Sunday, March 29, 2015

The World Turned Upside Down

In the 1970s investment in renewable energy was killed dead by the realization that the Saudi's could drop the cost of oil to zero making any capital investment in wind and solar foolish, that and the relatively high cost of wind and solar at the time made it certain that the cost curve for renewables would not reach that of oil and coal within the investment horizon.

Fossil fuel energy sources have relatively low capital costs and high (cost of fuel) running costs. Today, no one has any idea of what the price of oil will be next month, let alone next year or the next decade.  Having seen a close to $(US)100/bbl swing within a year, planning is not possible.

The extraction cost of coal is low, but again, anybunny investing in fossil coal plants has to worry about pollution control costs and costs imposed in the future to pay for other externalities such as putting the top back on mountains and disposing of the ash and overburden.

Renewables are the reverse, high up front capital cost and low running costs with large recent cost drops driven by improved manufacturing.  With over half a decade of low interest rates behind us and no indication of any inflation at all in the developed world, capital costs todaydo not carry high interest, and investment in renewables looks attractive to any organization, even the ones in Texas.

Tom Dart in the Guardian reports that Georgetown, a town of 50,000 in Texas, is planning to go 100% wind and solar.

When its staff examined their options last year, they discovered something that seemed remarkable, especially in Texas: renewable energy was cheaper than non-renewable. And so last month city officials finalised a deal with SunEdison, a giant multinational solar energy company. It means that by January 2017, all electricity within the city’s service area will come from wind and solar power.
This is a 25 year deal.  Especially in Texas, wind and solar have strong advantages, guaranteed (and low) pricing amongst them
The region bordering New Mexico is one of the prime solar resource sites in the US and the wind whistles across the plains to such an extent that, as Scientific American pointed out last year, the state is America’s largest wind power producer – as well as leading the nation in the production of crude oil and the emission of greenhouse gases. 
Renewable energy also uses much less water than traditional power generation – a bonus in a state where half the land and more than nine million people are affected by drought conditions, though Briggs said that for Georgetown, water conservation was only a “side benefit”.
Today relatively expensive W. Texas crude is at more risk from Saudi petro-politics than wind and solar.  Indeed, many commentators thought that the Saudi's dropping the price of oil was directly aimed at killing off the frackers and further expansion of oil drilling in the oceans rather than renewables.


Steve Bloom said...

Fragment at the end of paragraph three, Eli.

Nigel Franks said...

Why do people say that the Saudis are responsible for the fall in the price of oil. IIUC it was the increase in US production over the last few years that caused over supply. So why should the Saudis curtail their production?

Nigel Franks said...

Oil is rarely a major direct replacement for renewables, so the fall in oil price is not a real threat.

Barton Paul Levenson said...

Actually, I think the Saudi cutting their oil prices was aimed at ISIS. The Saudis can stand a year or two of lost revenue. ISIS can't.

BBD said...


That's my understanding too.

BBD said...

Indeed, many commentators thought that the Saudi's dropping the price of oil was directly aimed at killing off the frackers and further expansion of oil drilling in the oceans rather than renewables.

Should add that if the oil price drop buggers up the economics of the US fracking industry *as well* then that's just gravy for the Saudis. A couple of years' reduced revenue starts to look like a wise investment in the future.

Fernando Leanme said...

I'm doing an analysis of the Mexican energy industry, and trying to forecast it's potential options to 2030. This keeps me looking very closely at fossil fuel prices. The oil price took a dive from around $100 to around the $50 per barrel level (it wasn't a $100 swing).

The cost of renewables may be lower in a special case like Georgetown's because they get to piggy back on the existing infrastructure. They can't go off grid unless they put in backup natural gas driven turbines. And once they put those turbines into the mix their overall cost structure is going to be higher.

Wind and solar intermittency are a serious problem. And I'm afraid they may run into additional cost issues they haven't foreeseen. However, I'm glad they are doing it. This serves as a benchmark for towns along the USA / Mexico border.

