Lower oil price and more renewables?

Although the oil price has been declining for more than a year now, investors and countries keep building up renewables energies. The link between both disappears due to several good reasons.

While the oil price has fallen from about $100 in April 2014 to about half of that in April 2015, countries and investors keep building up renewable energy sources. Many clean tech funds have performed very well during that period. The International Energy Agency expects, that renewables will account for 25 percent of energy production in 2018, up from 20 percent in 2011. The McKinsey report “Lower oil prices but more renewables: What’s going on?” identifies the reasons for the remaining interest in renewables despite the oil price drop.

First, renewables and oil operate in different markets. While renewables are used for direct power production, oil is not a major source of electricity but used as fuel. Globally, only five percent of the consumed oil is used for power production. A lower oil price will thus not automatically drive down energy prices and renewable energy remains attractive.

Second, the economics of renewables are improving. While most regulatory supports including portfolio standards, tax credits and feed-in tariffs remain in place, renewables are getting cheaper all the time. While 70 gigawatt have been installed in 2011 for $279 billion, 95 gigawatts have been installed for $270 billion in 2014. An increase in output of about 40 percent per dollar invested. Most crucial, the economics of renewables are not expected to fall and further improvements in efficiency are not just “possible but likely” as the report claims for some renewable energy sources.

Another aspects are changing dynamics of global energy markets. Due to their expensiveness, most investments in renewables have been made in developed economies. Now, more oil rich countries and more emerging markets are investing in renewables. The report illustrates this by means of China, India, courting in the Middle East and Japan.

Finally, the report claims that science is improving. While production is becoming cheaper, new technologies as fuel cells emerge and storage is improving. Renewables can now be used as power sources even in times the sun does not shine and the wind does not blow.