Forget Oil Prices, Renewables are Here to Stay
Monday, March 28, 2016

Solar panels are still on the roof of the White House. President Barack Obama put them there in 2010, when oil traded as high as $91 a barrel, and they're still there now that it's selling for almost 70 percent less.

We are now in the teeth of the most profound oil bust since the 1980s, but this time, investment in renewable energy development continues apace even as crude is scraping against 12-year lows. The supply of wind power, measured in British thermal units, rose more than threefold between 2008 and 2015, and the supply of solar power rose almost sixfold, according to the U.S. Energy Information Administration. Wind power is expected to rise another 23 percent and solar another 36 percent by the end of 2017.

For the past several years, the world has added more renewable power generating capacity each year than it has coal, natural gas and oil combined.

There are several reasons for this decoupling between renewables and oil. First, renewables are not tied directly to commodity markets. Over time, their cost is determined more by advances in technology than global trading activities. The Brookings Institution noted recently that technological improvements in renewables are likely to drive their costs lower more rapidly - and keep them lower - than prices for oil, which are more volatile. Simply put, wind and solar power are getting cheaper, and the rate of price declines is accelerating.

Second, concerns about climate change are now influencing policy around the world. In the U.S., the federal government's extension of the production tax credit for wind power continues to make it more competitive. Meanwhile, there's the little matter of the Environmental Protection Agency's Clean Power Plan, which aims to create new incentives for renewable energy and natural gas-fired generation and discourage the use of coal. The Supreme Court recently put the plan on hold while it considers a challenge from 29 states and dozens of companies and industry groups. But regardless of the outcome, utilities are moving away from coal-fired generation in favor of a mix of renewables and combined-cycle natural gas plants.

Finally, oil is primarily a transportation fuel, while renewables are used for electricity generation. Of course, electricity, too, is a transportation fuel, although its market share is miniscule.

These three factors are driving investment around the world. China spent $100 billion on its clean energy infrastructure last year, 17 percent more than the year before. Faced with pervasive pollution problems, it will continue to invest in clean energy even if its growth, which has dipped to about 7 percent annually, slows more.

In addition, half of the world's renewable energy investments now come from emerging markets, where countries are looking to electrify regions without building massive power grids and other infrastructure. Solar and wind power (often combined with portable natural gas-powered generating systems) are well-suited to localized microgrids that can provide affordable and reliable power to specific regions that are not connected to a centralized network.

Even in the oil-centric Middle East, a major renewables push is underway. Morocco, Jordan and the United Arab Emirates have made significant commitments to solar and wind power. In oil producing nations such as Qatar and Saudi Arabia, the progress has been slower, but the need is clear. Power demand across the Middle East is expected to rise by almost 10 percent a year through 2020.

Saudi Arabia may be the world's biggest oil producer, but all that oil wealth is driving domestic electricity demand, which is rising at about 8 percent annually. The Kingdom already uses 25 percent of the crude oil it produces - unlike most of the world, Saudi still uses oil to generate electricity - and the 17 percent rise in its population since 2005 will only continue to spur demand. At the current pace, Saudi will consume all its oil production domestic and have to begin importing by 2030, Citigroup predicts. No wonder the Saudis, too, are embarking on a large solar project to help meet domestic demand.

Despite this global movement, renewables' ascent is far from assured. New regulations or changes to existing policies could impede growth. Capital could be restricted as interest rates rise, public funding could dry up and investors may lose their enthusiasm for renewable energy investment vehicles that fail to deliver promised returns.

Nevertheless, it is clear that a fundamental change is occurring, one that is permanently altering the energy mix both globally and in the U.S. This change is vital to ensuring our economic growth and security aren't tied to a single, dominant energy source.

What will this new energy mix look like? The biggest changes will occur among renewables, coal and natural gas. In the U.S., solar power currently accounts for about 1 percent of our energy supply, wind is 3 percent to 4 percent, coal is 39 percent and natural gas is 40 percent. Within time, we could be looking at far greater balance, with coal at 20 percent to 25 percent and natural gas at 35 percent, while increasing wind, solar and other renewables to 20 percent to 25 percent.

The staying power of renewables amid plunging oil prices shows how far we have come from the days when oil prices dictated investment levels. We have significantly reduced our dependency on foreign oil by boosting domestic production of both crude and natural gas. Now, we need to complete the transition to a new energy future by continuing to encourage development of renewable fuels to ensure we are never again dependent on a single energy source or at the mercy of foreign producers.

We must not squander the opportunity. We can enhance our energy diversity and improve the safety, reliability and security of our energy supply.

 

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