The oil price has slumped. This brings problems for oil majors, the shale industry and various others, but could it also create difficulties for the renewables sector?
- Previous oil slumps have seen governments move away from support for renewables
- However, there is greater political will for energy transition today
- Renewables also look more competitive on costs than they did during previous oil crises
A low oil price has typically created problems for renewable energy. It decreases its price competitiveness at a time when there is already an infrastructure challenge for new forms of energy. While the lower oil price has already dented old style oil and energy companies, might it also bring bad news for those companies geared to the ‘energy transition’?
In the period of low oil prices from 2014-16, governments moved away from renewables subsidies. At a time when there was little political momentum behind the renewable sector, it became increasingly difficult to justify supporting expensive forms of fuel. More generally, lower fuel prices tend to reduce the incentives to conserve it – it reduces a notable incentive to buy electric cars, for example, and also to create fuel efficiency. In this way, the impact of the oil price hit could find its way into the renewables sector.
That said, companies in the renewables sector have been resilient so far. For example, the Schroder Global Energy Transition fund is down just 4.6% over the past three months, while the Allianz Climate Transition fund is down 11.7% and the Aviva Investors Climate Transition European Equity fund is down 12.2%. These falls look relatively small in the context of broader market dislocation.
Investors may have concluded that it could be different this time. In the last oil price slump, there wasn’t the public support for climate change action or the same targets. Equally, Covid-19 itself may change the landscape. Mark Lewis, head of sustainability research at BNP Asset Management says people will change their behaviour: there is likely to be more localised production, which favours renewables rather than oil. Equally, he argues that renewable energy looks far more competitive today than ever before: “We think oil prices will have to fall to $10-$20 for gasoline and diesel to remain competitive with electric vehicles powered by renewable energy.”
Future energy demand is also likely to come from emerging markets where pollution is a significant factor. India and China, which import 80% and 60% of their oil respectively, are crying out for alternative energy sources even if oil is cheap. The falling oil price is unlikely to derail the energy transition significantly, even if it stalls temporarily.
