Does the current low oil price sound the death-knell for solar?

Does the current low oil price sound the death-knell for solar?

For many years now we’ve seen conventional energy prices increase faster than general inflation and this fact, when combined with the dramatic falls in the price of solar, means solar has become increasingly attractive. This convergence in price between conventional energy and solar energy means that we can now foresee a day when solar might become the cheapest forms of energy available to us. Indeed the Solar Trade Association predicts that, on current trends, solar might become cheaper than electricity generated using gas as soon as 2018.

When you consider that solar is also not the preserve of multinational corporations because it is affordable enough for many people to put on their own homes, then its clear why this technology is both popular and revolutionary.

But are there dark clouds on the horizon? It won’t have escaped your attention that over recent months there has been a dramatic fall in the price of a barrel of oil from a peak of $145 a barrel in June 2008 to around $60 a barrel today. Although in the UK we don’t burn much oil to generate electricity, we do use a lot of gas and the price of gas has historically followed the price of oil. So with the prospect of energy prices reducing, where does that leave solar?

Well the first question is: will the cheap oil price feed though to cheaper energy in our homes? Before we all cry “foul” at the big energy companies, the answer may not be as simple as we first think. Firstly our energy companies do forward buy much of their energy so as to smooth out some of the volatility in wholesale pricing. Secondly, the price of electricity is becoming less linked to oil. This is because oil is predominantly used to produce transport fuels and our electricity is generated using a combination of methods, from gas to coal, nuclear, wind, hydro and increasingly solar. There’s a good article which explores this a little further on the BBC website by David Shukman here. So although there will be some downward movement in the price of energy for our homes, it probably won’t be anything like as dramatic as the fall in oil price.

But if we assume any reduction in retail energy price might undermine the case to buy solar there are two strong counter arguments to such a theory:

1. Generally when something falls hard, as is the case with the price of a barrel of oil, it will bounce back harder, eventually. We’re already seeing the oil companies making deep cuts in their budgets for exploration and developing new reserves. They are making skilled staff redundant and even selling off assets. What this means is that when the current glut in oil supply runs dry, as it inevitably will, then with fewer new supplies available, there will certainly be a strong recovery in the price of oil as demand outstrips supply. This is inevitable, the only question is when? I’m not an expert in oil markets but I feel it’s unlikely to be much longer than a year and yet solar is a 25+ year investment. So on that basis most intelligent people will still see a strong case for solar because it makes even more sense beyond the sort-term.

2. Even if we don’t see much of a reduction in household energy prices, the reduction in transport costs will make us temporarily better off in many ways. Not only will it be cheaper to fill up our cars but this will also feed through into, amongst other things, reduced food costs (fuel costs are a major factor in food cost due to the fuel used in food production and transport).

So, in summary, I would argue that as people will have a more disposable income, and know that higher energy costs will always be on the horizon, low oil prices mean the prospects for solar over the coming months are stronger than ever. Interested in finding out what solar system Poweri would recommend for you? Get in touch; we’d be happy to help.

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