Since last June, when global oil prices began their precipitous slide from over $110 a barrel to less than $50 a barrel, we have had numerous corporate clients ask how this phenomenon will impact the solar industry at large, and more specifically, how the decline in oil prices will affect the economic returns associated with onsite solar photovoltaic projects.
The short answer is that oil prices have very little direct impact on solar, and perhaps counter-intuitively, in many parts of the U.S., the slide in oil may actually improve solar project economics.
The first takeaway is that solar projects “compete” with the retail price of delivered electricity (i.e. the kilowatt-hours that are no longer purchased from the grid when clean solar electricity is generated onsite), whereas in the U.S., oil is primarily used for transportation. According to the U.S. Energy Information Association (EIA), only 1% of electricity is derived from petroleum in the U.S., with coal (39%) and natural gas (27%) comprising the largest sources of electricity generation. So while oil price volatility has a huge impact on transportation economics (and related technologies like electric vehicles), it has negligible direct impact on electricity prices.
OK, but how can these free-falling oil prices be good for solar? Interestingly, in much of the U.S., the marginal price of electricity is driven largely by the price of natural gas. And to a large degree, the recent abundance of natural gas in the U.S. (and its extremely low pricing) is a result of the significant increase in “fracking” activity, where wells targeting oil often harvest natural gas as a by-product. As global oil prices have declined, the economics for new oil fracking wells have deteriorated sharply. And as the number of active fracking wells is reduced in the U.S., the supply of by-product natural gas from these wells will shrink, which we believe will lead to higher electricity prices, which in turn will lead to improved solar project economics.
Going forward, whether electricity prices are whipsawed by future natural gas price volatility, or the increased need for utility investment in transmission & distribution lines, or the additional regulatory costs for coal generators – onsite solar generation can “immunize” businesses from this risk by providing long-term certain power pricing (often at kWh rates that are below current spot market rates).