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Cheap oil vs wind and solar: fight for future of energy

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In a major new report, global investment bank Citigroup has defined the current battle between cheap oil, and renewables like wind and solar, to be so fundamental it will define the future of energy.

But it says that while the slump in oil and associated gas prices may provide some road-humps for wind and solar, renewables will win out because of basic economics, as well as energy security and environment issues. And, Citigroup says, because renewables are the cheapest way to substitute coal-fired power.

Oil is the single largest source of primary energy globally, and the seismic shifts in the oil market can send shockwaves through the world’s energy markets.

Citigroup says that two common statements have dominated recent dialogue: 1) that cheap oil will deal a serious blow to renewables, and 2) because oil and renewables rarely compete in the power sector, the impact will be minor.

It says neither is strictly true. Citigroup believes the fall in the oil price is terminal – it says the days of triple figure oil prices are over – meaning the end to some high-risk, high-polluting oil ventures in marginal regions such as the Arctic, tar sands and deepwater.

On the other hand, the long-term outlook for renewables remains bright. “Fundamental factors – increasing economic competitiveness, energy security, and environmental goals – all remain potent forces driving ever more rapid adoption of renewable energy globally.”

Wind and solar costs have fallen dramatically, and these cost declines should continue. On an unsubsidised basis, wind farms are getting built at costs below $40/MWh in some regions. Recent solar auctions in the Middle East have produced prices below $60/MWh.

“The straightforward answer to whether cheap oil threatens renewables is no – at first glance, oil poses few direct threats to renewables.”

Oil competes directly against renewables in only about 5 per cent of the market – those places where oil is used in generation – particularly the Middle East (Saudi Arabia uses oil for 55 per cent of its electricity needs, and the Middle east as a whole 36 per cent), and in the Caribbean (Jamaica 91 per cent).

But, as we noted in this report about low solar costs, and the assessment by the National Bank of Abu Dhabi, oil can no longer compete with solar and wind in electricity economics.

“Even with greatly reduced oil prices in the $50-60/bbl range, more mature renewables like wind and solar have little trouble competing with new oil-fired generation in the Middle East,” Citigroup writes. See graph below.

citigroup oil parity solar ME

“Indicatively, large-scale solar in the Middle East should be competitive with oil when oil is above around $30, and on-shore wind when oil is above $23. Technologies such as offshore wind and nuclear are comparatively more exposed.”

Indeed, it is interesting to note that the world’s biggest oil producer, Saudi Aramco, is now installing solar at many of its installations to save on oil costs, and to allow more oil to be exported. (One good thing for the climate is that Gulf oil is not just cheaper than other supplies, it is also cleaner).

Citigroup says it is also wrong to assume that falling oil prices mean falling gas prices in the US, and therefore headwinds for renewables. (It notes that the Obama administration has already outlined plans for 35 per cent wind by 2050, although it could actually be 41 per cent).

Already, the plunging price of oil has caused half of the shale oil rigs in the US to be withdrawn, because shale oil is no longer economic at these low prices.

In Texas, Citigroup notes, around one-quarter of the gas supply comes from “associated gas” – from the oil extraction. That means the demise of shale oil will also crimp supplies of gas, putting upward pressure on prices. Already, city utilities such as Georgetown in Texas and large corporate users such as Dow Chemical are choosing wind and solar over gas.

In Europe, the gas price is indexed to the oil price, and cheaper gas may make it more competitive against renewables. Still, Citigroup says it is very unlikely European renewable energy targets will be meaningfully threatened by lower gas prices, particularly given the strategic benefits of diversification away from oil-indexed imported gas.

The same is true in Asia. Citigroup says the recent drop in LNG spot prices has made gas-fired generation newly competitive with large-scale solar, although solar remains cheaper than gas-fired power from oil-indexed LNG.

“While cheaper gas looks like a challenge to renewables in the region, policy once again insulates renewables. Aggressive renewables policies in China and Japan are propelling growth in wind and solar investment. And in China, there is not much gas available in the power sector anyway.

“Long term, renewables hold strong appeal as way for energy importing nations like Japan and Korea to diversify away energy price risk for LNG, coal, and oil. LNG is cheap now, but a power plant is a 40+ year asset.

“Historically, Asian importers of LNG and coal have been willing to put up large sums of capital to ensure security of supply. Renewables may benefit from this ‘energy security’ demand.”

And it notes that most of the world’s LNG is sold on an oil-indexed basis, tying the expansion of global LNG projects to the price of oil.

And lower oil prices threaten LNG projects over the next decade, many of which have already been plagued by cost overruns. Nearly half of the 600 mtpa of global LNG supply projected by 2030 is either “speculative” or “possible” – and these are projects that will come under pressure from lower oil  prices. See graph below.

Citi gas

“With less LNG supply, the world has two main alternatives for power generation: coal and renewables. And renewables stand to benefit the most from any disappointment to LNG supplies.”

As for the battle between diesel generation and distributed solar, the fall in oil prices may level the playing field a little, but this is by no means certain, as diesel is often heavily subsidised and the oil price drop may not be passed on to consumers.

In any case, it hardly seems like a fair battle. Solar PV installation costs now range between $.08/Kwh and $.5/Kwh, depending on local conditions.

