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How the Oil Price Slump Helps Renewable Energy

Geoffrey Styles's picture
GSW Strategy Group, LLC

Geoffrey Styles is Managing Director of GSW Strategy Group, LLC, an energy and environmental strategy consulting firm. Since 2002 he has served as a consultant and advisor, helping organizations...

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  • Jan 19, 2015 8:00 pm GMT
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gas price drop and renewables

Intuition suggests that the current sharp correction in oil prices must be bad for the deployment of renewable and other alternative energy technologies. As the Wall Street Journal’s Heard on the Street column noted Wednesday, EV makers like Tesla face a wall of cheap gasoline. Meanwhile, ethanol producers are squeezed between falling oil and rising corn prices. Yet although individual projects and companies may struggle in a low-oil-price environment, the sector as a whole should benefit from the economic stimulus cheap oil provides.

The biggest threat to the kind of large-scale investment in low-carbon energy foreseen by the International Energy Agency (IEA) and others is not cheaper oil, but a global recession and/or financial crisis that would also threaten the emerging consensus on a new UN climate deal. We have already seen renewable energy subsidies cut or revoked in Europe as the EU has sought to address unsustainable deficits and shaky member countries on its periphery.

Earlier this week the World Bank reduced its forecast of economic growth in 2015 by 0.4% as the so-called BRICs slow and the Eurozone flirts with recession and deflation. The Bank’s view apparently factors in the stimulus from global oil prices, without which things would look worse. The US Energy Information Administration’s latest short-term forecast cut the expected average price of Brent crude oil for this year to $58 per barrel. That’s a drop of $41 compared to the average for 2014, which was already $10/bbl below 2013. Across the 93 million bbl/day of global demand the IEA expects this year, that works out to a $1.4 trillion savings for the countries that are net importers of oil–including the US. This equates to just under 2% of global GDP.

Although the strengthening US dollar mitigates part of those savings for some importers, it’s still a massive stimulus–on the order of what was delivered by governments during the financial crisis of 2008-9. Even after taking account of the reduced recycling of “petrodollars” from oil producing nations, which have historically invested billions of dollars a year outside their borders, the pressure on governments to reduce expenditures on programs including renewable energy should be lower than it would be without this unexpected bonus.    

Just as the arrival of $100 oil in the last decade didn’t produce an overnight transformation to renewable energy, $50 oil seems unlikely to harm the sector much, particularly in light of the cost reductions that wind, solar PV and other technologies have demonstrated in the last several years. If developers use this opportunity to shrink their costs further and become economically competitive with low or no subsidies, they will be well-positioned when oil prices inevitably recover, whether a few months or a few years in the future.

Photo Credit: Oil Price Drop and Renewabes/shutterstock

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Josh Nilsen's picture
Josh Nilsen on Jan 19, 2015

It’s unfathomable to the oil guys to even think their product could ever be inferior.  

That’s all this is.  There is now a better technological solution for automotive transport than oil / ICE.  Solid state power electronics are just better.  That’s not my opinion, that’s physics.  

Geoffrey Styles's picture
Geoffrey Styles on Jan 19, 2015

Josh,

I’ve driven enough hybrids, EVs and FCVs to understand that electric drive is very likely to win in the long run, a conclusion I reached in the 1990s. However, that doesn’t mean it will be energized exclusively or even mainly by batteries. Oil wins hands down on energy density–that’s not my opinion, that’s chemistry–and you can transfer 300 miles worth of H2 in a tiny fraction of the time necessary to recharge a battery to the equivalent extent. The big unknown that can’t be determined by physics or chemistry today is what transportation energy mode(s) the mass market will ultimately prefer as the best combination of cost, convenience, envrionmental trade-offs, etc.

So when someone comes to a different conclusion that you, maybe it’s not because they’re blinded by experience or preconceived ideas.

