Oil prices have been hovering below $55 per barrel for the past year and this has taken a tremendous toll on the energy industry. The OPEC cartel’s days are numbered and a plethora of oil companies have closed their doors permanently. And while oil has been the focus of the markets for a while now, no one has been paying attention to what low oil prices have done to the green energy industry.
What makes an energy source economically viable comes down to the cost per megawatt hour. The US Energy Information Estimated Administration shows the levelized cost of electricity (LCOE) for new power generation scheduled to come online by 2020 and green energy beginning to be able to compete with traditional power sources. Total LCOE for conventional coal is $95.1/MWh, while advance nuclear is at $95.2/MWh. Wind is actually one of the cheapest total LCOE at $73.6, while solar PV costs $125.3/MWh before subsidies. Geothermal comes in as the cheapest total LCOE at $47.8/MWh before subsidies, but unfortunately needs to be built at the right geological location.
Now investors are wondering what the next step is – will green energy survive, or will traditional fossil fuels put green energy out of business?
The Grass Isn't Always Greener on the Other Side
From a very long-term point of view, traditional fossil fuels – like oil and petroleum – are in limited supply and can’t keep pace with the world’s global energy demands. That means green energy will have to be used more as we move forward, or there simply won’t be enough materials to provide power to consumers.
But that doesn’t mean green energy can’t have a setback. Many experts have expressed concerns that cheap oil will hurt renewable energy projects and make it difficult for global CO2 emission targets to be met without the widespread use of solar, wind and other green energy sources. In the 1980s, falling oil values derailed the fledgling green energy industry, which at the time was only in its infancy.
But there’s a big difference in costs this time around. Two decades of technological advancements have made many green projects viable – even with oil priced so cheaply. And even the most bearish oil analysts can admit that oil prices won’t stay below $55 per barrel for much longer.
OPEC, surprisingly enough, may actually help the green energy industry. With oil prices as low as they are, oil-rich exporting nations are seeing their GDP drop precipitously. So in order to maximize profits, they need to export as much oil as they can and use renewable energy to meet their own energy demands.
Finally, oil has come a long way since it was first used to power the industrial age. Now oil is primarily used to heat homes and make gasoline – industries that don’t cross over into the realm of utility-grade power generation. That market belongs to coal, natural gas, wind, solar, nuclear and other forms of power generation. So oil’s ability to influence overall energy costs isare actually much more limited than many investors believe.
Investors should keep in mind that even with oil priced so low, green energy will continue to move forward and costs will continue to fall. Even now, some green energy projects are becoming cheaper than traditional fossil fuels. And with oil no longer being associated with utility-grade power generation, oil prices shouldn’t be dictating how the entire energy industry trades. Perception is a powerful tool on Wall Street though, so price volatility will likely go on until there’s a more defined separation between oil and other means of power generation.