Risk for Renewable Energy

Renewable energy has been on a big roll in the last couple of years, with solar energy leading the way. The massively falling costs of renewable energy has made it competitive with fossil fuel power in a large number of places. For example Solar energy over 25 years can be sold at a lower rate in places where fossil fuel prices are high. Places like Brazil, Chile are going to see massive growth due to high electricity prices. Government is also pushing renewable energy hard to ensure energy security and to look green. India is set to unleash massive investment soon in both solar and wind energy. China is already the leader, with almost 13 GW of solar energy and more than 15 GW of wind energy installed in 2013.

However, fossil fuel prices have fallen sharply in 2014. Coal prices have crashed and finally oil prices are following suit. The main reason for the fall is the falling Chinese demand which had led to a very sharp growth in the prices of all commodities in the last decade. Iron ore prices touched a new low, as steel demand in China is falling. Oil prices have fallen almost 20% in the last couple of months, since the Chinese demand is cooling fast with expectations that the Chinese oil growth demand will be zero this year after a very long time. Despite geopolitical tensions, falling world demand is taking a huge toll on all commodity prices.

Even gas prices in Europe are falling despite the Ukraine Russian tensions. Saudi Arabia recently lowered its oil price premium by $1/barrel, as sales have been slow. Supply has increased globally as the commodity boom led to massive investment in discovery and extraction of new mines and sources.

Though fossil prices are still high, any further fall could make renewable energy less attractive as thermal and gas power becomes cheaper. Renewable energy is becoming more of an alternative to fossil fuel energy in power markets. Pricing is a crucial factor in deciding the capacity set ups and renewable energy will lose out, if fossil prices plunge massively. Unlike fossil fuels, sharp drop in commodity prices will not affect renewable energy plant prices too much. This will place them at a competitive disadvantage. I think this is a short term risk only, given that global warming has become a massive concern and renewable energy prices are declining in a secular manner.

ET
Energy analysts initially said the price declines were largely the result of greater supply, citing the North American shale boom, the tapping of new offshore reserves worldwide and greater output of coal. But analysts have also begun pointing to a slowdown in demand. They cite China’s ebbing thirst for oil and what could its first drop in demand for coal in over a decade as indicators of a sharper slowdown in the world’s second-biggest economy…Coal, the world’s most important source for electricity generation, has almost halved in value since spring 2011 to levels at which most producers are losing money. Gas prices in Europe have fallen over 6 per cent this year despite the crisis between Russia, its main supplier, and Ukraine, a vital transit route for EU imports. China’s gas demand growth is expected to ease to its slowest in three years in 2014 and dip again in 2015, due in part to its slowing economy. “Serving as a bearish signal, Saudi Aramco has cut official selling prices (OSPs) for November loading cargoes to all regions … The biggest cuts were again seen in Asia, the third consecutive round of downwards adjustments there,” JBC Energy said in a research note.