Engineer- Poet's picture
Engineer- Poet on Jan 19, 2015

I understand that Tesla is now able to swap batteries in roughly 90 seconds.  The quickest fill-time for hydrogen is several minutes.  Advantage:  batteries*.

The downside of hydrogen is that the clean ways to make it are costly, and the cheap ways to make it are dirty.  Transportation is a major issue (liquid hydrogen has a density of just 0.07, so a gallon’s worth of energy takes nearly 4 gallons of volume even when condensed) and the infrastructure needs to be built more or less from scratch.  Electricity is already brought most everywhere in the country; almost every highway rest area already has the basic necessities to install a charging station of some kind.

* So long as you have swap-stations with compatible batteries where you need them.  There’s always SOMEthing…

Geoffrey Styles's picture
Geoffrey Styles on Jan 19, 2015

Battery-swapping could bridge the convenience gap, if someone finds a workable business model. Unfortunately, BetterPlace went broke trying this. From my analysis of them, the basic problem was the working capital requirement associated with maintaining an adequate inventory of very expensive charged-up batteries. They apparently couldn’t charge users enough to recover their costs. Advantage: liquid and gaseous fuels, for now.

Charlie Hewitt's picture
Charlie Hewitt on Jan 20, 2015

I think the problem is one of short-sightedness.  With insurance, the time to buy is before you need it.  In the renewable technology world, investment and R&D needs to take place when when oil is $50 rather than when it jumps to $100.  I agree that the renewable energy sector will not be set back much by the new oil price levels.  At least, I certainly hope that it won’t be.  However, with the Residential Renewable Energy Tax Credit set to expire after December 31, 2016, I am anticipating support for federal and state technology subsidies to wane.  I think it will be more telling if the continued production increases from shale gas wells will keep electricity rates in check.  This could have an impact on the development of utility-scale solar and electricity storage projects.

Schalk Cloete's picture
Schalk Cloete on Jan 20, 2015

I partially agree with the analysis. It is somewhat ironic how subsidized renewables are dependent on healthy growth in disposible incomes while at the same time serving to limit said disposible income growth through increased energy costs. 

However, a time of prolonged low (normal) oil prices could restore the paradigm of plentiful cheap fossil fuels. This paradigm was partially unravelled over the past 8 years when oil, gas and coal were priced 3-4 times higher than their historical norms. This direct proof of the finite nature of fossil fuels was arguably an important factor influencing the sharp rise in renewable energy subsidies.

But people forget quickly, as clearly demonstrated by the broad classification of current (still above normal) oil prices as “low”. Without immediate peak oil / energy security concerns, climate change is left as the major global driver behind renewable energy subsidies. Unfortunately, climate change remains a topic of much talk and little action. 

I therefore think that quite a lot depends on how long oil prices remain back closer to historically normal levels. 

Engineer- Poet's picture
Engineer- Poet on Jan 20, 2015

The cost of that inventory is an issue, certainly.  That cost is going down.  How fast?  I don’t know.  BetterPlace may just have been ahead of its time.

I wouldn’t be surprised if Tesla succeeds where BetterPlace failed.  Tesla already has the Supercharger, which takes 30 minutes or so for a half-charge.  The battery swap would save somewhere between 30 minutes and the time required for a full charge (depending on DoD at arrival).  Right now the swap is being offered as a reservation-only option.  If a battery can take a half charge in 30 minutes, it should be able to come up to full charge in 75-90 minutes.  Therefore, so long as the swap station has sufficient power available for charging it only needs enough batteries on hand to serve the next 75-90 minutes’ worth of arrivals.  If this is done by reservation this should not be a big issue.  For that matter, if a battery is not available at the current station but one is due to be swapped out at the next one by an earlier driver, a driver could take a 30-minute boost charge and then swap for the newly-charged battery a hundred miles down the road, the short delay having provided the time for the battery to charge.  (Sorry if this isn’t quite coherent, I’m doing the keyboard equivalent of thinking out loud here.)

