$40 oil and the death of decentralised energy?

For the first issue of 2015 it would be hard to ignore what is shaping up as the biggest story in the energy industry in years: the precipitous drop in global oil prices from a high of $147 a barrel in 2008 to a recent closing of under $50 a barrel. Just when the energy experts were sure that the emerging economies in Asia and growth in automobile ownership would keep oil prices at $100 and above indefinitely, they were surprised to find that sometimes the laws of supply and demand do actually work, even in a cartel-influenced market. US shale oil production, a slowing global economy, and strategic production decisions by the Saudis, among other factors, have worked to push the price for oil down, which created an early Christmas present for consumers and a blood bath for oil and gas producers and their publicly traded securities. How low they will go is probably less important than ‘how long will they go low’ to determine whether the market will confirm the belief that this situation could prove to be sustainable. What this means for power generation and distributed energy markets is still to be determined; however, we can start to see a few possible risks and opportunities taking shape. What we can be assured of, though, is that decentralised energy investments will still make economic sense since oil is predominantly used as a transportation fuel and less so for power generation.

In the US, new power generation has been dominated by natural gas and renewables and oil has not been a significant contributor for a number of years. So far this winter, natural gas prices have not spiked even with a few tastes of Arctic air coming our way, but of course that could change quickly with an extended cold snap. But as oil prices and production decline, it could also lead to a decline in associated gas supplies and an increase in natural gas prices which could push back project payback timeframes. In certain geographical areas like the northeast, we may see greater reliance on oil-based fuel over the winter if natural gas prices do spike and pipeline capacity constraints limit deliverability. To make things even more interesting, a number of utility customers in the northeast woke up on New Year’s Day to more than just a hangover. Significant rate increases on some systems went into effect in 2015 with rates doubling for certain customers. Rising grid costs will keep on-site energy competitive even if spark spreads narrow.

In parts of the world that rely heavily on oil for power generation, we may see delayed investment in efficiency and new generation, but on the positive side, a reduction in the oil import bill could provide the capital needed to replace an aging generation fleet. For countries that are net oil producers, like Saudi Arabia and Russia, the net impact on their economy will be decidedly negative with a downward push to economic growth.

Most analysts do not believe that the current price deck for oil is sustainable over the long term and power generation decisions tend to be based on longer term price expectations. So, for now, you may want to hold off on buying the Tesla for a few months and look around for what may be some interesting opportunities for decentralised energy even in a low oil price environment.

David Sweet à‚  David Sweet
Executive Director World
Alliance for Decentralized Energy

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