Impact of low oil prices on the deployment of renewable energy technologies in developing countries

Pilita Clark writes in the Financial Times about how the recent oil price plunge is affecting the installation of renewable energy technologies in many developing countries.

 

Cheap oil endangers poorer nations’ switch to renewable energy

After oil prices started edging back up above $100 a barrel at the start of this decade, a Canadian gold mining company called Iamgold decided it was time to try something new: solar power.

Like a lot of miners, it had expanded into far-flung spots with patchy electricity grid connections during the commodities boom, becoming more dependent on heavy fuel oil generators that were increasingly costly to run.

It built a $12m solar plant early last year at its South American mine in Suriname and was planning an even bigger one at another mine in Burkina Faso in west Africa.

But the oil price crash has set back Iamgold’s plans, providing a sharp reminder of the risks that cheaper crude poses to one of the most potentially transformative ideas to emerge from the green energy industry.

This is the hope that people in developing countries can “leapfrog” conventional electricity grids powered by coal or other fossil fuels and go straight to renewable energy — in a manner that some poorer nations have bypassed fixed line phone networks in favour of mobiles.

As the price of Brent crude plunged from $115 a barrel in June last year to below $50 in January, and the value of gold fell to four-year lows in late 2014, Iamgold put its Burkina Faso solar plant on hold.

“As oil prices went down, the economics shifted,” says Bob Tait, Iamgold vice-president of investor relations. “The savings you’re going to get by switching to solar become less obvious.”

The lower price of gold also played a part in Iamgold’s decision because it forced the company to cut back on capital spending. But the arguments against solar were inescapable.

The cheaper fuel the miner was trucking into landlocked Burkina Faso meant electricity that had cost US$0.30 a kilowatt hour fell to as little as US$0.20 kWh, says Mr Tait.

Iamgold hopes to revive the solar project, he adds, saying energy accounts for nearly 30 per cent of its Burkina Faso mine’s costs and oil prices could obviously rise again.

But until they do, the impact of cheaper crude is being closely watched in places where the idea of making a leap to renewables has a powerful appeal.

That includes island countries and large swaths of Africa, where unreliable electricity supplies have led to a heavy dependence on expensive and polluting diesel, heavy fuel oil or kerosene.

In the Marshall Islands in the Pacific, the fall in crude prices was watched with a mixture of concern and relief by the small nation’s foreign minister, Tony de Brum.

The price plunge came just as a project to install solar systems on the country’s outer islands was completed, he says.

“We’re fortunate that all the assessments for solar happened before the oil price dropped,” he adds. “They may have delayed support for solar in the outer islands if the oil price had been lower.”

Across sub-Saharan Africa, meanwhile, most nations rely on diesel generators for electricity that costs three to six times what people pay for grid power across the world, according to McKinsey, the consultancy.

Oil is only used to generate 5 per cent of the world’s electricity globally, International Energy Agency figures show, so it does not compete directly with wind, solar or other renewable sources of power.

But it is a different story in many African countries, such as Liberia, where the capital, Monrovia, is largely supplied by expensive diesel-based generators, according to a report by the Africa Progress Panel, a body campaigning for sustainable development on the continent.

In Tanzania, the state utility’s struggle with power shortages has led it into expensive deals with emergency suppliers such as Aggreko of the UK for diesel generation.

Both Liberia and Tanzania have been targeted by Redavia, a German company that supplies rented solar systems for use with diesel generators that it claims can produce savings of up to 30 per cent.

The company has felt the impact of lower oil prices, says Erwin Spolders, its chief executive.

“We’ve had to be more aggressive on pricing here and there,” he adds. Still, solar panel costs have plummeted so sharply that the cost advantage his business offers would still exist even if oil prices fell to $25 a barrel, he says.

The cost of producing one watt of solar power this year fell to a quarter of the level in 2008.

The lower cost of oil is also being closely monitored by groups such as the Carbon War Room, a group trying to help 10 Caribbean islands shift from electricity generated from fossil fuels to renewables.

“I think potentially it has slowed down some of their [the islands] aggressiveness about going towards renewables,” says Justin Locke, director of islands at the Carbon War Room.

Still, since some islands pay as much as US$0.52 kWh for electricity, nearly four times the average price mainland US consumers pay, he thinks the argument for switching to increasingly cheaper and cleaner forms of power remains strong.

And as companies around the world race to produce cheaper batteries to store wind and solar power, making it easier to rely on green electricity even on windless days or at night, the leapfrogging idea remains very much alive.

When Elon Musk, the billionaire behind the Tesla electric car, unveiled the company’s Powerwall battery in May, he said it was going to be “a great solution” for people in remote regions with unreliable and expensive electricity.

“In fact what we’ll see is something similar to what happened with cell phones versus landlines, where the cell phones actually leapfrogged the landlines,” he said

“So people in a remote village or an island somewhere can take solar panels, combine it with the Tesla Powerwall and never have to worry about having electricity power lines.”

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