And of course, in the mean time there’s always the PHEV which has no need to wait to charge but gets rid of the majority of ICE use if charging is available at most normal stops.

Hops Gegangen's picture
Hops Gegangen on Jan 20, 2015

 

Listening to interviews from the recent auto show, the auto makers all see electric vehicles in their future. Only Toyota sees hydrogen at the moment, but they make a good case, and they are determined to move it forward.

The reason isn’t even the price of gas, which auto makers know is volatile, but rather the new CAFE standards. 

IIRC, California’s plan is for ALL zero emission vehicles by 2050. Imagine that; clean air in California.

Hops Gegangen's picture
Hops Gegangen on Jan 20, 2015

 

The plunge in retail gasoline sales due to the CAFE standards and economic and demographic factors is astonishing: http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=A103600001&f=M

I can imagine a time when EVs are becoming popular enough that gas stations start to become scarce, and then, ironically it’s the people with gas-powered cars that start getting range anxiety. 

 

Hops Gegangen's picture
Hops Gegangen on Jan 20, 2015

 

It seems the hydrogen is generated on site from water: http://cafcp.org/index.php?q=sunhydro-opens-first-hydrogen-fueling-stati...

so there are no hydrogen trucks running around. And the car would have a 300 mile range. Fueling is faster than charging.

I suppose one could invest in a home hydrogen generator. But Toyota seems silent on the subject of the cost of hydrogen.

A battery swap makes me nervous — you want the $20K battery from my brand new $40K car and you’ll put in a used one? 

Rick Engebretson's picture
Rick Engebretson on Jan 20, 2015

We have seen many oil boom and bust cycles since;

“The Hydrogen Economy” was scientifically advocated by J.O.M. Bockris ~ 1976.

Windmills began appearing < 1600.

Photoelectric and photovoltaics < 1910.

Battery Cars < 1910.

I appreciate your supportive message, Geoff. And entirely agree, it is a good time to expand our energy options. We prepare for winter in summer, and prepare for summer in winter. With Saudi policy shift toward lower oil prices, we should prepare for Saudi policy shift toward higher oil prices.

And we must do our best to minimize subsidies for all the great (not so) new ideas it seems everybody has.

Hops Gegangen's picture
Hops Gegangen on Jan 20, 2015

 

I just saw that the Saudis are postponing their $100B+ investment in solar. The idea was to generate electricity from solar and sell the oil instead of burning it. 

That might tell us something about how they see the price of oil over the next decade; might as well just burn it.

This has to be a pretty big hit to the plans of the panel makers. Perhaps bigger investments elsewhere, like China, will make up for it, especially if it means cheaper panels for the rest of the world.

Geoffrey Styles's picture
Geoffrey Styles on Jan 20, 2015

Schalk,

Agreed. Notwithstanding the current drop in oil prices, getting back to “historically normal levels”–or even staying as close to those levels as we are now for very long–seems unlikely until demand falls back to the level that can be satisfied by output with production costs < $30/bbl. Meanwhile, the cuts to the investments in new production necessary to keep up with depleting fields have already started. If history is a guide, this is setting the stage for the next cycle, although the dynamics of shale production make it harder to gauge how long that will take, and how high it will go. Uncharted territory.

Geoffrey Styles's picture
Geoffrey Styles on Jan 20, 2015

Hops,

I’m afraid the chart you picked reflects a structural shift in the industry–refiners getting out of retail and leaving more of it to independent distributors–rather than a change in national consumption.  So this is not an accurate picture of the effect of CAFE standards, a weak economy, and demographics. Here is the chart you were lookiing for, showing total domestic gasoline supplied (excluding exports): http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MGFUPUS2&f=M

This suggests that from 2007-13 US gasoline demand fell by just under 5%, followed by a bump up of under 1% last year (through October.) Call it 4% net. I’m not sure that qualifies as a “plunge.” 