Diesel costs will vary significantly due to tax regimes, subsidies, transport costs and other factors, but broadly speaking, diesel generation costs may range from $.3 to 3.00/kWh.

“Distributed generation is a major answer to the estimated 1.3 billion people in the world who still lack access to electricity,” Citigroup says. “It may also represent one of solar’s biggest long-term opportunities”, it adds – although it notes that solar and diesel will likely work together until battery storage costs further remove the need for any diesel.

The two fastest growing big economies, China and India, have also recognised the cost falls in renewables, as well as their environmental benefits.

India is aggressively targeting renewable energy growth and taxing coal to help fund clean energy. It aims for 100GW of solar, 60GW of wind, and 15GW of biomass and small hydro by 2022. Additionally the clean energy levy on coal has been raised twice, and now stands at 200 Rupiah per tonne. Growth of coal-fired power should still be robust in India, but renewables are poised to make major inroads.

China is pursuing renewables in a “flat out” strategy that calls for 200GW of wind, 100GW of solar, and 350GW of hydro power targeted for 2020. Peak coal should happen soon, if it hasn’t already.

Finally, improved prospects for progress at the Paris climate talks after 2014’s US-China climate announcement point to potential upside for renewables, Citigroup says. Any agreement would tend to be supportive of additional renewables investment.

“Broad climate efforts will have to focus on reducing coal use in developing countries in some manner; the cheapest way to do this in many cases will be to substitute renewable energy for coal-fired power,” Citigroup says.

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  • RepPhilBarnhart

    Can you give a link to the report?
    Thanks.

  • JonathanMaddox

    I don’t believe it for a second that oil prices won’t go back up, though it could take years. The low oil price today is purely cyclical, basically a matter of investment in production having gotten ahead of demand, but demand never really stopped growing. If prices stay low, demand will most certainly catch up and supply will be constrained again.

    http://www.energytrendsinsider.com/2015/01/22/why-50-oil-wont-last/

    That doesn’t mean that the point about renewables isn’t equally true: renewables are the cheapest form of electricity to be had today and there’s no stopping their growth. Renewables will continue to displace gas, nuclear power and coal in the electricity sector, even as gas, efficiency improvements and electric energy increasingly substitute for oil in the heating and transportation sectors.

    • Bob_Wallace

      I’m not so sure demand is going to rise over time.

      Demand is very likely to continue to fall in the US. First, fleet regulations are requiring a doubling of efficiency. The population is aging and older people tend to drive less. Then there’s an observed decrease in driving with younger people.

      Aging populations are becoming more common and population growth has essentially stopped in most of the more prosperous/developed countries.

      Oil consumption has slowed in China. Additionally the Chinese government is putting on a big push to get drivers into electric cars for both air quality and climate change reasons.

      Then there are EVs, growing exponentially. Battery prices are falling very rapidly and once people can purchase a longer range EV for about the price of a same-model ICEV we should see significant movement off fuel.

      We’re seeing efforts at efficiency for flight and shipping. Electric buses and taxis are starting to appear on our streets. Delivery companies are using more battery powered and hybrid vehicles. We’re even seeing battery powered garbage trucks.

      • JonathanMaddox

        US oil consumption in 2014 was just 19 mbpd, so it is not yet back up to its 2005-2008 plateau of 21 mbpd, but it has risen noticeably above the 2012 low of 18.5 mbpd in 2012 and is still growing. Demand will certainly fall again in the US, but it’s not falling right now, it’s going up again thanks to the low price and the economic recovery. This includes rebound effects from efficiency improvements. Enough high-cost oil is produced in the USA that the low price is bringing about an economic contraction all its own, but it’s not yet enough to cause demand to fall again.

        To date, oil consumption has only ever actually fallen in times of economic recession. I don’t really expect that to change in the absence of major changes in the policies of governments worldwide, withdrawing financial and regulatory support from the oil industry and favouring its competitors to the tune of many billions per year.

        • Bob_Wallace

          Let’s look at more data than a single year or two. US oil demand is down. And it will almost certainly continue to fall as the average MPG rating for cars and trucks sold rises. Higher mileage ratings will work themselves through the entire US fleet as older, less efficient vehicles age out and go to the crusher.

          “oil consumption has only ever actually fallen in times of economic recession”

          That is no longer true. In the US GDP has been growing while oil use is stagnate.

          BTW, China has separated GDP and coal use.

          Efficiency and renewables are starting to change the energy world.

          • JonathanMaddox

            Good points, but I think mine stands. Neither US nor global oil consumption is measurably falling right now. On the contrary, US consumption is more-or-less flat as you say, and global consumption is measurably increasing. We already had economic growth with stable oil consumption during the 2004-2008 period when oil prices steadily rose and production simply did not until the 2008 spike and crash. Now we see that again, more or less, but we aren’t seeing demand fall.

            https://www.iea.org/oilmarketreport/omrpublic/

          • Bob_Wallace

            Your last three, probably 4, data bars are hypothetical. We’ve just finished the first quarter of 2015.

            Look at the long term trend US oil consumption is declining.

            Please don’t try to tap dance around the facts. GDP growth and oil consumption have been de-yoked. It’s happened in the US and it’s happened in China. The relationship between economic growth and oil consumption has fallen apart.

