What falling oil prices may mean for the future of renewable energy investment

石油价格plummeted in recent months, with the price of oil today hitting itslowest point for five years. That’s led to lots of speculation about the impact of falling oil prices on the world’s efforts to cut emissions by decarbonising the energy sector.

There’s little consensus. Some analysts argue that the falling oil price could end the world’s slow march towards zero carbon energy. Others say renewables are established enough to see out the storm.

There are good reasons for such uncertainty. The renewable energy industry’s fate rests on a number of factors that are very hard to predict.

We take you through the key elements of what’s likely to continue to be a major story in coming months.

Geography

The impact of falling oil prices on renewables varies in different parts of the world.

Renewables generateabout a fifthof the UK’s electricity. Only 0.06 per cent comes from oil. It’s a similar story in the US, where oil generates aboutone per centof electricity. Where oil and renewable electricityaren’t really competing, the falling oil price isunlikelyto have a major impact, in the short term at least.

But that’s not the case everywhere in the world. Oil accounted for about10 per centof electricity production in Central and South America in 2012, and about29 per centin the Middle East. Here, renewables compete with oil as an electricity source. Renewables have historically beensqueezed outof the generating mix when that’s the case.

Transport

Low-carbon fuels are likely to be hard hit in the transport sector, where oil and petrol continue to dominate.

In 2013, the transport sector used53 per centof the 90 million barrels of oil consumed each day, according to the International Energy Agency (IEA). Biofuels remain a very minor player, accounting for about 1.4 per cent of the world’s liquid fuel supply in 2013, the IEA’s stats show. That share is likely to fall as oil prices drop, analysts Energy Intelligencepredict, particularly as biofuels rely on government support, which iswaning in some parts of the world.

Duration

Oil prices are notoriously volatile, and no one knows how long the price slide will last.

Some renewables, such as solar power, areincreasingly cost competitivewith fossil fuel energy. So a short slump shouldn’t have much impact, Energy Intelligence says. But other analysts say some renewables, such as onshore wind, aren’t that resilient, particularly if prices continue to slide.

Consumer advice service USwitch tells the Independent that renewable generators may requireadditional subsidiesas the gap between the cost of fossil fuel power and renewable power gets bigger. That could be a problem in the UK, where the cost of supporting the country’s switch to a low-carbon energy system has come underintense scrutinyin recent years.

Falling oil prices could undermine the UK government’s argument that investing in renewable energy now willsave consumers money in the long run. It could also lead the government to revise itsfossil fuel price projections. Those form the basis of its energy sector modelling, and could lead it to alter its view on whether current low carbon energy policies are cost effective.

Investment risk

It’s not just renewables that are potentially threatened by low oil prices, however. Falling prices also threaten some fossil fuel industry investments.

Energy companies have turned to harder-to-reach sources of oil, such as the Arctic or the Canadian tar sands, as conventional wells dry up. The Carbon Tracker Initiative, a thinktank, suggests the oil price needs to be around$95 a barrelto make such risky investments worthwhile. That’s much higher than thecurrent priceof around $50 a barrel.

A low oil price could also disrupt the fracking industry. The North American shale boom led to aglut of new oilon the market, driving down prices. Saudi Arabia, OPEC’s leading player, could potentially cut its production to reduce supply and help the price rebound. But it’s not keen on doing this, as it would meanhelping out its new and traditional economic rivals, such as the US, Russia and Iran.

Climate policies

One of the major drivers of renewables’ growth in recent decades has been policymakers’ recognition that countries need to curb emissions to tackle climate change. While the prospect of major climate action may not be enough to encourage continued investment on its own, it could help to secure the renewable industry’slong-term future.

The oil price slump presents an opportunity for countries to implement policies that bolster the world’s efforts to decarbonise,the IEA says. Now is the time tocut fossil fuel subsidiesand implementa carbon tax, it argues, as the low oil price reduces the policies’ effect on consumers. Both policies would help cut emissions and keep renewables competitive in the long-run.

Renewable generators also argue that because sunlight and wind are free, they can helpinsulate countriesfrom the kind of economic shocks the oil price shift has caused.

So while falling oil prices may threaten renewables in the short-term, climate policies have the potential toact as a counterweight, encouraging long-term, low carbon, investment.

Ongoing problem

The oil price interacts with the wider energy market in myriad and complex ways, and it may take some time for the full impact of the price slump to become clear.

石油价格been falling steadily for sixth months, with many analysts expecting the trend to continue through thefirst part of 2015. Carbon Brief will be keeping an eye on what it means for renewable energy investment and the world’s efforts to decarbonise as the story unfolds.

Main image: Oil pump jack.