Regarding the Saudi move, they were just protecting market share. The fact that the current slump was a punch in the gut for supposed bad guys like Iran, Russia, Cuba and Venezuela sure came in handy. But I believe that was secondary.

EliRabett said...

As the lowest cost producer the Saudi's control the bottom of the market. Their choice was to earn more by producing less at the high end of the market or earn more producing more at the low end while caverning the price. They had done this before in the late 1970s with the explicit aim of wiping out any effort on renewables.

Given that ISIS had been financed by rich Saudis and is sunni fighting shiites, well.

BBD said...


They had done this before in the late 1970s with the explicit aim of wiping out any effort on renewables.

Is there any documentary evidence of this?

BBD said...

Given that ISIS had been financed by rich Saudis and is sunni fighting shiites, well.

Yes, but there are two strongly opposed views within Saudi Arabia concerning the desirability of the ISIS jihad. For example:

He [Dearlove] remembers the then head of Saudi General Intelligence "literally shouting at me across his office: '9/11 is a mere pinprick on the West. In the medium term, it is nothing more than a series of personal tragedies. What these terrorists want is to destroy the House of Saud and remake the Middle East.'" In the event, Saudi Arabia adopted both policies, encouraging the jihadis as a useful tool of Saudi anti-Shia influence abroad but suppressing them at home as a threat to the status quo. It is this dual policy that has fallen apart over the last year.


Saudi Arabia has created a Frankenstein's monster over which it is rapidly losing control. The same is true of its allies such as Turkey which has been a vital back-base for Isis and Jabhat al-Nusra by keeping the 510-mile-long Turkish-Syrian border open. As Kurdish-held border crossings fall to Isis, Turkey will find it has a new neighbour of extraordinary violence, and one deeply ungrateful for past favours from the Turkish intelligence service.

As for Saudi Arabia, it may come to regret its support for the Sunni revolts in Syria and Iraq as jihadi social media begins to speak of the House of Saud as its next target. It is the unnamed head of Saudi General Intelligence quoted by Dearlove after 9/11 who is turning out to have analysed the potential threat to Saudi Arabia correctly and not Prince Bandar, which may explain why the latter was sacked earlier this year.

Source: The Independent, 30/03/15

BBD said...

Silly dating error above - the Independant article appeared on July 13 2014.

Hank Roberts said...

Related: the argument whether coal in the ground is money in the coal companies' banks, and thus arguing that regulating CO2 is taking money away from the coal companies.


hat tip to:

Hank Roberts said...

Oh, and then there's the gentleman from West Virginia, Mr. McKinley:

"... the United Nations goes on to say that all coal-fired powerhouses in America, if you shut off every--terminated a coal-fired power--every one of them shut down in America, under the United Nations, said you only reduce the
CO2 emissions by 2/10 of 1 percent. That is not my statistic, that is from the United Nations, 2/10 of 1 percent.

So what I am doing, I am the engineer in the room here on this. So now we are getting to the point, under this rule, they want to reduce it 30 percent, so we are talking about a rule that reduces 30 percent of 2/10 of 1 percent. e are talking about a reduction of CO2 emissions in the globe of 6/100 of 1 percent. Forget the argument over 112 or 111(d), we are going to spend billions of dollars, we are going to raise rates, we are going to -- jobs are going to be lost to save 6/100 of 1 percent of the CO2 emissions. That just -- that doesn't make logical sense. From an engineering perspective, there is something wrong when we start chasing a rabbit over here, when we are putting our economy at risk over 6/100 of 1 percent...."

(yeah, he's conflating biologically cycling carbon with fossil carbon. So?)

KAP said...

So, conflating biologically cycling carbon with fossil carbon is like an accountant conflating revenues with profits. It's just plain wrong.

EliRabett said...

Sorry Kap, it's economics:)

Andy S said...

Regarding Fernando's comment. Georgetown may not be going off the grid, but the Texas grid is increasingly being powered by solar and wind. Because of the State's wide longitudinal direction (850 miles), solar in its western deserts peaks nearly the same time electricity consumption does in its more eastern population centers. Wind predictably picks up at night when solar power drops.