          • JonathanMaddox

            Well that’s why I took the screen cap with the Q42014 bar highlighted. We have good data until end 2014.

          • Bob_Wallace

            Go back and read the comments. You just now introduced global consumption after I pointed out the fact that GDP and oil consumption were no longer running together in the US and China.

            Do you not believe that as go the US and China so will the rest of the world? Do you not think efficiency is operating elsewhere or will be soon?

          • JonathanMaddox

            No, I didn’t “just now” introduce global consumption. Check the posting dates on the comments :-)

            Oil is a global market and has been for at least 90 years. My *first* weigh in on this thread was to post a link to Mr Rapier’s argument on the subject, which very explicitly pits growing demand in growth economies against whatever is happening in developed economies, which doesn’t (yet) look like demand contraction except during recession.

          • Jens Stubbe

            Jonathan Maddox

            I think you forget to take into account that energy efficiency measures are being developed and deployed very rapidly. EV’s are just one example. Solar panels and battery storage is head on in competition with Diesel and natural gas generators and will sweepstake the market eventually. Also you have to take into account how the oil industry will react to their crisis. Their sunken assets will be sunk for good and most of their activities will simply stop being meaningful in an economic sense. If you stop exploring then the market supply will fall. I have two friends that work for a company that supplies pipes for deep sea drilling and their customers pay cash to exit orders they have already signed. It will not be pretty seen from the perspective of the oil business – it will be messy and reluctant and they will fight internally to the bitter end so you can be sure that most oil fields will produce at a loss for a time before they are abandoned.

            Bunker oil for the international shipping industry is responsible for the death of 50.000 Europeans annually and account for 7% of the health cost in Europe. This is well known peer reviewed research numbers and yet has there been no real movement towards cleaner alternatives to bunker oil or for implementation of scrubbers.

            Once oil is no longer essential to our way of life the business will loose its hold over the political process and then they cannot continue to externalize cost on the scale they do presently.

            So my scenario is an oil business collapse not a gradual retreat.

          • JonathanMaddox

            “my scenario is an oil business collapse not a gradual retreat.”

            Bring it on! I consider this vanishingly unlikely. Demand for 90 million barrels per day doesn’t just evaporate overnight.

          • Bob_Wallace

            Are you watching what is happening to coal?

          • JonathanMaddox

            Coal is not qualitatively the same as oil. It has never been scarce globally, and in its main applications (electricity generation, building heat and hot water) it is very easily substitutable by literally any other energy source. For fifty years from the 1920s to the 1970s, oil was actually the preferred fuel for most of these applications. Any shift to coal has been driven by the high price of oil alone.

            Coal will likely retain its usefulness for several decades, as a metallurgical fuel and seasonally to meet residual electricity demand until renewable generation is sufficiently overbuilt, but we’ll consume it in ever-declining quantities because the substitutions are easy.

            Oil is qualitatively less substitutable and thus more valuable than coal, because of its immediate application in liquid fuels. Substituting other energy sources for oil in the applications for which we’ve come to rely on internal combustion engines is a big, difficult task. Far from impossible, but a very expensive transformation in capital terms.

          • Bob_Wallace

            The coal industry is undergoing demand problems. Several US mines have been closed. Expansion projects are being canceled. The value of coal industry stocks have fallen.

            That’s the parallel. What has happened with coal can happen to oil.

            If we see continued demand drop in the US, China and other large markets along with slowing/drop spreading to other countries then smart money will pull out of oil and stock values will fall.

            The value of oil stock will fall faster than demand.

            The part of oil that goes to personal transportation can be quickly replaced. Given EVs selling for the same price as ICEVs we would likely see new ICEV sales disappear in ten years and most of the remaining ICEVs gone in another 15 years or so. That is very fast in terms of overturning an entire industry.

            It will not be an expensive undertaking. It will simply happen in the same way we replace our current ICEVs, a portion of the fleet every year. New car purchasers will simply spend their money on EVs rather than ICEVs.

          • neroden

            Oil business collapse is correct. Bet on it. It won’t happen next year; maybe a decade or two from now — it’s really dependent on the scale-up rate of battery production.

            Oil is already far too expensive to burn for anything except transportation. It’s so expensive that alternatives have been considered even for plastics-making and chemicals (applications for which oil is perfect) — these applications use only 2% or so of the worlds oil, however.

            So, look at transportation, which is burning most of the oil. Small fuel engines are notoriously inefficient (<20%).

            It's already far cheaper to run from overhead wires if you have them, and it's cheaper to put them up if you're running enough trains or buses per day (roughly 30).

            If you have a start-stop duty cycle (like city buses or garbage trucks), it's already cheaper on Total Cost of Ownership to buy battery-electrics rather than diesel or gasoline.

            If you have high usage (100000 miles / year) it's already cheaper, long-term, to buy a Tesla Model S than a Toyota Prius.

            The trends are more extreme than that, because fuel vehicles are rising in price while battery vehicles are dropping in price. And electricity from renewable sources is still dropping in price.

            Basically the only thing keeping fuel-burning vehicles in use on the ground is habit.

            The sudden and very fast disappearance of fuel-burning vehicles will smash the economic model of the oil companies.

