Clean energy in the Pacific: Will cheap oil stall investment?

Published on Friday, 19 June 2015

Published by Mike Trainor on Friday, 19 June 2015

An ADB-supported energy supply project for low-income communities in the Marshall Islands.
An ADB-supported energy supply project for low-income communities in the Marshall Islands.

Over the past decade, ADB’s portfolio of renewable energy investments in the Pacific has been increasing steadily, driven largely by the spike in oil from below $40 per barrel in mid-2004 to above $140 in July 2008.

The brief respite in the wake of the global financial crisis was just that, brief, with prices climbing steadily back up to the $100+ level and remaining there for much of the past five years. The impetus to displace diesel in power generation remained.

World oil prices have declined steeply over the past year, hovering currently around $60 per barrel. Understandably, this drop from above $100 to a level not sustained since before the global financial crisis raises doubts in many observers' minds as to the future of investments in renewable generation as an alternative to diesel-fired generation in this region.

In my view, the impact of lower oil prices on investment in renewable energy is not likely to be as great as one might intuitively expect, for a variety of reasons.First, there is a great deal of uncertainty regarding where oil prices will be a year from now. But one thing that is certain is that oil is a finite resource. We can state with confidence that as this commodity becomes scarcer and its marginal production cost increases, world oil prices will continue their long-term upward trend, ceteris paribus.  While some hedging strategies can be used to shield small island utilities from short-term price volatility, the long-term trend in oil prices is not in question.

Second, wind and solar photovoltaic costs are plummeting, and have come down by 60% and 80%, respectively, over the past five years. Investment decisions are thus becoming increasingly driven less by oil and more by the cost of renewable generation technologies themselves. In other words, where oil prices over $100 per barrel might have been necessary to bring wind and solar generation to “grid parity” a decade ago, that is no longer the case, especially in remote locations in the Pacific where the landed cost of refined product includes high shipping costs. Another factor in favor of renewables is that, once installed, generation price volatility from wind or solar all but disappears completely. Investment in renewable generation is its own hedging strategy.

Finally, as storage technologies improve and costs decline as the industry comes to scale, renewable generation will increasingly become a viable alternative to diesel for baseload requirements of small Pacific island states' power systems, and not just for marginal displacement of diesel-fired generation.

These trends are real and visible, and not likely to be reversed, irrespective of the recent dip in the price of oil – even if $60 per barrel becomes the “new normal.”