Tuesday 28th April 2020
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Lower costs and green incentives have made wind and solar less susceptible to falls in crude prices than historically
As oil prices spiked in the late 1970s, then-U.S. President Jimmy Carter installed solar panels on the roof of the White House. Historically, expensive crude spurred experiments to develop alternative energy sources and falling prices reversed the trend. But times have changed and today’s ultralow oil prices aren’t likely to slow the roll out of renewables.
What matters more today may be regulation. How far governments embed environmental priorities into post-Covid recovery plans is a key question facing green-minded investors now.
Oil and renewables aren’t direct substitutes. Oil is mostly used for transport and heating while renewables produce electricity. But there are crossover areas. Cars can have batteries or combustion engines; heating can be electric or diesel; and power plants can run on wind, solar, coal or natural gas, which is often a by-product of oil production.
Users have a choice upfront, but once they buy a technology, the fuel is locked in. That makes future price expectations more influential than spot rates. Wind turbines and solar panels were once expensive and experimental, but thanks in part to state subsidies and incentives, their costs are now comparable to fossil fuels, and expected to keep falling.
For oil producers the relationship is more direct: High prices generate cash for pet projects. European oil majors, such as Royal Dutch Shell and Total, have recently invested billions of dollars into alternative energy projects to trial how they might make money in the lower-carbon world envisioned by the Paris climate accord. Such funding is now at risk, but fortunately for the wider sector, the major oil companies represent only a fraction of global investment.
Most wind and solar projects are built by utilities and often funded by yield-hungry institutional investors—insurance companies, pension funds and the like. Renewable investments provide an almost bond-like long-term return. Low interest rates ease initial funding costs, running costs are low and the payback is secured through power-purchase agreements with local governments, companies and others.
Government incentives were an important support for the industry in the last oil bear market, from 2014 to 2016. Projects can be cost-competitive now without government support, but incentives are still a consideration. Public help will likely be required to roll out electric-vehicle charging networks and the smart electricity grid and power-storage units crucial to letting intermittent renewables generate a greater share of the energy mix.
The European Union’s so-called Green Deal, launched in December, involves commitments to invest in low-carbon technology. China has included some green incentives in recent stimulus packages. The U.S. under President Trump is the exception among the big economic blocs.
For some governments, the Covid-19 crisis could push renewable energy further down their priority list as they cope with the economic fallout. For others, scientists’ climate warnings may take on a new gravity. Recovery stimulus packages, such as subsidies for electric-car buyers in the EU and China, might end up furthering decarbonization goals.
For renewables investors, there are other risks besides the vagaries of government intervention. New sites can be hard to find—hence the growing popularity of offshore wind farms—power prices fluctuate, and buyers must be able to pay over decades. The Covid-19 crisis could make raising debt more expensive, delay projects and clog up international supply chains.
Low crude prices are a recurring disaster for the oil industry. But on its path to maturity the wider renewable sector has developed some immunity.
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