            Now, a nimble and clever oil company could ride this out. No new exploration; just pump the cheap "gusher" oil and sell it during market peaks. But none of the oil companies are doing this. Instead, they're loading up on debt for "exploration", which is finding nothing profitable. *This* will cause a wave of bankruptcies in the business, a supply disruption, and a final price collapse.

          • JonathanMaddox

            “Basically the only thing keeping fuel-burning vehicles in use on the ground is habit.”

            Habit, yes, but also massive sunk costs, not only in the vehicles themselves but the skills and equipment in the industries servicing them, the supply chains for the vehicles themselves, and the supply chain for the fuel. Car owners and car companies and oil companies and (most of all) oil-exporting nations aren’t going to relinquish the value in these assets in a hurry; that’s not just habit, it’s justified conservatism. Habit is, in part, a way of expressing our reluctance to write off those sunk costs.

            I have no doubts whatsoever that electric vehicles will supersede fuel-burning vehicles; we already see the leading edge of this change and it will become very rapid indeed within, as you say, a decade or two (and *that*, ladies and gentlemen, will be the final, genuine “peak oil” moment). But I doubt that the transition will be *complete* all that soon.

            The 2005-2014 loading-up-on-debt-for-exploration bubble, however, has been pricked already, and not by the efficiency and electrification measures you mention (well ok, gross global oil demand might be one or two percent higher without them).

            Today’s price drop is cyclical, its proximate cause being debt-driven over-investment on the supply side. We can even pick the exact historical moment when the price began to fall, namely the OPEC meeting. Sure there are layoffs and bankruptcies happening right now, but that’s happened before without a total paradigm shift on the demand side, and it is happening again right now, before this paradigm shift has moved more than a tiny fraction of demand.

            I’m quite sure there is life on the demand side yet for at least one more of these cycles, maybe two or three. Indeed the cycles will undoubtedly proceed beyond the “peak oil” moment: the replacement of petroleum with other energy sources will not be slow, but it won’t be instantaneous either.

          • Bob_Wallace

            You can’t use the history of ups and downs in oil prices to predict the future of oil. With the emergence of practical electric vehicles the rules of the games have changed.

            Will vested interests try to keep ICEVs alive? Sure, but how can they be successful if new car buyers quit buying them?

            A lot of the vehicle supply change will continue unchanged. Windshields, seats, body panel, etc. will still be manufactured and installed. Engine companies will have to find something new to manufacture or go out of business. They will be replaced by companies that manufacture electric motors and batteries.

            Jobs for mechanics will shrink. There will still be need for suspension/steering/drivetrain repairs and new specialities dealing with batteries.

            Oil industry jobs will shrink. But they will be replaced with renewable energy jobs.

            I don’t see a route for the vested interests to stop the transition to EVs. The best they can do is to slow things a bit, as is now happening with the end of EV subsidies and the establishment of EV road use fees. (Not that either of those things are wrong. It’s the timing.)

            EVs are on route to being cheaper to purchase than same-model ICEVs. We could reach that point in very short years. And gas would have to sell for around $1/gallon to make it competitive in terms of cost per mile. Economics should drive the switch to EVs very rapid. Save money on the purchase. Save money on operation.

          • JonathanMaddox

            I said nothing about *stopping* the transition away from petroleum for transportation energy. I just don’t think the transition is what’s causing the present low oil price, it hasn’t gone far enough yet. The present low oil price is cyclical and driven from the supply side.

            *After* we reach the point when EVs are cheaper than ICEVs, the transition will become a rapid one, and *after* it has become a rapid transition, it will undermine the price of oil. That’s ten years away at least, probably more.

          • Bob_Wallace

            And I didn’t say that you did.

            if you wish to bet that we won’t see a rapid transition to EVs for ten years or more I suspect you’d be making a losing bet.

            The “Recent US” box in the graph below is stale. Battery prices are now in the area at which PHEVs and hybrids cease to be competitive. The Tesla/Panasonic GigaFactory should make their batteries/EVs price competitive with gasoline at $3/gallon.

            Other battery manufacturers lag T/P only by a couple of years, at most. We seem to be less than five years from EV/battery manufacturing costs equaling or dropping below the cost of ICEVs.

      • JonathanMaddox

        More to the point, wealthy “first world” economies which have long wasted enormous amounts of money and energy on private petrol-burning car fleets can quite easily afford to divert those funds into efficiency measures like electric vehicles and public transit. Europe has been doing so for years.

        Growth economies where the normal mode of transportation today is packed buses, bicycles and high-occupancy motor scooters don’t have quite the same opportunity for transformation and indeed are moving rapidly the other way. But even if they were move wholesale towards electric, not internal-combustion-engine vehicles, their oil demand would continue to rise for all the other applications: heavy trucking, agriculture, aviation, mining, construction etc.

        • Bob_Wallace

          As more advanced countries devise alternatives to oil those developments will be shared with developing countries.

          Take, for example, city buses. The falling price of batteries will help close the purchase gap between diesel and electric buses. With the difference made up in a few years from fuel savings why would a developing country purchase diesel buses?

          (They will likely find it much easier to borrow money from international lenders if they make low carbon decisions.)

          Something else that is happening in developing countries is that people are speaking out against air pollution. If the cost of progress and food on one’s table was dirty air, people tolerated the dirty air. But now it’s becoming clear that there is an alternative route to progress that does not include polluted air. There will be more and more pressure to take the clean route.

