| IMPACT OF LOWER CRUDE PRICE ON INVESTMENT IN RENEWABLES State of the Renewable Industry
The last 12 months have seen some astonishing volatility in oil prices; falling to below $50 per barrel from highs of $115 per barrel last summer, the impact is starting to be felt across the UK oil and gas sector. Medium term capital budgets are being slashed, (e.g. BP -20% and BG -30%) while the value of assets are being written down. It has also driven a new round of M&A activity, as evidenced by Shells bid for BG Group. The knock-on effect is being felt in the utilities sector, with wholesale gas and power prices falling. The outlook for power prices is also influenced by a benign carbon market and a coal market that has experienced even greater relative price falls than the oil market. The net effect of falling gas prices is that these reductions are slowly making their way through to end consumers with falls in the prices consumers pay (although the big suppliers have not yet passed on any power price reductions).
State of the Renewable Industry
So what does this all mean for investment in the UK renewable energy sector? Does it
make renewable investments more or less attractive?
There is some evidence on the correlation Impact of lower crude price on investment in renewables Impact of lower crude price on investment in renewables
The last 12months have seen some astonishing volatility in oil prices; falling to below $50 per barrel from highs of $115 per barrel last summer, the impact is starting to be felt across the UK oil and gas sector. Mediumtermcapital budgets are being slashed, (e.g. BP -20%and BG -30%) while the value of assets are being written down. It has also driven a new round ofM&A activity, as evidenced by Shells bid for BG Group.
The last 12months have seen some astonishing volatility in oil prices; falling to below $50 per barrel from highs of $115 per barrel last summer, the impact is starting to be felt across the UK oil and gas sector. Mediumtermcapital budgets are being slashed, (e.g. BP -20%and BG -30%) while the value of assets are being written down. It has also driven a new round ofM&A activity, as evidenced by Shells bid for BG Group.
between key input variables and the costs of technologies such as offshore wind which suggests that currency fluctuations and commodity prices have the greatest impact on the levelised cost of offshore wind. However, it is worth adding that as most of this manufacturing is outside the UK, international commodity prices will have a greater bearing on technology costs. Another key cost is bunker fuel prices which have fallen significantly on the back of lower oil prices. This should feed through to the transportation costs of both wind turbines and biomass. There is a timing issue around the lag between commodity price falls and how this feeds through to technology specific costs which will depend on contractual terms through the supply chain. In principle, falling commodity prices
will have the effect of making the relative cost of supporting renewables look more
Figure 6:Historic oil price (Brent $/bbl)*
100 120 140 160
20 40 60 80
-
100 120 140 160
20 40 60 80
-
Measurement Framework (CRMF) report. The CRMF assesses cost reduction in the offshore industry annually against the trajectory required to deliver an LCOE of £100/MWh in 2020. The findings of the January 2015 assessment suggest the industry is in fact ahead of the benchmark pathway, although the CRMF assessment is calculated over a 25 year period (contrasted with a 15 year CfD).9 Levelised Cost of Energy (LCOE) is the calculated cost to produce electricity over the life of the asset (typically 20-25 years), based on expected power output (MWh). LCOE includes all of the assets lifetime
www.r-e-a.net
The knock-on effect is being felt in the utilities sector, with wholesale gas and power prices falling. The outlook for power prices is also influenced by a benign carbonmarket and a coalmarket that has experienced even greater relative price falls than the oilmarket. The net effect of falling gas prices is that these reductions are slowlymaking their way through to end consumers with falls in the prices consumers pay (although the big suppliers have not yet passed on any power price reductions).
So what does this allmean for investment in the UK renewable energy sector? Does itmake renewable investmentsmore or less attractive?
