Analysis: Why Lower Oil Prices Won't Clip Clean Energy’s Wings

gaspumps_650x350It feels like you can’t open up a news website these days without seeing an update on the plunging price of oil. From Ontario’s rosier prospects to Russia’s plunging ruble, the implications of lower oil prices at home and abroad are profound. Little wonder the Canadian Press chose oil’s price slide as its business story of the year for 2014.

Clearly, it’s time for us at Clean Energy Canada to hop on the bandwagon with some analysis of our own. What does lower-priced oil mean for the global shift to clean energy?

Of course, cheaper fill-ups make driving our cars more appealing—so it’s fair to ask whether lower-priced oil is bad news for the environment. Some commentators have also suggested that clean-power development could become a casualty of the current oil price trend—after all, if fossil energy is cheap, won’t clean power be more costly in comparison?

The reality is a bit more complicated. The way we use energy in North America today means oil and electricity rarely substitute for one another. Oil is mostly used for transportation—we burn it in our planes, trains, and automobiles—while electricity runs our appliances and keeps the lights on.

Because oil and clean power still run on separate tracks, clean energy analysts have largely maintained their optimism about the prospects for strong clean power sector growth in the face of low oil prices.

In North America today, the main fossil-fuel competitor to power sources like wind, water and solar is not oil but natural gas. The price of natural gas hasn’t plunged like oil’s—but on the other side of the equation, the cost of clean power technologies has fallen sharply. (As just one example, Deutsche Bank projects that solar will out-compete the average electricity price in virtually every U.S. state by 2016.)

And while price matters, governments and companies choose clean electricity for other reasons too. In the United States, the Environmental Protection Agency’s new rules to reduce carbon pollution from power plants will shape clean power demand. China is making massive clean power investments largely to improve its air quality.

So the factors that have been driving clean power investment don’t look poised to change. In the short term at least, the drama in the oil markets is a bit of a sideshow for the clean-electricity sector.

It’s a bit of a different story for electric cars, where electricity does directly substitute for oil. And the share price for the poster child of electric vehicles, Tesla Motors, has fallen as oil prices have plunged. But once again, consumers often choose (or reject) electric cars for reasons other than the price at the pump—questions like how far you can drive before running out of juice often matter far more.

As a result, Bloomberg New Energy Finance’s analysis concludes that U.S. electric vehicle sales will grow more slowly if oil prices stay low—but that they will grow significantly nonetheless, rising from less than one percent of the U.S. fleet today to six percent by 2020.

In Part 2 of this post, coming Tuesday, we’ll cover the link between stronger action to cut carbon pollution and lower oil prices—and what that means for Canada. See you then!

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