SINGAPORE (April 9): Burning more fossil fuel hurts the environment, but with crude oil prices staying way below the historical peak, the lure of basic economics has stymied the pace in which renewable energy is used as an alternative.
Over the years, greater environmental consciousness has taken root, especially among the younger generation, forming — eventually — sufficient momentum for some semblance of a global call to action in the form of the 2016 Paris Agreement.
Ratified by 196 countries, the agreement aims to keep the global temperature rise this century to “well below” 2°C above pre-industrial levels. It also aims to pursue “efforts” to limit the temperature increase even further to 1.5 °C and to strengthen the ability of countries to deal with the impacts of climate change.
To achieve these aims, countries around the world set targets to reduce their respective car- bon emissions by 2030. For instance, the EU pledged to lower its emissions by 40%, from 1990 levels. India pledged to reduce its emissions by 33% to 35%, from 2005 levels. Singapore committed to cut its emissions by 36%, from 2005 levels.
Targets to increase the share of renewable energy sources were also set in place. The Philippines pledged to triple its renewable energy sources by 2030. Malaysia committed to increase renewable energy sources to 21% by 2050. Similarly, Singapore, which enjoys optimal sunshine, is on track to generate 340MW of solar power for consumption by 2020. The country has set a new target of 2GW by 2030, comprising 4% of the country’s total electricity demand.
As a result, global renewable energy has grown considerably. According to the most recent data by the International Renewable Energy Agency (IRENA), the total amount of electricity generated from renewable energy in 2017 was 6,191 terawatt-hour (TWh). This represented growth of 293TWh or 5% compared to 2016. Hydro energy accounted for about 65% of the total amount of electricity generated from renewable energy. This was followed by wind energy at 18%, bioenergy at 8%, solar energy at 7% and marine energy at 1%.
Solar and wind generation were the main drivers of growth, according to IRENA. During the year, solar generation increased over 35%, while wind generation grew almost 20%. Together, these two sources of energy continue to dominate growth in renewable generation, accounting for 70% of growth since 2013, it says. The exception, however, is hydro generation which recorded a decline, mainly in Europe, Eurasia and South America.
Geographically, much of the growth in renewable electricity generation occurred in Asia, with an increase of 165TWh in 2017, according to IRENA. The region accounted for 39% of the global renewable energy generation. This was followed by Europe and North America at 20% each, South America at 13% and Eurasia at 5%. Asia continued to lead in the expansion of solar and wind generation, it says. The region accounted for almost half of all global solar generation, equalling Europe in wind generation during the year.
Globally, the total renewable energy generation capacity grew about 8% to 2,356GW at end-2018, according to IRENA. This comprised about a third of total installed electricity capacity. Hydro energy accounted for about half of total capacity, followed by wind energy at about 24% and solar energy at about 20%. The remainder capacity comprised bioenergy, geothermal energy and marine energy.
Now that crude oil prices have plunged again, could the transition towards renewable energy accelerate further? Or will that be dampened given that fossil fuel energy has become a much cheaper alternative?
Short-term pain
So far this year, the West Texas Intermediate (WTI) and Brent crudes are down 55.9% and 48.4%, respectively, to trade at US$26.92 ($38.36) and US$33.81 a barrel as at April 7. The decline in crude oil prices was due to expectations of lower oil demand ahead, no thanks to the Covid-19 pandemic which is sending economies into recession around the world.
This was exacerbated by Russia’s refusal to cut crude oil production, prompting Saudi Arabia to launch a price war aimed at gaining market share. Both countries are part of a flagging alliance, comprising members of the Opec and non-Opec members — otherwise known as Opec+.
Deloitte Vasconcellos, energy, resources & industrials leader at Deloitte Southeast Asia, says: “...The general consensus is that the current oil price shock resulting from the Opec+ group’s failure to agree on an extension of production limits could place downward pressure on renewable energy investments in the short term as major oil and gas operators are cutting back on investments in renewables in the current climate.”