          • neroden

            I’ve seen wildly varying quotes. But the Chicago quote was $500K for a diesel bus + $300K for fuel vs. $1,000K for a battery-electric plus fuel. This is very close to breakeven, except that the battery-electrics don’t have economies of scale in production yet (so they’ll get cheaper), and diesel fuel could go up in price.

            Just for reference. City buses will probably go electric very very fast. In China cities are already purchasing electric buses in lots of hundreds and thousands.

            For anything with a severe start-stop duty cycle, electric is cheaper *right now*. Gas & diesel will be restricted to long hauls.

    • Jouni Valkonen

      Actually, low oil price is the norm. High oil price was based on bubble economics and OPEC misuse of their cartel position.

      Now things are different, because people do not trust on bubble economics anymore and OPEC cartel has inner conflics as some OPEC members are against production quotas. Also there is problem that non-OPEC countries are considering the misuse of cartel position as unfair.

      Therefore no high oil price is in the realms of possibility ever. Oil price may plunge as low as 20 dollars per barrel during the next five or ten years.

      • JonathanMaddox

        Cycles and “bubbles” are the norm, actually. While markets do tend toward “balance” of supply and demand, the idea that they’re actually capable of achieving equilibrium without strict regulation is a pernicious myth. Cartel behaviour most obviously contributes, but that too is the norm — eliminating cartels requires anti-trust regulation of the most stringent type. Not something you’re going to achieve smoothly when the cartel is a powerful group of sovereign nations.

        • Jouni Valkonen

          Bubbles are always intentionally created. But with international tax on carbon, oil price could be stabilized to near actual production costs of oil. E.g. we could have 30 dollar tax for oil and this would stabilize the oil price to 20 to 30 dollars per barrel before taxes. And after international carbon tax, oil price would be 50 to 60 dollars per barrel.

          • JonathanMaddox

            “Bubbles are always intentionally created.”

            I don’t know about intentional, but historically speaking market bubbles are natural and normal — always something is on the boil, attractive to speculative investors and insufficiently regulated to prevent investment from overtaking demand.

            The 30 dollar per barrel tax you propose might indeed take the heat out of the oil market, I’d be strongly in favour, but good luck imposing one on an oil industry as powerful as the one to which the US is captive. An *international* tax? Already I can hear the tea partiers screaming “one world government”… and that’s before you get OPEC to sign on!

      • Jens Stubbe

        I do not think $20 per barrel is economically sustainable for any oil producing country. Saudi Arabia presently has 25% of the oil resources and are able to produce crude oil at $17 per barrel, but the Saudi Arabian economy is not in balance at that price point. And the same is true for every other major producer of crude oil, which can be seen in this article. http://www.vox.com/2014/12/16/7401705/oil-prices-falling

        • Bob_Wallace

          This graph is kind of old but should give some sense of how cheap/expensive oil costs from different countries.

          (Anyone know of a newer source?)

          • Jens Stubbe

            Bob

            I think the oil business has picked up since then and it is now actually cheaper to produce oil. At least in Denmark $35 per barrel is frequently mentioned as a breaking point and they have been able to expand the percentage of oil that can be extracted from oil fields and also the operational lifetime of oil rigs.

            Denmark should be comparable with UK North Sea as the oil fields are in the same geological formation.

          • Bob_Wallace

            Found some 2014 data…

          • neroden

            Wow, Russia really used up their cheap oil between the first graph and the second. That’s a hell of a jump in the breakeven price for them.

          • Jouni Valkonen

            And if Denmark is subsidizing oil production with 15 dollars per barrel, then Danes could produce oil with 20 dollar market price. Easily.

        • Jouni Valkonen

          So, you are suggesting that we should continue feeding oil producers with completely ridiculous profit margins?

          Actually we should have the situation that Saudi-Arabia should pay at least 30 % export subsidies for the rights to export oil. Similarly as United States is paying export subsidies for grain exports. In total, United States is subsidizing agriculture by 50 billion dollars annually. Saudi-Arabia should subsidize their oil exports in similar quantities.

          For reference, in EU area, there is paid more than 100 billion dollars for agricultural subsidies. In China over 150 billion. Therefore, if global oil markets are 75 million barrels per day or about two trillion dollars per year, then it means that Saudi-Arabia should pay about 100 billion dollars annually for export subsidies for oil.

          Then it would make things somewhat fair and justified. And not just leaching on the money of the rest of the world.

    • Jens Stubbe

      The energy bubble bursted last year, which incidentally was the first year with global economic growth and falling CO2 emissions.

      Fracking and coal is only alive in USA due to heavy government subsidies and the same is true for nuclear. In the last few years coal related shares has dropped 76%. Despite the $17 billions that the Obama administration has poured into to the Nuclear sector and the recent additional $12,5 billion for nuclear research Nuclear is utterly and fundamentally non competitive.

      The average 2013 PPA 20 year contracts for wind are 2,1 US cent per kWh in US interior (2014 figures are lower but not made official yet) and the wind power industry expects 30-50% cost drop short term according to the brand new Fullenkamp report.

      The article is fundamentally wrong about the threat that renewables represent for fossils. Since before world war 2 we have known how to produce Synfuel and it is trivial to substitute carbon from coal with CO2 extracted from the sea.

