.

FIGURE 5.16

This principle of technological learning applies to all technologies from computers to aircraft through to energy technologies.

Of the range of renewable technologies that have already come down this cost curve, it is important to mention hydroelectric power, a 100-year-old technology already and whose costs are therefore quite stable, and wind power, which is the most mature of the new renewable technologies.

Wind power costs are also decreasing, albeit much more slowly than solar. For example, IRENA’s report shows that onshore wind costs have only dropped by an average of 10 per cent across the world over the past four years. However, this is still significant as wind is already very competitive with new build coal and gas fired stations, the two cheapest fossil fuel generation sources.

There is a sting in the tail for developed countries however, in the case of utility scale renewables. These only have an advantage when new capacity is being constructed or old generation must be replaced. In Australia, the Australian Energy Market Operator recently reported that due to the demand decline since 2009 and delayed (possibly indefinitely, in my view) recovery of demand growth, the National Energy Market (NEM) is not projected to need any new capacity for another 10 years.

The challenge for renewables in Australia is that given the way the market was designed, and the relatively cheap cost of maintaining aging fossil plant, it is likely that without specific policies such as the renewable energy target, it would be uneconomic to build new plant such as wind farms or solar farms. That is why it is important for the target to stand.

Globally however the majority of the growth in energy production is in developing countries such as India, China, and Indonesia; here renewables have a distinct advantage!

This is also not a problem for residential solar as it is competing not with the wholesale cost of power generation, but the total cost stack including transmission and distribution costs plus retail margins. This retail price stack seems to be constantly increasing so for now, residential PV is on a good wicket.

Finally, it is worth noting that the report from IRENA shows that there is a great deal of variation between renewable costs around the world as shown in the second figure from the report.

The figure also shows very clearly that in the majority of cases, renewables are already competitive with most fossil fuel costs as demonstrated by the shaded area, which also takes into account variations in fossil fuels prices themselves. This is indeed an exciting time for renewable technologies and bad news for fossil fuels.

FIGURE E.S. 2

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