Debunking the lower oil prices makes renewable energy less competitive myth
The dramatic and bearish market reaction to falling oil prices has benefited important sectors of the economy: the airlines, logistics and manufacturing industries have been among the biggest winners. But what about the power generation sector? There is the ‘gut’ perception that low oil prices would necessarily lead to lower power costs, but this is not the case. Simply, crude oil is a ‘mobility’ commodity; crude oil does not provide the electricity in homes and businesses. Natural gas, an important newer source of power generation, is related to crude oil in that several oil producing states, including a few in OPEC (Algeria, Qatar) are major producers; however, while prices are lower, they are not falling as steeply as crude oil and the reason for their drop is due to increased competition as there have been many new entrants to the market in the last few years. Therefore, electricity costs will not go down; nor will the value of alternative energy sources as green energy proponents, and detractors, have suggested.
Solar or photovoltaic power generation equipment needs rare earths (REE) and especially gallium, indium, cerium, ytterbium, selenium, germanium. China started to build solar farms since 2010 while the rise of hybrid and electric vehicles have only reinforced the demand for rare earths. A Toyota Prius requires 13.5 kg of rare earth, accounting for 15.2% of the total cost. A 1.5 MW wind turbine needs 350 kg of rare earth or 6.7% of the total cost. Since China has held a virtual monopoly in the production of rare earths, it has been able to dictate prices in the same way that OPEC has controlled oil prices. The intense drive to develop ‘clean energy’ in China, punctuated by a recent agreement to cut emissions with the United States, has been driven less by environmental concerns and more by the economic policy of using its own resources, which has led to the infamous and WTO sanctioned supply shortages and trade restrictions that pushed REE prices to unprecedented highs in 2010-2011. In the medium term, production outside China will become increasingly important as China holds one-third of reserves and overall production of rare earths will have to increase.
Low oil prices will not make renewable energy sources like wind or photovoltaic redundant; therefore, they will not cause demand for rare earths to drop. For starters, rare earths are used – apart from their better known battery, television sets and military technology applications – in oil-refining devices such as ‘fluid catalytic cracking units’ (FCCU). The REE price hike of 2011 raised the cost of FCCU’s by 25% and weighed on the price of gasoline consumers paid at the pump. In many industrialized countries, particularly in those where oil is tied to currency values such as Canada, low crude prices mean that export goods become cheaper and more desirable, generating demand for manufacturing sectors, which have been struggling. Higher industrial output will lead to higher consumption – and production – of refined oil products. However, this is a mere footnote on the longer term and deeper impact trends.
The renewable energy sector is no longer marginal. In Germany, solar power accounts for 6% of the total and for the time being, a rekindling of nuclear power generation reactors is not in the cards. Solar ‘farms’, or areas dedicated to the production of solar energy, are even being planned in oil rich Alberta, where in the northern regions, sunlight is as intense and plentiful as it is Florida while competition from China has lowered the costs of solar panels. The course of solar energy, evidently, has followed a path unrelated to crude oil prices and there is no correlation whatsoever between the two. In the United States, coal is still the main source of power generation (39%) followed by natural gas, nuclear, hydro, renewables (6%) and then, only last at 1% of the total does oil come into play. If anything then solar and renewables compete with coal, gas and nuclear. A similar energy generation mix can be found in Japan and in the EU with renewables filling 6-8% of demand. In China, where the renewable energy demand is expected to rise the fastest over the next decade, solar and wind account for less than 1%. Rising costs of electricity generation have come more as a result of infrastructure costs than the input fuel. Meanwhile, higher output and smaller size batteries with better storage capacity, already being developed and with a very promising future thanks to nanotechnology advancements, will make solar and wind energy much more competitive in the long run.