By Bill Ellard, Energy Economist
Over the past 2 years, we have seen 50% lower oil prices in the US and the rest of the world. Firms that produce oil have seen their respective stock prices crash. We have also seen these lower oil prices have a negative impact on the solar industry’s publicly traded firms, such as First Solar. But I believe that low oil prices are a good thing for the solar electric (photovoltaic) industry.
First, I’d like to classify solar a bit better and add some understanding of the economics of solar. Solar is part of the business and customer spending sector – it’s a consumer product much like a computer, laptop microprocessor, commercial forklift, or new car or truck. Solar firms are not just energy firms, but also high-tech consumer product companies.
Second, we must understand the economics that drive solar consumer spending. The cost-benefit for solar is pretty simple. There are two components: how much it costs per kWh to produce your own electricity, and how much money you offset or save by installing solar.
When I installed a 7 kW solar system on my home, the economics were compelling. I was paying 15 cents/kWh with my utility; I am now paying 5-6 cents/kWh to produce my own energy. The cost-benefit is even more impressive in the future as my cost is fixed, while electric rates will increase over time. (For the past ten years my utility’s rates have been increasing at about 6% per year.)
This cost-benefit will vary for every site based on local electric rates, the site’s solar insolation rate, local permitting fees, the local cost of labor, etc. A simple cost-benefit from my 7 kW array: fully installed cost of about $2.25/ watt, 18% solar insolation rate, and 6% rate in grid inflation. [Bill, what is grid inflation? Do you mean the retail rate you pay for electricity?]
I gather that equity markets must somehow think that much lower oil prices will reduce the retail price of electricity. Let’s take a quick look at some data from the Energy Information Administration (EIA):
As we can see, oil prices have no correlation to retail electric rates. Oil goes up, electricity prices go up; oil goes down, electricity prices still go up. Oil is typically not used by utilities to produce electricity. The main feedstocks for utilities are coal, natural gas, and nuclear.
Oil is still deeply embedded in almost all economic activity across the globe. With lower oil prices, businesses all across the US and in most of the world’s large economies (Euro Zone, China, India, Japan, etc.), are getting an infusion of cash – more disposable income. Businesses are able to realize lower manufacturing and shipping costs.
A decrease in manufacturing and transportation costs will further reduce the cost to install a solar system. For my 7 kW array, the cost for just shipping the equipment from California was about $1,000 – or about 1.5 cents per watt. But the price I paid for my solar modules included the shipping – so both equipment cost and transport to sites around the world will be reduced.
In my opinion, the largest positive factor for the solar industry of oil prices dropping 50% will be the world-wide increase in consumer spending. The main target markets for the solar module manufacturers are Germany, China, India, Italy, Japan, USA, Spain, France, Australia, Belgium, and UK. These countries are all importers of oil and should see significant economic stimulation from much lower oil costs.
The last of my list of positive factors for the solar industry from lower oil prices is a bit more speculative. The 2015 and 2016 capital expenditure budgets for oil and gas firms are down significantly. We can see from the next set of charts that drilling for natural gas is down more than 75% in just 18 months:
This sharp decline in drilling for natural gas will cause production to decline as well. Looking at the next chart, we can see the sharp increase in gas production from 2010 thru 2015, and in 2016 the start of this decline.
Looking forward, my theory is that with a combination of fracked well depletion rates, lower drilling for both oil and gas, and increasing natural gas demand from activities such as coal to gas switching, more gas exported as liquefied natural gas (LNG), and increased aggregate demand, we will see natural gas prices rising in the second half of 2016 and beyond. Higher natural gas prices during the summer months will increase electric rates during the daytime to compensate utilities for running their peak power generation. This is a perfect fit for solar, which produces most of its power during the long days of summer.