 

 

Geoffrey Styles's picture
Geoffrey Styles on Jan 20, 2015

I wouldn’t necessarily read long-term implications into that postponement. Clearly the drop in oil prices took a big slice out of the expected benefits in the first year or two of the planned solar investment. If they just push the projects out by 2 years, the PV gear will be cheaper and oil probably more expensive again.

Rick Engebretson's picture
Rick Engebretson on Jan 20, 2015

If true, it more likely tells us they have some actual physicists making energy decisions in Saudi Arabia. The statistical mechanics of photo-excited electron voltage provides roughly 10% electricity and 90% heat (100% if you include the electric end use). Solar energy collection of heat in Saudi Arabia is the last thing they need. They need solar reflection or water evaporation for cooling, and can get a much better electric power to heat generation with gas.

Hops Gegangen's picture
Hops Gegangen on Jan 20, 2015
Engineer- Poet's picture
Engineer- Poet on Jan 20, 2015

It seems the hydrogen is generated on site from water… so there are no hydrogen trucks running around.

Yes, about that.  The electrolyzers are from protononsite.com, whose brochure claims 64.5 kWh/kg for their C30 unit.  At not-unreasonable coastal rates of 18¢/kWh, electricity alone would cost $11.61/kg of H2.  That is about 6 times the energy-equivalent cost of gasoline at the moment.  Further, there is no guarantee that the electricity comes from clean sources.

If the FCEV achieves 60 miles per kg-H2, the input energy is about 1.07 kWh per mile.  This is almost 3 times the ~380 Wh/mi required by a Tesla, and about 4 times as much as the electric requirements of a Leaf or typical PHEV.  The convenience of a 5-minute fill must be measured against the massively higher energy demand and associated emissions.  If the electricity is generated from natural gas-burning units emitting 550 gCO2/kWh, the FCEV’s indirect emissions are almost 600 grams per mile.  Any sensible carbon regime would prohibit such grossly polluting schemes outright.  By contrast, the average US ICEV achieving 25 MPG emits roughly 370 gCO2/mi.  If cost didn’t make hydrogen from electrolysis prohibitively expensive for transport use, government needs to ban it for excessive pollution anyway.

A battery swap makes me nervous — you want the $20K battery from my brand new $40K car and you’ll put in a used one?

Lease the battery, then you don’t care.

Geoffrey Styles's picture
Geoffrey Styles on Jan 20, 2015

It’s very difficult to compare the environmental impact of EVs and FCVs, because so much depends on location, time of year and time of day. You also really need to do the comparison on a well-to-wheels basis, as well as including the embedded battery and fuel cell stack impacts. Most of the WTW comparisons I’ve seen show a marked advantage for FCVs over ICEs and similar results to EVs.

Geoffrey Styles's picture
Geoffrey Styles on Jan 20, 2015

OK, though that doesn’t preclude them picking it up again in a couple of years if the economics improve. It’s a big and growing volume of oil going to make electricity there, for which many alternatives including LNG might make more sense.

Engineer- Poet's picture
Engineer- Poet on Jan 20, 2015

It’s very difficult to compare the environmental impact of EVs and FCVs, because so much depends on location, time of year and time of day.

How is that, specifically?  How do those factors change what happens at the vehicle vs. elsewhere?

You also really need to do the comparison on a well-to-wheels basis

Steam-methane reforming and NG-fired electric generation have essentially identical upstream pathways.  SMR is roughly 86% energy efficient, compared to 51.6% (33.3 kWh energy out over 64.5 kWh in) for the electrolysis step alone.  A gas-fired plant emitting 550 gCO2/kWh has an efficiency of about 36% (higher heating value), for a dismal pipeline-to-hydrogen efficiency of 18.6%.

The above Aspen document gives the efficiency of hydrogen production from coal gasification as 59%.  This shows that there will be a very powerful incentive to power “clean” FCEVs with dirty coal, since it will have none of the cost or reliability issues of wind and solar and bypass the losses of electrolysis.

