Oil and solar - a phantom relationship with real consequences

Given that oil and solar energy compete in different energy sectors, for the most part, simple logic dictates that price changes in one should not really affect the other.

According to Bloomberg, solar doesn’t compete with oil as a source of electricity except on small islands and in some crude exporting countries. Oil generates less than 1 percent of the U.S. electricity power supply and 5 percent globally. And yet changes in the oil price have had a long-standing impact on the attractiveness of solar energy to investors.

Nevertheless, it would seem the correlation between oil and solar is little more than a psychological link in many investors minds. According to a report in The New York Times’ green blog analysts believe this phenomenon is  “…a sign of oversimplification by investors, who lump renewables together and expect them to rise as old energy, or fossil fuels, decline. “

“It’s a guttural connection people make, based more on feeling than on facts,” said Ron Pernick, a researcher quoted in the report. Nevertheless, when the price of oil goes up, solar stocks almost always rise along with it, and vice versa. The effects of the oil price on solar are real.

“Nitin Kumar, a well-respected analyst in the solar space published a research note in October that studied the link between the crude oil price and solar for the first time. The bottom line is that we are starting to see solar stock trading up and down with the whole energy sector,” as Dr. Shawn Qu, CEO and founder of Canadian Solar, wrote in his LinkedIn blog.

“I have been in the solar industry for my entire 18-year career and I take it as compliment to all solar industry participants that solar has achieved such a prominent position. If the crude oil price can directly influence solar product demand, the day must come when we see solar energy production affect the demand for oil and gas.”

 

However, for the moment, it is clear that changes in the crude oil price affecting people’s investment in solar energy is driven more by emotional considerations than supply and demand in the oil energy market directly impacting demand for solar. The numbers reveal just how small the intersection of oil and solar in the electricity market actually is.

In the US, 39% of electricity is coal generated (still surprisingly high), 27% gas, 19% nuclear, 7% hydro, 6% renewables and only 1% oil.

After the Fukushima Nuclear double-meltdown accident in Japan, 27.6% of electricity generation is now from coal, 42.5% from LNG, 8.6% from hydro, 6.4 from renewables, while 8.3% is from oil.

In the European Union (EU 27), it’s 28% coal, 16% gas, 2% oil, 27% nuclear, 12% hydro, 7% wind and the remaining 8% from solar and other forms of energy.

While in China, 74% comes from coal, 2% from gas, less than 3% from wind and a mere 0.16% from solar. The remaining power is provided by hydro, nuclear and others.

“It would appear that, by and large, we don’t really burn that much oil for electricity, and the cost of electricity is more related to coal and gas than oil,” said Dr. Qu. “Meanwhile, a significant portion of solar products goes to the distributed power generation market and serves retail customers. The retail electricity price, which has seen a rising trend in recent years, is mainly affected by transmission and other fixed costs rather the input fuel,” he said.

Nevertheless, over the long term, the writing is on the wall. Cost of production of solar energy will continue to fall, while efficiencies will rise. And it is safe to assume that the reverse is true of oil and all other fossil fuels. The implications are clear for energy investors who take a big-picture view that spans decades rather than months or years.

And what could be better proof of this than the fact that the world’s largest crude oil producer, Saudi ARAMCO has chosen Canadian Solar to partner in developing the largest ground-mounted PV system in Saudi Arabia.

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