So what does this allmean for investment in the UK renewable energy sector? Does itmake renewable investmentsmore or less attractive?
costs, such as construction, financing, fuel, maintenance, tax and insurance. Some costs are excluded, such as costs of selling power (due to Power Purchase Agreement discounts or fees) and working capital costs. Figure 7 shows the assumed LCOE
There is some evidence on the correlation between key input variables and the costs of technologies such as offshore wind which suggests that currency fluctuations and commodity prices have the greatest impact on the levelised cost of offshore wind.However, it is worth adding that asmost of thismanufacturing is outside the UK, international commodity prices will have a greater bearing on technology costs. Another key cost is bunker fuel prices which have fallen significantly on the back of lower oil prices. This should feed through to the transportation costs of both wind turbines and biomass. There is a timing issue around the lag between commodity price falls and how this feeds through to technology specific costs which will depend on contractual terms through the supply chain.
There is some evidence on the correlation between key input variables and the costs of technologies such as offshore wind which suggests that currency fluctuations and commodity prices have the greatest impact on the levelised cost of offshore wind.However, it is worth adding that asmost of thismanufacturing is outside the UK, international commodity prices will have a greater bearing on technology costs. Another key cost is bunker fuel prices which have fallen significantly on the back of lower oil prices. This should feed through to the transportation costs of both wind turbines and biomass. There is a timing issue around the lag between commodity price falls and how this feeds through to technology specific costs which will depend on contractual terms through the supply chain.
trajectory set out in the CRMF required to reach £100/MWh in 2020, along with the estimated LCOE based on the most recent data collected. The falling LCOE of offshore wind supports the cost reduction assumption which has been applied in the investment factors
It could be argued that equivalent cost savings would be expected for onshore wind,
In principle, falling commodity prices will have the effect ofmaking the relative cost of supporting renewables lookmore expensive. This situation is exacerbated by the newly introduced CfD support scheme for low carbon generation. As the energy policy debate has played out over the past 18months,
In principle, falling commodity prices will have the effect ofmaking the relative cost of supporting renewables lookmore expensive. This situation is exacerbated by the newly introduced CfD support scheme for low carbon generation. As the energy policy debate has played out over the past 18months,
The knock-on effect is being felt in the utilities sector, with wholesale gas and power prices falling. The outlook for power prices is also influenced by a benign carbonmarket and a coalmarket that has experienced even greater relative price falls than the oilmarket. The net effect of falling gas prices is that these reductions are slowlymaking their way through to end consumers with falls in the prices consumers pay (although the big suppliers have not yet passed on any power price reductions).
Figure 6:Historic oil price (Brent $/bbl)* FIGURE 7 HISTORIC OIL PRICE (Brent $/bbl)*
100 110 120
40 50 60 70 80 90
100 110 120
40 50 60 70 80 90
*Federal Reserve Economic Data
expensive. This situation is exacerbated by the newly introduced CfD support scheme for low carbon generation. As the energy policy debate has played out over the past 18 months, what has become more evident is the importance of the overall level of energy price (the price we pay as consumers). The irony of low commodity prices is that it makes renewables under a CfD look expensive, but overall consumer prices should be lower. In summary, at a macro level lower commodity prices should not materially impact on the economics of renewable energy projects in a CfD world and should make consumers less focussed on the cost of renewables if overall energy prices are falling. We have concerns however, that the nature of the LCF mechanism could act as a constraint that reduces the total capacity of renewable projects that can be funded from a fixed pot and that issue needs to be addressed.
Investment in Renewables
RENEWABLE ENERGY VIEW 2015
Investment in Renewables
given the technology similarities (WTGs, financing, supply chain). However, onshore wind is impacted by fundamentally different planning conditions, which act as a barrier to the scale of onshore developments which would be required to realise many of the cost saving opportunities that have allowed offshore to reduce its LCOE. Turbine size, for example, has not increased at the same rate as onshore (offshore projects reaching FID 2012-14 are dominated by 6MW WTGs), where turbine size is a significant determinant of LCOE. Onshore wind is not able to achieve the same direct economies of scale that arise from greater efficiency or indirect economies of scale from fewer installations
REview Renewable Energy View 2015 81
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