Schalk Cloete's picture
Schalk Cloete on Jan 20, 2015

I would actually not be too surprised if we stay at these levels for quite a number of years. Alhough peak conventional oil is certainly a valid concern, there are numerous reasons why the extended period of excessively high prices we just went through should not be repeated. 

On the demand side there are a number of interesting trends at work. The most important of these I think is increasing ICE efficiency where the average new car being sold today is probably at least 30% more efficient than the average old car being scrapped. In addition, people (especially young people) are simply driving less for a variety of reasons that don’t have much to do with the oil price. The global economy is also facing numerous headwinds which are not going away any time soon.

Furthermore, even though the global impact of alterative fuel vehicles will remain insignificant for many years, these emerging technologies will also moderate oil prices in the long run. Perhaps the most important medium-term impact of alternative fuel vehicles would be to keep ICE manufacturers focussed on efficiency even if oil prices remain closer to historically normal levels. 

On the supply side, the market may now have learnt how quickly US shale can scale and perhaps this will prevent an extended price overshoot like we just went through. Hopefully, the market can keep prices at the level where drillers just make an honest living instead of being at the receiving end of the economically inefficient wealth transfer caused by excessively high oil prices. The wild card is of course the Middle East, but perhaps a return to historically normal oil prices will not cause large supply disruptions, but instead help these nations to start a long overdue rebalancing of their economies.   

Hops Gegangen's picture
Hops Gegangen on Jan 21, 2015

 

Thanks, I thought that seemed too big a drop.

But GDP growth was around 3% last year, so 1% growth in gas sales shows some decoupling.

Hops Gegangen's picture
Hops Gegangen on Jan 21, 2015

 

So, if you’ve got solar panels, and you don’t need inverters because the electrolysis runs on DC, then 6 cents a KWh would be practical just to amortize the cost of the panels.

That drops the cost to 1/3 of what you projected at 18 cents.

 

Geoffrey Styles's picture
Geoffrey Styles on Jan 21, 2015

A last thought: steam-methane reforming is the source of over 90% of all H2 today, and it can be done at virtually any scale. Electrolysis, unless done directly with renewable electricity, should only be an interim measure.

And I thought that electrolysis efficiency figure seemed very low. 70% is apparently more typical, with some upside possible: http://www.electrochemsci.org/papers/vol7/7043314.pdf

Geoffrey Styles's picture
Geoffrey Styles on Jan 21, 2015

The steady decarbonization of GDP–fewer emissions per $ of output–is one of the most hopeful trends out there.

Bas Gresnigt's picture
Bas Gresnigt on Jan 21, 2015

Are oil prices high or low??
More than a decade ago I came across a table with Dutch car fuel prices since ~1950. Then asked myself whether prices were high or low compared to the fifties or sixties.

So I compared with inflation.
Then with average salary.
Then with av. salary per worked hour.

But I hadn’t the right tables at hand, etc.
So, in the end I couldn’t conclude how much the oil price went down despite the 2 oilcrisis.

May be someone is well-up in this subject?

It would be interesting to know whether oil prices did indeed go down past half century compared to av. salary per worked hour.

Bob Meinetz's picture
Bob Meinetz on Jan 21, 2015

Geoffrey, electrolysis efficiency is very low, which makes it a perfect complement to a carbon-free source of energy which, when harnessed safely, makes efficiency nearly a moot point.

That source, of course, is nuclear. Nuclear electrolysis (or better, hydrogen from HTGR steam reformation currently showing promise in Japan) combined with Fischer-Tropsch fuel synthesis would permit development of carbon-neutral fuels and the use of the infrastructure and vehicles we already own.

Hops Gegangen's picture
Hops Gegangen on Jan 21, 2015

 

Right. 

Now standardize the reactor designs, build a lot of them, put them someplace people don’t freak out about miniscule risks of small radiation leaks, and we’re good to go.

