Wind ready as Saudi sparks oil price rise


December 6, 2016

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Saudi Arabia has had enough. After a 30-month oil price slump, the Middle Eastern fossil fuels giant has taken action. Last Wednesday, it agreed with other members of the Organization of Petroleum Exporting Countries that it is to curtail oil production.

The reason is clear. Oil prices fell from around $115 a barrel in June 2014 and have languished at around $50 a barrel or less for the last two years. Saudi initially sought to maintain high levels of production to keep prices low so it could put pressure on rivals like Iran, and other power sources such as US shale and renewables.

Now it hopes that cutting production will drive up prices again and, indeed, we have seen an initial jump to over $50 a barrel.

That oil price slump initially caused some concern among those working in the wind sector. Surely, so the thinking went, cheap fossil fuels would undermine renewables?

It is a concern that has proved unfounded. There are very few countries that burn a large amount of oil to produce electricity and so, while oil prices have had an impact on sectors like transport, it has had little impact on wind or those investing in it.

Meanwhile, the world’s largest oil-importing nations – China, the US and India – also have some of the most ambitious renewables plans, at least in terms of overall installed capacity.

Let’s look at some statistics before and after the oil price crash. In 2013, $272bn was invested globally in renewables according to Bloomberg New Energy Finance. This rose to $316bn in 2014 and again to $329bn in 2015. Cheap oil has not de-railed it, although it is likely to drop in 2016 due to the impact of China’s slowdown.

And wind has also grown over this time. In 2014, 51.5GW was installed around the world, and this annual installation figure rose to 63.5GW in 2015 – although much of this has been driven by China. This has happened hand-in-hand with reductions in the cost of wind energy. The oil price slump has not undermined wind.

If anything, low oil prices forced companies and countries to accept that fossil fuels are not infinite or infallible, and so they have to plan accordingly. Cheap oil has not distracted these people from the move to renewables. It has focused them on it.

For example, we saw last week that Dong Energy is in talks with Maersk to merge their oil and gas operations so it can focus more on wind; and businesses including BP, Shell and SSE starting to dip their toe in wind because they see it makes financial sense.

But Saudi’s new deal brings with it new uncertainty. Two years ago the concern in this industry was whether low oil prices would harm wind – and now it is whether high prices would do likewise. If oil gets more expensive then will companies invest more in it again?

In our view, some will – but the move towards renewables has strong momentum.

Nothing that happens to oil prices affects the fact that fossil fuels will run out at some point. High oil prices might mean it makes more financial sense for some utilities to drill new oil wells, but it does not change the fact that wind and solar are unlimited.

We are also positive on the economics of wind, where turbines keep getting bigger and more efficient; and where the cost of wind energy is continuing to fall. Wind is reaching parity with fossil fuels in more parts of the world. Fluctuations in oil prices do not have a direct impact on the overall trajectory of the cost of wind.

And we are also seeing that governments around the world have committed to reining in the man-made elements of climate change through last December’s Paris climate change deal, which means more renewables. US president-elect Donald Trump and other right-wing parties sceptical about climate change may seek to de-rail the deal, but wind still enjoys political goodwill around the world. The market will continue.

Saudi Arabia has shown it can manipulate oil prices – but its attempts to de-rail this part of the power sector have been less successful. Long may that continue.

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