The Effect of Low Oil Prices on Rival Energy Sources

September 16, 2015 | 00:00
The Effect of Low Oil Prices on Rival Energy Sources
The Effect of Low Oil Prices on Rival Energy Sources
Oil prices have now plummeted to their lowest levels at any time over the past ten years, including in the aftermath of the global financial crises. NASDAQ figures revealed that the price of a barrel of crude oil, reached a nadir of below the $40 mark in August this year, as prices haven fallen precipitously since the end of 2014.

Rival energy sectors will have taken note of the fall in prices, and how it could effect their competitiveness in the market. The nuclear and renewable energy sectors have grown as part of many developed nations’ energy mix, now they may have to review their strategies, in the face of a potential new threat from oil.

Vattenfall confident of progress despite oil prices

Vattenfall has a broad range of operations across several European markets, from the Nordic countries to the Netherlands, Germany, and the United Kingdom. They participate in fossil based power generation, alongside nuclear power, and have a renewable sector presence in wind, biomass, and hydro energy. As power prices in North West Europe are not set by fluctuating oil prices, Vattenfall does not expect a significant threat from the demise of the value of oil. And they do not believe that oil fired electricity generation cannot compete with the nuclear or renewable sectors. And rival fossil fuels gas and coal are also better positioned to survive in the electricity market.

Marcus Bokermann, head of Vattenfall’s market strategy, explained: “The oil prices, however, are an important indicator of the global economy, and of the demand for energy. Demand for electricity has been depressed since the start of the economic crisis, and this is one of the main factors behind the low power prices.”

“In the case of nuclear energy, the maintenance costs might be high in comparison to other energy sources, but the short run marginal costs are more competitive.”

“Also, nuclear has shown that it produces energy at a lower marginal cost than oil or gas plants. This is another factor why the low oil prices will not have a damaging effect on the nuclear sector.”

He added: “For the renewable energy sector it is about the investment costs, and not oil prices that have a direct impact.”

The increasing erratic nature of oil prices, will also not have a strong negative influence on the power sector, Bokermann said. As it is the nature of competitive markets, and market participants should be able to deal with the volatility.

Regulatory stability would have a greater impact, especially with renewable energy. And there are also protective measures for investments that can be used to combat price fluctuations, such as hedging activities.

Nuclear body says oil prices are not a threat

Jonathan Cobb, an analyst at the World Nuclear Association, also believes that the price of oil has very little direct impact on nuclear generators, because the use of oil as a fuel for electricity generation in Europe, has declined to a very low level.

A recently modified report from the European Environment Agency, revealed that electricity production across the European Union (EU), has moved away from being oil based. In 1990 oil produced 224,247 GWh of the EU’s energy, by 2012 this had been reduced to 72,490 GWh.

Fossil fuels however, were still the most dominant part of the energy mix, as oil combined with coal and gas, accounted for 48% of all EU electrical energy produced.

Nuclear was the second largest power source, according to the report but peaked in 2004. Since 1990 it has grown the amount of GWh it produces from 794,863, to 1,008437 in 2004, after which decline set in to 882,366 three years ago.

The renewable energy sector is an increasing part of EU member states’ energy portfolio, producing 327,348 GWh in 1990 and 798,736 in 2012.

European energy markets differ in policy

Laszlo Varro, head of the International Energy Association Power Markets Division, ascertained: “Across Europe, nuclear energy is more likely to be effected by policy decisions from national governments. Such as Germany’s phasing out of nuclear power, and in Switzerland the moratorium on nuclear plant building, and the plan to decommission all plants by 2034.”

In contrast, Russia, which has plans in place for a vast expansion of reliance on nuclear energy, might be swayed as an oil rich country, to increase investment in electricity producing oil power stations.

Reviewing the effect of oil prices on the renewable energy sector, there are many examples Varro said, where renewable energy has been competitive in the current environment, such as solar power amongst the oil fields of the Middle East.

However in Europe, government policy has a greater bearing on how renewable energy can thrive, despite the oil prices plummeting. Incentives such as Feed in Tariffs have proven successful.

Worryingly for the renewable energy sectors, there is evidence that government support is being withdrawn. This has happened in Spain, and in the UK subsidies for onshore wind projects have been ended.

Varro opined that the strategies that the nuclear and renewable sectors should use to ensure they combat the low oil prices, include cost efficiency, strong regulatory policies, and designing the policies in a way that would result in low cost financing.

Analysts highlight renewable energy prices and technology

Evidence that has been collated from energy analysts, would also largely support the view that the abrupt reductions in oil prices has not distorted energy markets.

Vedavyas Nandyal, GlobalData’s power specialist, said: “The relation between oil and renewables is likely to deteriorate in the coming years, due to a combination of volatile oil prices, and the constantly declining cost of renewable generation.”

“This is a very important factor for any country to consider when creating a balanced energy portfolio, as energy investment always takes into account the long-term scenario.”

All of the leading economies in the world, Nandyal enthused are increasing their share of renewable energy, which will soon achieve grid parity in many markets.

Conversely, analysts at information provider IHS warned that lower oil prices reduce the urgency to pursue alternatives to oil for power generation in a few key countries. This is not expected to effect European markets. And only about 15% of renewable capacity that IHS forecasts to be added from 2015 to 2020, is located in markets where there is substantial oil use in the power sector. These markets include India, Japan and Mexico, and the regions of North Africa, Central America, and Sub-Saharan Africa.

Eduard Sala de Vedruna, director at IHS Energy, predicted that because of improved technology in wind and solar since 2010, the reduction in oil prices will not have as a significant bearing, as it might have done in the past.

And oil price falls would have to persist for some time, before policy decisions are altered

Lower oil prices are likely to create, short-term opportunities for developers of well-advanced, high quality renewable projects with secured off-take as investors shift focus away from the upstream sector in search of better returns.

Solar power shows increasing financial power

Solar energy is a fast growing source of energy, and according to SolarPower Europe, a record 40GW was installed during 2014 worldwide. The increase in solar capacity is reflected in the amount of capital market investment that it now attracts.

Consultancy Mercom has estimated, that solar VC investments has mushroomed to more than double in a year on a global scale, from $612 million to $1.3 billion.

“Total corporate funding into the solar sector encompassing venture capital/private equity (VC), debt and public market financing increased 175 percent in 2014 with $26.5 billion, compared to $9.6 billion in 2013”, Mercom found.

Comparatively, many oil projects are no longer profitable when the price of a barrel falls to $70, Goldman Sachs said last December, and prices have fallen consistently lower.

James Watson, CEO of SolarPower Europe, explained: “The fact that solar is reducing costs in terms of components and increasing efficiency at the same time so that you produce more power for less money, is simply impossible for investors to ignore. Solar is already cost effective and can boast levelized cost of energy equivalent to coal, nuclear and gas today in Europe.”

Only time will tell whether prolonged low oil prices will result in pricing or policy changes for nuclear or the renewable energy sectors. So far, there appears to be little evidence that oil prices have effected other energy industries, in any substantial way.

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