 

Geoffrey Styles's picture
Geoffrey Styles on Jan 21, 2015

Such a vision makes at least engineering sense. However, getting from here to there looks extremely challenging; it’s not the future we’ll end up with on present trends.

Bob Meinetz's picture
Bob Meinetz on Jan 21, 2015

Hops, I’m good with you on the first two points, but respectfully submit that moving the reactor based on misplaced perceptions is putting the cart before the horse.

Perhaps we’ll need people freaking out about catastrophic climate effects before priorities are in order and such a vision is realized. I hope not.

Geoffrey Styles's picture
Geoffrey Styles on Jan 21, 2015

The US Energy Information Administration has an app on their site that looks at one aspect of this, comparing nominal and real oil and motor fuel prices over time. Unfortunately it only reaches back to 1976 for fuels and 1968 for oil. On this basis real gasoline prices are still above their level for the mid-1980s to 2003, and so presumably well above the pre-1973 levels, based on real oil prices of around $20/bbl then. See:

http://www.eia.gov/forecasts/steo/realprices/

Engineer- Poet's picture
Engineer- Poet on Jan 21, 2015

electrolysis efficiency is very low, which makes it a perfect complement to a carbon-free source of energy which, when harnessed safely, makes efficiency nearly a moot point.

That source, of course, is nuclear.

Bob, I’ve got to disagree with you here.  There are far cheaper and more efficient pathways than fission->steam->electricity->hydrogen.  Hydrogen is being touted as THE “clean and green” energy storage medium for renewable energy, but it’s only required because the supplies are so unreliable.  If you’re starting a run with 18 months of energy stockpile in the reactor, you don’t need to worry about reliability of supply; the uranium is your storage medium.  And cheapness is important, because our resources are far more limited than they appear.

We mostly need something to buffer daily cycles in demand.  Running the nation’s transportation system on an inefficiently-produced chemical energy medium isn’t the way to do that.

Bas Gresnigt's picture
Bas Gresnigt on Jan 21, 2015

Thanks!

Bob Meinetz's picture
Bob Meinetz on Jan 22, 2015

EP, I think we’re on the same page. My response was specifically addressing Geoffrey’s comment

Electrolysis, unless done directly with renewable electricity, should only be an interim measure.

Nuclear steam generation is (currently) the most efficient path to abundant and dependable carbon-free electricity. But the substitution of “renewable” with “carbon-neutral” is important in reference to replacing fossil fuels. Given the tens of $trillions of global infrastructure investment we have in machinery designed to burn fossil fuels, synthetic hydrocarbons could provide a carbon-neutral bridge to a future where chemically-derived energy is seldom needed.

Joris van Dorp's picture
Joris van Dorp on Jan 22, 2015

Agreed, also with the replies to your comments.

I would add that the most energy efficient way to produce hydrogen from water is through high-temperature thermolysis using (for example) the sulphur-iodine process (but there are many other options at high temperature). Since this process primarily uses heat directly, it eliminates the conversion losses incurred when producing electricity from heat to drive the electrolysis.

A proposed high-temperature (800°C +) nuclear heat source could be used to produce carbon-free hydrogen with a thermal(!) efficiency of 80% or more. It is feasible that such a combination of technologies could provide practically unlimited amounts hydrogen cheaper than from the reforming of natural gas. This would effectively make possible the production of a subsidy-free synthetic substitute for crude oil-based liquid fuels, which would solve humanity’s energy/climate problem at a stroke.

Such a technology should be demonstrated as soon as possible, since the buildingblocks are available and proven.

In a hypothetical world with a global HVDC supergrid and globally distributed solar PV (thereby yielding the holy grail of ‘always-on’ solar power), hydrogen production using basic (low-efficiency) electrolysis techniques might also make possible the production of a subsidy-free substitute for crude oil-based liquid fuels. But since I doubt such a global supergrid will ever be cost-effective and therefore will never be built, I consider the nuclear option the only credible option for sustainable, cheap hydrogen production. This option could have been implemented 30 years ago.

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