Renewables are not yet a credible alternative to oil or its fossil fuel cousins. But it might just be a matter of time – and price
There have been many recent major geopolitical developments over the security of natural gas, nuclear energy and oil supplies. Concerns triggered by the meltdown of the Fukushima-Daiichi nuclear power plant in Japan, uncertainty surrounding global climate change obligations and disrupted oil supplies in the Middle East have magnified short-term risks to global economic growth and long-term energy security.
Middle East unrest
In the first quarter of 2012, crude oil prices exceeded $128 per barrel. International oil traders were decidedly bullish; the new floor price for crude, they said during International Petroleum week in London mid-February, would be $120 per barrel.
Multiple factors are placing an upward pressure on oil prices. The EU’s embargo on Iranian oil imports threatens to reduce Iran’s exports to Europe by roughly 600,000 barrels per day (bpd). This, combined with an oil worker strike in Yemen that removed 200,000 bpd from the export flow during February, played into the upward price swing.
In March, South Sudan stopped producing in response to high transit fees imposed by Sudan, removing a further 350,000 bpd. Combined with supply disruptions in Nigeria over fuel subsidy disputes, the reduction will amount to 500,000 bpd for the duration of 2012, according to the Centre for Global Energy Studies.
The region’s north-eastern neighbour, Syria, where civil unrest has escalated, could similarly see its output of 150,000 bpd compromised. The global oil market is currently 90m bpd and Syria is a relatively small producer, but the combined effect of stemmed oil production from Iran, Yemen, South Sudan and Syria, in addition to reduced output from Libya, whose 1.6m bpd has been nearly halved to 900,000, has created significant uncertainty.
Add to this is Iran’s threat to close the Strait of Hormuz, used for a third of the world’s seaborne oil trade. In the unlikely event that Iran does manage to halt traffic through the strait, it would block 15m bpd. Countries such as Iraq are particularly vulnerable; of the average 2.2m bpd that Iraq exported last year, roughly 1.7m bpd went via Hormuz.
“France and Germany have increased their strategic stocks – at a time when prices are very high. People are getting nervous, and it is this uncertainty that is driving [the price increase],” observes John Hall, energy consultant and fellow at the UK Energy Institute.
So what is the actual impact of this short fall in supply?
Until recently, there was confidence that Saudi Arabia, which according to the US Energy Information Administration holds about 3m bpd in spare capacity, could meet the shortfall. In January 2012, however, the International Energy Agency downgraded Saudi Arabia’s maximum output capacity estimate from 12m bpd to 11.88m barrels a day.
This is significant, given that Saudi Arabia, as the biggest producer among the Opec countries, is the only producer with any spare capacity. As Saudis switches on their air conditioning in the hot summer months of June, July and August, it will need to draw on this spare capacity to meet domestic energy demand.
Global energy demand will be such that the world could well be running on maximum oil capacity, prompting the IEA to say that it would probably release extra stock supplies this summer.
“Supply will be very tight as we go into the second and third quarters,” says Hall, noting that unlike previous oil price spikes, this one will be sustained.
Energy freeze
The countries hardest hit by sanctions on Iran happen to be the most vulnerable. Greece, Spain and Italy are importers of Iranian crude, as is Japan. “When the US and Europe introduced the sanctions, they failed to look at the wider impact,” Hall says.
The European cold snap in February 2012 was bitter reminder to EU member countries that a high proportion of their energy imports are concentrated among relatively few partners. Italy and Greece faced a critical gas supply shortage when Russia’s state-owned producer Gazprom diverted export reserves to meet a peak in domestic demand. The UK also saw gas prices swing to a six-year high, triggered by concerns that its only gas supply link with Norway could be compromised by the weather.
According to Eurostat, close to four fifths of the EU-27’s imports of natural gas come from Russia, Norway or Algeria. A similar analysis shows that, in 2009, 57% of EU-27 crude oil imports come from Russia, Norway and Libya, while 77.5% of hard coal imports are from Russia, Colombia, South Africa and the United States.
The downturn in the primary production of hard coal, lignite, crude oil, natural gas and more recently nuclear energy has led to a situation where the EU is increasingly reliant on primary energy imports in order to satisfy demand. With the exception of the UK and Poland, where indigenous reserves of oil, natural gas and coal remain, EU members are net importers of primary energy.