      The cheapest oil is produced in Saudia Arabia at $17 per barrel. If you can buy electricity at less than $0,01 per kWh you can out compete that oil and that is exactly what is going to happen.

      My guess is that the oil price will bounce a little with a steady trend towards $20 barrel and then simply cease being explored and marketed.

      • JonathanMaddox

        “My guess is that the oil price will bounce a little with a steady trend towards $20 barrel and then simply cease being explored and marketed.”

        I’m right with you until that last paragraph, which is fantasy land. Even at $100/bbl, oil is significantly cheaper than synthetic fuel from new facilities (which are powered using gas and coal, not electricity), so do expect to see the price of oil reach $100/bbl again and again. Maybe once fuel synthesis becomes a mass growth business, its costs will begin to decline, but that’s a commercial impossibility now with oil below $50.

        Right now, clean electricity is substituting for oil only where coal- and gas-fired electricity did not already substitute for it in the 1970s and 1980s, namely in oil-exporting nations without significant gas supplies (like Saudi Arabia, Nigeria and Venezuela) and island states (Pacific and Caribbean).

        Electric vehicles are making headway much faster than synthetic fuel, and *that* may eventually depress the price of oil in the longer term, but continuing growth in oil demand in developing nations is sure to be faster in the next decade or two.

        • Jens Stubbe

          I think you should read up on Synfuel. This is a pro nuclear site but the article is interesting never the less. bravenewclimate.com/2013/01/16/zero-emission-synfuel-from-seawater/

          I am not talking about synthetic fuel based upon fossils I am talking about synthetic fuels based solely upon seawater and electricity from renewables.

          If you look more into the matter you will discover that the US congress is dead against the research, which is pretty saying about the disruptive potential. They are more into Tarsand, Keystone and nuclear subsidies.

          There is really no future for fossils because renewables will keep the pace up. The stone age did not end because stones came in short supply and it is the same story with fossils.

          • Bob_Wallace

            $0.79/litre means $3/US gallon. That moves synthetic fuel into the usable range for places where we need liquid fuel.

            US Congress (Australian and Canadian PMs) aside, the world is likely to get very serious about climate change over the next ten years. Expect prices on carbon to be springing up all over. It will be easier to put a price on fuel oil if there is an affordable alternative.

          • Jens Stubbe

            True Bob but I think you have to accept that fossils will not keel over unless there is absolutely no business left for them and this means that you have to go significantly lower. Besides the rivalry between wind and solar is going to drive prices down and they will soon need market expansion, which means that they have to clash against fossils with Synfuel.

            Politicians are short sighted and quite easy to buy. So unfortunately it will be a huge struggle to even remove fossil subsidies let alone impose carbon taxation.

          • Bob_Wallace

            I do not think that fossil fuels will go gently into that good night, but I think within ten years we will be actively chasing them away with a large stick.

            Climate change simply becomes more problemsome with each passing year. We’ve about reached Glacier-less National Park and melted out the Arctic sea ice. First Texas and now California has been hit with major drought. The evidence keeps piling up and deniers keep fading away.

            If we were asking people to give up driving and give up flying in order to slow climate change I think we would have a difficult time passing laws and regulations to make that happen.

            But if we offer people cheaper, more convenient cars and trucks powered by electricity and selling for about the same price or less than fueled vehicles and let people fly for about the same price as they now pay, but using synthetic or biofuels, then that’s something acceptable.

          • JonathanMaddox

            I’ve followed these developments and research for a long time and I’m usually the one to point out that generation of liquid fuels from renewable electricity is a physical possibility and to post links to the relevant research and pilot programs. This is the first time I’ve had someone arguing my side for me, so forgive me if I play devil’s advocate.

            In the long term you’re perfectly right. But we started out talking about today’s oil prices, and the oil price trend over the next decade or two. Total synthetic liquid fuel production in the world today is on the order of two million barrels per day out of “all liquids” production of 90 million barrels per day — it’s dwarfed by biofuels, not just petroleum, and it’s almost exclusively from cheap coal and stranded gas feedstocks. All these synthetic fuel plants have been built during periods of exceptionally high oil prices, either globally or due to local conditions such as war or in the South African case, sanctions against the apartheid regime. Any new build is completely stymied by the current low oil price — in fact a couple of proposed US plants were already stymied by low domestic crude prices two years ago.

            There is precisely one existing instance of a plant making liquid fuel from electric energy, namely at Svartsengi in Iceland, and it makes methanol alone. Its capacity was just expanded to 4000 tonnes per annum. In energy equivalent terms that’s a bit over 13,000 barrels of oil. Per year. Thirty-five barrels per day out of 90 million. That’s a lot less than a drop in a bucket — all the rest is fossil fuels or biofuels.

            It’s a major thing, this synthetic methanol plant. It runs on geothermal electric power and uses CO₂ sourced from the same geothermal vent. It’s living proof that liquid fuels can be made from clean electric energy without any fossil fuel energy at all. But to suggest that it or any similar technology will help put a lid on oil prices over the next 10-20 years is too much of a stretch.

