Clean energy needs to find strong messages of perspectives and viability in the weak commodity price environment. The arguments exist in the contribution to lower energy prices as well as prolonged resource life. Communication also needs to go further and proactively address business viability long term under prolonged oil and gas price weakness. Those sectors that can achieve that will be at a distinct advantage in the view of investors and policy makers alike. I see good chances for that in solar, storage, smart energy and industrial solutions.
Clean energy performance has been historically and remains still correlated to the oil price. There are perception and direct earnings reasons.
The clean energy sector faces a new struggle with low oil and gas prices.
The idea of ever rising conventional energy prices needs a re-think with big implications for the clean energy sector. Oil and gas prices are cyclical and have and will experience material down turns. Clean energy needs to re-evaluate its communication on ever increasing fossil fuel prices and in many a case business models predicated on an uninterrupted rise of oil and gas prices. It needs to consider its argument and commercial viability for prolonged fossil fuel commodity weakness.
The oil vs clean correlation is cyclical and self-perpetuating. Increasing supply of alternative energy along with energy conservation (in our universe part of alternative energy) has a negative impact on competing fossil fuel demand and prices. Demand reduction and increased supply (through renewables) lowers prices and at the same time increases supply through prolongation of conventional resource lives. In here, I see an argument for clean energy. It is contributing to reduction in costs of energy and energy security indirectly.
The grid parity goal post has moved materially. I estimate a new entrant cost in the order of Eur 96/MWh for Europe and USD 130, both of which provides retail grid parity. That will remain the case even when commodity induced price reductions come through. The difficulty lies in commercial segments where PPA (power purchase agreement) has slowed as a result of weaker commodities, ie grid parity. The sector needs to strongly communicate in all directions how it is addressing that through cost reductions. The scale and high tech based sectors are at an advantage, namely solar.
The peak oil argument has been largely put to a side some time ago. Peak oil is further away than ever, at least on markets’ minds. The urgency to build up alternatives has decreased materially.
A similar thinking to a point is on the mind of many policy makers. The urgency to build up alternatives has decreased materially, even though long term energy security considerations are still a concern.
It is demand weakness amongst others that has induced the latest commodity weakness. With priority off-take rights, the market has further shifted towards a higher weight of renewable energy. See above, the circular correlation.
The sector has another argument to rely on, climate change. With that, it heavily depends on politics and regulation. Public powers that are supportive of the sector for whatever reason are considering the issue. It may help to hold incentives up for longer. But without a doubt, the base will get thinner, because many a politician will look at the other side of the equation.
For it to be viable, the clean energy sector needs to find a sustainable (in a business sense) way to wean itself off regulation and incentives.
It needs to find new avenues that are more independent of the oil argument. It will never fully rid itself of the oil and gas connection, its ultimate competitor, though.
The sector is well advised to use the current commodities trough to become more competitive and accelerate the transition to main stream in order to emerge as a true alternative.
The clean energy sector can dissociate itself from the oil connection, through differing demand dynamics. This has been the case in the past: See the various speculative solar bubbles, wind build demand in function of incentive expiries, idem biomass, macro correlations for energy efficiency, lighting, the industrial argument and the like.
The changing nature of electricity supply markets, migration towards service and equipment package based businesses with strong consumer relation and brand equity components is a change for clean tech to achieve viability.
There are viable business models across the sector that can persist in a long term very weak oil environment. Storage and optimisation is one. Smart energy is another. Integration of clean features into conventional energy is also very viable. Solar will become viable even at lower oil prices, it is well equipped to address the cost challenge through technology advance still.
Yield co’s have a great advantage: yield differentiation and mature projects with stable returns and low commodities correlation. That argument has led them to hold up well. Other project developers might consider that and shed more light on the mature parts of their portfolios.
Gas is the truly important commodity for clean tech. It impacts coal and is the direct competing alternative in many instances – notwithstanding, it being a necessary complement at the same time. Clean tech has an argument that low gas prices foster clean energy through the complementarity.
I see potential for outperformance by those parts of the sector that adopt a communications strategy that focuses on commercial and consumer merits as well as the direct and indirect contributions to the energy system. Investors and policy makers will find those as credible and viable sectors and focus their support there.