The UK, however, is feeling the pinch of dwindling North Sea reserves. According to industry association Oil & Gas UK, oil and gas production fell by 18% to 1.8m barrels of oil and gas equivalent per day in 2011, due to a large number of unplanned stoppages combined with the lowest ever volumes of new production coming on stream. Although production in 2012 is forecast to rise modestly to 1.85m barrels of oil and gas equivalent per day, “the overall profile for the next five years remains depressed”.
A renewable hedge?
Even oil can be priced out of the market, though. The question is, what happens when it does? “There is talk that oil prices will reach $200 per barrel, but who will pay for it at that price? It can’t go beyond $150 per barrel without an impact on economic growth,” warns Hall.
Oil and gas prices have become decoupled in recent years due to the exploitation of shale gas reserves and the increase in liquefied natural gas (better known as LNG), and according to Hall, lower gas prices will slightly ease the pressure “if people can switch to gas”. He adds that coal will also be brought back into play in the event of an energy shortfall.
But these too are fossil fuels, of which reserves are finite and dwindling. As Jeremy Leggett, executive chairman of UK solar panel company Solar Century notes, rising fossil fuel prices are part of a long-term trend against a backdrop of a “systemic downward cost trend in wind and solar energy prices”.
Even so, he warns that the programme of renewable energy deployment is “out of sync” with energy security and climate change issues. “We should be mobilising these technologies as though we were mobilising for war,” he says.
Instead, the UK’s recent solar feed-in tariff cut has threatened the future of the sector. In October 2011, the UK government’s Department of Energy and Climate Change cut the solar feed-in tariff (a form of subsidy) by 50%, which threatens thousands of job losses and widespread bankruptcies.
Spain too, whose renewable energy sector met 33% of domestic energy demand in 2011, has pulled the rug from beneath its renewable energy sector by introducing an indefinite moratorium on feed-in tariffs.
Germany, however, having shut down two-fifths of its nuclear capacity in the wake of the Fukushima disaster – with promises to close all nuclear capacity by 2020 – provides evidence that renewables are a decent hedge.
In the first half of 2011, a record 20.8% of Germany’s electricity was produced by renewable sources: wind, solar, biomass and hydro. Analysis released in late February 2012 by market research group Frost & Sullivan indicates that renewables will account for 36% of Germany’s energy mix by 2020, with wind energy capacity growing by an average of 2GW per year.
Nuclear energy was traditionally viewed as a viable, low-carbon baseload alternative to fossil fuels. Since Japan’s earthquake and tsunami, enthusiasm for nuclear energy has waned.
While the UK and eastern European countries, and to a lesser extent the US, appear to be pushing ahead with their nuclear strategies, other countries such as Germany and Japan have dropped nuclear from their agendas.
Even France, a nuclear stalwart, may be reconsidering its position on nuclear power. French socialist party candidate François Hollande recently pledged to cut France’s nuclear programme by 50% if elected.
The only other baseload alternative is concentrated solar power (CSP), with thermal storage. The concept is simple: instead of burning gas or coal to create the steam to drive a turbine, sunlight is concentrated by mirrors onto a receiver tube that carries either a mineral oil or water to generate the steam. Unlike other renewables, however, the cost of CSP has increased, rather than decreased, over recent years, primarily due to the incorporation of technologies such as dry cooling and thermal storage capacity.
The alternative to baseload alternatives is decentralised microgeneration. In emerging economies, where increased oil prices are acutely felt, renewables on the micro-generation scale are already proving their worth. Bharti Airtel, India’s largest mobile-phone operator, has upgraded 1,646 out of about 22,000 rural sites with little or no grid-connected power to run on solar and other renewable sources.
Similarly, India’s Jain Irrigation, the world’s biggest mango-puree producer and a major supplier to Coca-Cola, completed an 8.5MW photovoltaic solar project in March to replace diesel-fired output at its processing plant in Maharashtra, at a cost it expects to recoup within five years.
For now, countries continue to postpone the uptake of renewable energy. But, says Solar Century’s Jeremy Leggett, with oil on an upward price trajectory and renewables not far from grid price parity, “when the time comes, we will surprise ourselves by how quickly we [make the transition]”.