          • Jens Stubbe

            Johnathan Maddox

            “It’s a major thing, this synthetic methanol plant. It runs on geothermal electric power and uses CO₂ sourced from the same geothermal vent. It’s living proof that liquid fuels can be made from clean electric energy without any fossil fuel energy at all. But to suggest that it or any similar technology will help put a lid on oil prices over the next 10-20 years is too much of a stretch.”

            First of all Synfuel is not doing it alone. EV’s and advanced hybrid drivetrains are coming fast and will suppress demand – on that count I go with Bob Wallace.

            With the current solar and wind technology trends you are looking towards production prices below 1 US cent per kWh in prime locations within less than 10 years. These prime locations are scattered everywhere around the globe, which means that most of the globe will have access to produce their own cheap and abundant energy.

            Intermittency can be approached by storage, HVDC grid or by dumping excess power into production of synthetic fuels. Synthetic fuels means that solar and wind can keep expanding so they will invariably turn their interest towards Synfuel.

            Despite the fact that Synfuel plants are not widespread the basic technologies are all well understood and the industrial base is available.

            90 million barrels per day distributed over for instance 10.000 Synfuel plants is hardly a challenge for the industry. There are over 100.000 ships in the international shipping fleet and it is expanding fast. Given that new oil rigs and tankers will be scarce orders and that all other ships in the international shipping fleet will stop slow steaming and thus also be scarcer orders there will be ample resources and capacity to build the needed production base.

            9.000 barrels of Synfuel contains 14.400.000 kWh, which with a Synfuel conversion efficiency of 60% consumes 24.000.000 kWh daily.

            When you break the numbers down your pessimism may appear a little too defiant.

            When CRT’s began loosing ground to LCD’s the business did not take the competition serious at all and the same was true when Nokia was challenged by Apple and yet most CRT producers has folded their display operations entirely and Nokia is now owned by Microsoft.

            Lastly I wrote that oil will stop being explored and marketed in 10-20 years, which basically means that oil exploration activities will grind to a halt and that any further production will be for domestic markets only.

            The coal industry in USA has lost 76% of its market value in the last few years and the tracking industry is running at a loss. Both these two fossil industries are heavily subsidized and so is the US domestic oil industry and the global oil business is protected and dominated by USA. At some point it simply becomes too expensive for US taxpayers to keep the fossil business going.

          • Bob_Wallace

            I don’t see wind and solar prices going that low. Around 3 cents/kWh, on average, seems to be more reasonable.

            And I don’t think synthetic fuel plants will run on ‘surplus’ electricity. Due to the cost of the plant it’s more likely they will run 24/365, or at least as many hours as demand will support.

            Modeling synfuel prices should be done based on a realistic electricity price. Remember, fuel plants will be competing with EVs and storage facilities for the cheapest power in the daily cycle and that will create price supports.

          • Jens Stubbe

            Bob

            If you read the report I linked to you will see that electricity cost makes up most of the cost so forget about 24/365. Further Synfuel from Seawater is a cascade process in separate steps where the intermediary products can be stored for later synthesis so the plants can be very flexible. If you run a plant you can also decide to regulate freshwater output or biomining refinery output etc. In short the Synfuel cycle is basically a fantastic opportunity to regulate the demand side.

            In 2013 wind power was just a fraction more expensive than 3 US cent without subsidies as the average 20 year PPA deal in US interior was 2,1 US cent. After 20 years a modern wind turbine is fully operational and either keep running or can be recirculated with a net profit or for instance the foundation can be reused. Most of the wind turbines built in 2013 will enjoy the fruits of the constant development and will actually increase capacity factor over their lifetime and thus their economics.

            The brand new Fullenkamp report assess 30-50% wind turbine cost reduction just from rationalizing production.

            There are many new innovations on the way in wind power today that undoubtedly will reduce the cost of wind power significantly independently from the ongoing rationalization strategy and the scaling strategy.

            As for solar the Bill Of Materials, the maintenance cost, the land cost, the financial cost, the component lifetime, the efficiency, the construction cost, the insurance cost etc. are all moving in the right direction. I do not understand why you think it should be a problem to reach the sub cent threshold. If you accept the claims that First Solar has made about their cost and performance targets and place their solar modules in an optimal location and accept a PPA that run for 30 years you are sub US cent in less than 10 years. And might I add First Solar is not without competitors.

            I am curious about your pessimism about further cost reductions for wind and solar

          • Bob_Wallace

            You’re pushing the pencil very hard to make electricity cheap. That’s not a safe way to do estimates.

            Unsubsidized wind in the US in 2013 was just under 4 cents, not a fraction higher than 3 cents. And that is the price where the wind farm connects to the grid. There are transmission/distribution costs that will be added on before it reaches the syn plant.

            EVs and storage will also be dispatchable loads. There will probably be no “almost free” electricity like there now is. There will be no coal and few nuclear plants selling at deep loss in order to avoid having to shut down. When the price drops a bit below average someone will snap it up.

            I’m very optimistic about the future price of electricity, but for now I think it best to not expect generation costs to drop lower than 2 cents and more likely to average higher. And then one needs to add in the other costs.

            And I don’t think it will make sense to build 5x as many syn plants just so they can be run only 1/5th of the time when electricity prices are lowest.
            EVs and storage can afford to sit idle a lot of the time, waiting for best prices.

