Oil Money Flows to Renewables

Renewable energy is becoming increasingly viable, a trend that could be a game-changer for investors who are turning their backs on fossil fuels.
Published: Tue 01 Mar 2016

For the last couple of years, the decision to invest in renewable energy instead of fossil fuels has been more about environmental responsibility and less about financial viability. However, it is fast becoming clear that there has been a paradigm shift.

In January, portfolio planner Advisor Partners reported that between 2014 and 2015, New York City’s biggest pension fund lost US$135 million because of its fossil fuel holdings. Market Forces, an activist group that works in environmental finance, has reported that fossil fuel investments cost 15 of Australia’s top funds an estimated US$5.6 billion. On average, this cost each member of these funds US$1,109.

Michael Liebreich, chairman of Bloomberg New Energy Finance, explains the new maths of fossil fuels. Coal, he points out, is losing value in every country except India. Gas prices have also fallen sharply, leading to a steep drop in investment. A recent Citibank report predicted that oil is likely to “bottom out” in 2016. And Bloomberg recently quoted Vitol oil holding group CEO, Ian Taylor, as saying that crude oil will likely stay at US$60 a barrel for at least a decade.

The tide turns in favour of renewables

While fossil fuels prices are plummeting, the profitability of renewables is growing. Oil companies such as Exxon Mobil and Royal Dutch Shell cut jobs and curb capital spending to cope with prices that have fallen two-thirds in 18 months. Fears that low oil prices will continue into 2016 have knocked confidence among oil companies, delaying $380 billion worth of investment in upstream projects, according to an analysis by industry consultant Wood Mackenzie in January.

On the other side of the coin, six major renewable investment funds yield between 5.5% and 7% – attractive returns in the current market. Not surprisingly, there has been sharp growth in renewable generation.

“A dozen years ago, the best predictors in the world told us that the solar energy market would grow by 2010 at the incredible rate of 1GW per year,” according to former vice president Al Gore, who spoke at the UN Investor Summit on Climate Risk. He added: “But by 2010, they exceeded that by 17 times over. Last year, it was exceeded by 58 times over. This year, it’s on track to be exceeded by 68 times over. That’s an exponential curve.” In 2015, global clean energy investment hit US$329 billion, its highest level ever…as oil prices crashed to the ground.

Investors and companies have become aware of this turn in tide and are taking a more serious look into sustainable investments for safe long term bets. In fact, companies and investors that refuse to take the sustainability leap can expect to lose money.

The falling prices of renewables-generated electricity are competing fiercely with that of fossil fuel-generated electricity. Mr Gore said that solar power prices have been dropping by 10% per annum. If this curve continues, Mr Gore said, then its price is going to fall “significantly below the price of electricity from burning any kind of fossil fuel in a few short years”. Fossil fuel is quite literally being priced out of the market one solar panel and wind turbine at a time.

There is evidence of this already. A year ago, a solar project in Dubai went online, and offered electricity at a rate of US$0.058/kWh-much cheaper than natural gas.

Recently, Morocco announced an offshore wind farm that will produce electricity for $0.03/kWh.

In Nevada, US, energy generators are selling solar electricity to utilities for $0.3 cents/kWh, a price well below that of coal-based electricity. And some utilities such as TXU, a Texan utility, is giving electricity away for free during off peak consumption times.

In South Australia and parts of Germany, utilities have adopted negative rates for renewable electricity.

Summit- a  renewables investments

Despite the obvious value in renewables investments, a number of corporations and investors remain hesitant when it comes to investing in renewables, and they often charge outrageous interest for solar projects. Reasons include high upfront costs of technologies and a lack of financial and policy support.

UN secretary general Mr Ban Ki-moon emphasized that the recent COP 21 summit – particularly the pledges made by companies and governments from around the world – could further encourage investment in renewables. “The Paris agreement provides a durable, yet flexible framework,” he said. “There are transparent rules of the road to monitor progress and enhance accountability.” [COP 21 Climate Agreement Sets Scene For Energy Sector].

Ultimately, Mr Ki-moon says, both investors and corporations now have a signal that the time has come for them to direct their energies toward low-carbon, climate-resilient growth. “It marks the beginning of the end of growth built solely on fossil fuel consumption,” he said.

“The once unthinkable has now become unstoppable.”