This is because large oil companies and their lenders are now facing a cash crunch, according to Alex Whitworth, head of Asia Pacific power and renewable energy industry at Wood Mackenzie. “Across the energy sector, risky bets are being called in, values of financial assets are being cut and new investments are being slowed to shore up balance sheets,” he says. “The new crude oil prices will lead to major cost-cutting [measures] for oil companies, rather than new investments. As the renewable energy business in general is less profitable than oil and gas, even existing investments may come under scrutiny.”
Investors, such as fund managers, would also shy away from renewable energy investments, according to Peter Godfrey, managing director at The Energy Institute (TEI) in Asia Pacific. This is because the economic downturn has dwindled the opportunities in renewable energy infrastructure.
Moreover, as governments and companies enter into a “crisis mode”, environmental pol-icies and green investments tend to get sidelined, says Whitworth. Pilot or vanity projects related to sustainability will likely fall by the wayside too, he adds. As a result, growth in renewable energy could wither.
The Covid-19 pandemic has only made things worse — it has impeded economic activity, which in turn, leads to expectations of lower energy demands ahead, says Godfrey. “The last thing that’s going to happen is that a lot of people will spend a lot of money on any form of energy because energy demand is going down right now. So it’s a very soft market out there. Therefore, renewable energy investments right now look pretty awful,” he says.
Francesco La Camera, IRENA director-general, adds that this may negatively impact demand for solar panels, wind turbines and other technologies, similar to how demand is slowing in many other sectors. For instance, he points out that renewable energy deployment capacity in China will likely decrease this year.
Wood Mackenzie has forecast wind turbine installations to decline 4.9GW to 73GW this year. It says the potential impact on global installations remains most significant in China and the US, where wind-focused policy deadlines were expected to deliver record volumes. European Tier 1 wind energy markets, such as Spain, France and Italy, could be hit even harder on a percentage basis due to more aggressive lockdown measures inhibiting worker mobility, it adds.
“Production in those countries is also starting to suffer with factory closures mounting this week due to coronavirus infections. The domino effect for other markets may be limited, especially considering the rapid recovery envisioned for China’s wind energy supply chain and limited impact of the pandemic in India and Latin America to date,” says Dan Shreve, Wood Mackenzie head of global wind energy research in a March 24 statement.
Long-term trend intact
Nevertheless, the long term transition towards renewable energy should remain intact. This is because the world is heading towards decarbonisation, says Sharad Somani, head of infrastructure advisory at KPMG. While lower crude oil prices may cause a slight delay or slower rate of innovation in renewable energy, including energy-saving technologies, this will have minimal impact in the long run, he says. “It is highly probable that we will instead continue to see demand grow exponentially for renewable energy technologies and projects,” he tells The Edge Singapore.
Dave Sivaprasad, managing director and partner at Boston Consulting Group (BCG), shares a similar view. “We do not see a change in the fun- damental trends towards renewables in the long term. This is driven by [an] increasing momentum around climate action and the focus of investors shifting towards greening their investment portfolios,” he tells The Edge Singapore.
In any case, IRENA’s La Camera says renewable energy is rather insulated from the fluctuation in crude oil prices. This is because their price movements have little to no impact on the renewable energy industry, since oil accounts for only 5% of global power generation. In comparison, the bulk of oil demand comes from sectors that are difficult to “decarbonise”. This is led by the transport sector, which consumes more than half of all oil, followed by the refining and petrochemicals industries, he says.
Case in point was the mid-2014 crash in crude oil prices. La Camera points out that renewable energy investments leapt 15% y-o-y to US$315 billion that year. Renewable energy investments grew further in 2015, breaking a new record of US$329 billion.
“[Hence], oil plays a negligible role in power generation and therefore does not compete with renewables in this respect. Renewables have become the dominant source of new power generation capacity over the last six years because they are competitive at the bottom end of the conventional fossil fuel power generation cost range — primarily with coal,” La Camera says in a March 14 statement.
Better technology, lower costs
Crucially, the economics of renewable energy has improved in the last few years. In particular, the output of renewable energy sources has become more efficient, thanks to advancements in technology. And, the costs of building renewable energy infrastructure have come down dramatically.
