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How Could Falling Oil Prices Affect Renewable Energy Growth?

With oil prices falling, it's time to watch renewable energy.

Unless you’ve been living under a rock (which, hey, no judgments here), you’ve more than likely heard about the falling price of oil. Oil, of course, is big business and when big business affected somehow, it doesn’t happen in a vacuum.

One of the most impacted sectors is of course renewable energy. There are those out there who think that a fall in oil prices would mean a fall in renewable energy growth, but that would be oversimplifying things. The relationship between oil and renewable energy is much more complicated than that. 

“Inevitably, there will be some impact because we think the high oil price is a key driver [for] renewable energy,” Flora Chang, an energy analyst at Bernstein Research, told CNBC.

Chang believes that cheaper oil will only potentially delay projects, though, not completely derail them. Remember: the price of renewable energy is falling rapidly too.

“Renewable energy is a technology. In the technology sector, costs always go down,” Bernstein’s mid-November report read. “Fossil fuels are extracted. In extractive industries, costs (almost) always go up. Renewable and fossil fuel cost per unit of energy are now roughly comparable in many places… but heading in opposite directions. New, superior technologies don't split markets with old, inferior technologies.”

Some, such as Lin Boqiang, director of the Energy Economics Research Center at Xiamen University in China, believe this isn’t quite true across the board and countries such as China could see trouble in the renewable energy sector.

“If oil stays at current prices or weakens through the first half of next year,” he told Bloomberg, “the impact on new energy would be massive. Weakening oil prices would hamper the competitiveness of new energy. The government has to subsidize the new energy industry to support its development.”

Despite this fear in China, markets in North America and Europe will likely remain unchanged. Other major energy players might see some affects, but they are expected to be minimal.

“In the Middle East, and to a lesser extent post-Fukushima Japan, there is some relevance,” Pavel Molchanov, a senior research analyst at Raymond James Financial, told The Guardian. But even at prices below today’s forecasts, he added, “solar can compete effectively with diesel-fired generation.”

According to Colin Chilcoat of OilPrice.com, this competition isn’t what will hamper renewable energy growth.

“By 2020, utility-scale solar will be competitive with gas-fired power at a wide range of natural gas prices and in all key markets, including low-insolation regions,” he wrote for the CS Monitor. “Wind power is already there. The total LCOE (Levelized Cost of Energy) for onshore wind is cheaper than that of conventional coal as well as natural gas-fired plants with carbon capture and storage.”

What, then, should renewable energy companies be worrying about?

“The biggest threat to renewables growth is not the price of oil or gas, but instead policy and regulatory measures,” Chilcoat claimed. “With the United States’ solar investment tax credit set to expire in 2016, states taking matters into their own hands, and the EU’s own unclear renewable policy future post-2020, investors will have trouble guaranteeing an equitable and predictable return.”

While tackling policy is a whole different debate, what is the answer to the initially posed question? Will the drop in oil prices affect renewable energy? In short: no, probably not.

“Fluctuations in oil prices have little impact on solar or many other renewable energy sources. This is partly why the economic proposition of solar is so compelling, unique and valuable,” Marc van Gerven, vice president of global strategic marketing at First Solar, told The Guardian. “For example, up to 50 percent of the cost of a fossil plant is the expense of the fuel over the life of the plant, while sunlight is essentially free.”

So for now, don’t worry, and enjoy filling up the car for less. 

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