          • JonathanMaddox

            Bob, the only part of a synfuel plant which would need to run as dispatchable load is the electrolyser, which can be very easily overbuilt to spend 20% of the time using off-peak power to supply enough electrolytic hydrogen to run a round-the-clock fuel synthesis operation. Indeed power-to-gas pilot plants in Germany and elsewhere *already* operate precisely this way with the clear intention of time-shifting clean energy supply from spring abundance to winter scarcity. The capital costs of electrolysis equipment are modest enough that there’s no need to run them at a high capacity factor. I’m certain we two have had this discussion before.

          • Bob_Wallace

            I think you are expecting periods of very low cost electricity.

            I do not think that will continue.

            Very low cost electricity happens now because there are coal and nuclear plants that will sell at a very deep loss in order to avoid shutting down. The coal plants will go away. The nuclear plants will drop out as they age out and probably will not be replaced.

            Some sort of system will evolve which will turn on EV charging when other demand is low. The utilities will sell to EVs for “5 cents” before they will offer power to syn plants for “2 cents”.

          • JonathanMaddox

            Agreed. EVs and electrically-generated synfuels will compete for the same energy supply, off-peak power, and for the same market, energy for mobility. EVs are very clearly winners at this stage of the game. Synfuels can’t compete at all against cheap petroleum. But petroleum *will* become relatively scarce once more (or be penalised by a carbon price, same outcome), and $100/bbl liquid fuels can pay for a lot of 5 cent kilowatt hours. There are some things you just can’t do with batteries.

          • Bob_Wallace

            I don’t see syc fuels competing for personal transportation. Only for flight and niche applications where batteries have yet to reach.

            There will be less and less thing that would be pretty much impossible to do with batteries/electricity at the moment. Commercial flying and ocean shipping.

            Land freight could move to electrified rail and battery powered 18-wheelers. Lots of moderate and short distance flights could move to HSR.
            Then there’s the hyperloop. I’ve yet to see a group of knowledgeable engineers point out an unsolvable problem.

          • JonathanMaddox

            I’m not remotely pessimistic. I just think synfuels need $100/bbl oil to be commercially viable. Prove me wrong if you like :-)

          • Jens Stubbe

            I work with display technology, touch technology, lighting and coatings so energy is more like an interest to me. I bother out of concern about the development. If we do not get cheap abundant energy we cannot address the challenges we are faced with. Even with a total fossil stop this instance we may already have set fire to something that turns out irreversible and very damaging to nature and many people around the globe. The only viable alternative to fossils is renewables. Since Synfuel technology is so well understood I do think we have plenty of time to ready it for massive scaling but it would help if the general awareness of the potential could be improved so both research and pilot plant deployment could begin soon.

          • JonathanMaddox

            “If we do not get cheap abundant energy we cannot address the challenges we are faced with.”

            Unfortunately we *have* cheap abundant energy — and this is precisely the problem. It must be government policy, carbon taxes and subsidies and the like, which drive the switch from fossil fuels to cleaner renewable (and/or nuclear) energy. Moving electricity to renewable energy sources is now no longer especially expensive and has developed its own momentum after some decades of impressive, targeted subsidy. Displacing petroleum as mobility fuel is a more expensive and more technically challenging task (not that further *research* is required, the techniques are as you say very well understood) which will require a similar, but still larger, policy effort, in the face of the violent death throes of some very wealthy oil giants, both corporate and national.

          • Bob_Wallace

            If there is no price put on carbon.

      • Bob_Wallace

        $17 billion is small change. My view is that the Obama administration gave the nuclear industry enough to buy some rope.

        Left it up to them to either pull themselves back into competition or hang themselves.

        • Jens Stubbe

          Ok Bob the two of us has a very different take on government spending but seems to agree that nuclear power is not going to make it. Being Danish economy is much smaller and we only spend approximately 0,2% of GDP on subsidies for renewable, which of cause gives a net profit for society as well as the government. Two of the three largest wind turbine companies are incorporated in Denmark and we are the research hub for wind power. $17.5 billion spent on Synfuel, OTEC and other relevant energy research.

          • Bob_Wallace

            Nuclear has a lot of support in the US. Mainly right-wing support because the right-wing tends to be for anything that is the opposite of what “hippies” support.

            The money the US has put up for nuclear is largely loan guarantees, not direct handouts. And the guarantee program was tightened up, putting more of the borrowers’ assets at risk.

            What we’ve seen out of PBO and Co. is not opposition to things like nuclear and carbon capture/sequestration but a “Show us” approach. Putting the people making nuclear and CCS claims in a position to prove their claims.

            CCS was tried, failed, and proponents have largely shut up.

            Now we’re seeing some very expensive nuclear energy being created. There’s already been discussion of abandoning the Vogtle plants because costs are so high. (And wind/solar costs are falling so fast.)

            It looks very likely that no one else will start up another nuclear project without a major pricing breakthrough.

            We’ll likely have one more round of “Here’s some rope” funding with small modular reactors. There will probably be some funding to allow advocates to prove their point or be proven that they are wrong.

            In the meantime wind and solar will continue to get cheaper and more and more will be installed.

            To put $17 billion into perspective, US folks spend over $20 a year on bottled water and over $37 billion on pizza. In a year. The $17 billion may never be spent (it’s a loan guarantee) and if spent would be spread over 5+ years.