Cheap Fossil Fuels’ Impact on Renewable Energy

Energy, Power & Products

August 3, 2015

Windmills Barrels

Renewable energy has experienced significant growth over the past five years; but the question investors are asking today is whether lower fossil fuel prices are likely to slow or reverse the renewables’ growth trend in favor of fossil fuels: FTI Consulting does not think this is likely and expects further sustained growth in wind and solar. Our experts anticipate further advances in technology increasing cost competitiveness that will drive demand. This will be the case whether oil and gas prices remain low or recover, even in a market place that will increasingly be subsidy-free and market-orientated.

The oil price decline explained
A confluence of separate but related factors – massive new supplies from the U.S.; OPEC’s unwillingness to reduce output; and, a slowing of global oil demand (especially in OECD countries) – has had profound effects on the global price of crude. In June 2014, WTI crude peaked at $115/bbl. By January 2015, it had dropped to below $46/bbl and was at $50/bbl WTI Crude in mid-July. In many markets, the oil price decline has led to cheaper natural gas prices.

Impact on wind and solar
Wind and solar do compete with coal and natural gas in electricity generation - the latter is often a by-product of oil production and its price is linked to that of oil in many markets outside the U.S. In the U.S., however, the explosion in shale gas production at the end of the last decade, and the resultant strong supply of cheap gas, has caused the historic correlation between U.S. oil and natural gas prices to decouple dramatically. From January 2002 through July 2009, 57 percent of the variation in natural gas prices was determined by the price of oil.

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