For example, no thanks to over-enthusiastic Chinese manufacturers, the cost of solar modules has plunged about 90% in the past eight years. This has made solar electricity in Singapore cheaper than retail prices, and competitive compared to wholesale electricity tariff, says Thomas Reindl, deputy CEO at the Solar Energy Research Institute of Singapore (SERIS).
Battery costs have also fallen over the same period. For instance, the cost of lithium-ion batteries have reduced to US$150 per kWh in 2020, from US$1,100 per kWh in 2010, says BCG’s Sivaprasad. “Batteries combined with solar or wind can improve the cost efficiency of renewables and accelerate its scale-up,” he says.
Interestingly, Reindl of SERIS says that battery cost reduction is less due to the advancement of renewable energy, but more so due to the mobility sector, such as electric vehicles (EVs) and scooters. Both sectors largely use the same type of battery technology, which have been mutually beneficial, he explains. There are even discussions about the application of electric car batteries for the use of renewable energy installations, he adds, since the former has much higher requirements in terms of battery capacity and energy density.
“Nowadays, with the costs for the two major renewable energy sources — solar and wind — having come down so substantially, they have reached grid parity in most regions of the world, including Singapore. Coupled with the strong need to take actions with respect to climate change, the move towards renewables cannot be stopped anymore, irrespective of the oil prices,” Reindl tells The Edge Singapore.
That said, technology advancements in renewable energy can be a double-edged sword. TEI’s God- frey says technology is developing so quickly that the existing renewable energy technologies get replaced by newer ones. This could hold back renewable energy investments in current technologies in favour of newer ones.
For example, lithium ion batteries are currently the core technology of renewable energy. But hydrogen energy is developing quickly and could soon render lithium ion battery development as obsolete. “So the pace of investment is constrained as a result of some people looking beyond the current technology,” he says.
Corporate interest
Still, given the sustainability trend and the improving economics of renewable energy, oil companies are more incentivised to grow their renewable energy business, says KPMG’s Somani. Most, if not all, international oil corporations and national oil corporations are expanding their presence in renewable energy, he says. “Oil and gas companies are focused on securing their future by leveraging their strong market presence and financial resources to invest in the clean and green technologies of the future,” he says.
Sembcorp Industries is a prime example. The company has reduced reliance on its offshore and marine business via listed subsidiary Sembcorp Marine. With more than 120MW of rooftop solar projects across Singapore, the company has become a major solar power player. This includes rooftop solar capacity won under a 50MW peak tender from the HDB and the Singapore Economic Development Board. It also includes new projects to develop, own and operate rooftop solar farms for commercial and industrial clients.
In India, the company’s Sembcorp Energy India is a major renewable energy player through its 250MW SECI 1 wind power project in Tamil Nadu. This was the first project to be successfully delivered under India’s nationwide wind power tenders. Sembcorp also secured another 300MW via the national wind power tender. The company now has 1,177MW of wind capacity in operation and 550MW under development.
Despite their lower returns compared to oil, Brent Vasconcellos, energy, resources & industrials leader at Deloitte Southeast Asia, says the lure to invest more in renewable energy would still be appealing to oil and gas companies. This is because renewable energy is inherently insulated against “wild swings” in the oil market. “It is more likely traditional fossil fuel producers, refiners and investors will increasingly desire a more stable dividend source,” he says.
Such an example could be US-listed oil and gas explorer, Occidental Petroleum Corp, which recently announced that it will cut dividends by almost 90%, notes Vasconcellos. This is due to the poor economic outlook, on top of the low crude oil price environment. “Other companies in the industry will face similar pressure and therefore will be forced to search for alternative energy investments that will provide more stable — even if lower — economic returns,” he says.
Moreover, the threat of oil investments becoming stranded is increasing, says IRENA’s La Camera. He notes that fossil fuel investments made now are likely to lead to “significant” stranded assets or could lock in fossil fuel emissions for decades to come. By comparison, the energy transformation brings significant benefits, such as job creation, achievement of sustainable development, climate change mitigation and economic growth. “[The] world has invested US$3 trillion in renewable energy in the last 10 years — more than doubling the installed capacity,” he says.
