Pricing renewables into the market?

By Heba Hesham, Dubai correspondent

Faced with US and European Union oil sanctions that will take effect starting mid-year, Iran, the world’s fifth-largest oil producer, has threatened to block oil shipments passing the Strait of Hormuz.  Even a slowdown in the Strait, through which 20% of the world’s oil flows, would send oil prices rocketing

Brent crude has already soared to a historic high of US$124 a barrel and oil traders at this months IP week in London suggested that the floor price would likely settle at $120. With oil supplies plateau-ing and demand surging from galloping economies like China, India and Brazil, oil prices are likley to follow an upward spiral.

Oil volatility a double-edged sword

Instability in the oil sector may place greater urgency upon Western nations to incorporate more renewable energy into the energy mix, but “the pressure will be incremental”, says Justin Dargin, Research Fellow with The Dubai Initiative, Harvard University and a Fulbright Scholar of the Middle East.  He says there have been more significant drivers over the past decade, such the issue of climate change.

Georg Brakmann, Managing Director of Fichtner Solar similarly notes that the current support for renewable energy is primarily driven by environmental concerns and secondarily by worries over the security of energy supply. Hence, the positive effect of the current Iranian oil embargo towards renewable energy policy “might be rather small”.

“On the contrary, there might be a negative effect on programs like Desertec, where solar electricity from North Africa and the Middle East will be supplied to Europe. Such programs depend on political stability in the area”, Brakmann points out.

Solar switch

Renewables cannot directly replace oil, as most renewable energy technologies merely generate electricity. “To replace oil, we need alternative transport technologies such as hybrid and electric cars. Of course, electric cars can be charged using renewable-generated electricity”, says Robin Mills, a Dubai-based energy economist and author of 'The Myth of the Oil Crisis’.

Overall, oil is not a significant fuel for power generation due to its high cost; the resource only comprises between 5-7% of global electricity generation – and perhaps more in certain regions like the Middle East. 

“Natural gas and coal are the hydrocarbons that are consumed much more significantly in power generation. But since the price of natural gas is linked to oil, instability in the oil price will lead to increases in the price of natural gas which would encourage switchover to solar energy”, explains Dargin.

The Middle East effect

Dr. Luis Crespo, secretary general of Protermosol, believes that the oil crisis could push governments to become more self-sufficient, but not with the qualitative effect of the seventies' oil crises.

“At that time we moved from ‘nothing to something’. The first pilot plants were constructed and the industry started to develop. Now each renewable technology - including CSP - is running along its own learning curve and the higher the price of fossil fuels, the sooner breakeven will be reached”.

The squeeze in crude supply would add to the lack of Syrian and Yemeni oil in the market, South Sudan’s halted output, and Libya’s struggling, post-war oil sector. Consequently, oil-producing countries would be pressured to boost production. For example, Saudi Arabia – the world’s largest oil exporter - would need to produce 600,000 barrels per day (bpd) to replace Iranian supply, and would have to ship crude from its Red Sea ports if the Strait gets blocked.

More widely, GCC exporters and Iraq may need to invest in pipelines to circumvent the Strait of Hormuz altogether. The UAE is building a massive 370km pipeline from Habshan in Abu Dhabi to Fujairah to allow the country direct access to the Indian Ocean and ensure safe flow of its crude oil exports. Construction on the $3.3bn project should be complete by mid-2012 and when ready, the pipeline will have a capacity for 1.5 million bpd, increasable to 1.8 million bpd.

India turns a solar page

In the event of any oil disruption, Asian refiners are likely to be the hardest hit. Out of the 2.53 million bpd that Iran exported in the first nine months of 2011, 65% of those supplies were taken by Asia.

While Japan is still recovering from the meltdown at its Fukushima complex, resource-poor South Korea is looking for other suppliers in the GCC, having relied on Iran for nearly 10% of its crude oil. China has also been discussing its options with GCC leaders, and has signed a deal to build a refinery in the Saudi Red Sea port of Yanbu, besides the oil and gas concession it recently won in Afghanistan.

India, on the other hand, gets nearly three-quarters of its crude oil through imports, and Iran is its second-largest supplier after Saudi Arabia. Given the extent of its energy reliance on Iran, India is not in a position to cut supplies and has made it clear it will continue purchasing Iranian oil - saying it would only recognize multilateral sanctions imposed by the United Nations. Unlike developed countries, India lacks sufficient petroleum reserves, and its colossal transportation system could break down as a result of decreased oil imports.

Although Indian refiners are gradually buying more from GCC sources, a movement towards solar energy has been materializing. For the first time, India is producing power from solar cells more cheaply than by burning diesel, encouraging the country’s largest mobile-phone operator and Coca Cola’s mango supplier to replace fuel with photovoltaic panels.

Bharti Airtel, India’s largest mobile-phone operator, has upgraded 1,646 out of about 22,000 rural sites that get little or no grid-connected power to run on solar and other renewable sources, and Jain Irrigation, the world’s biggest mango-puree producer and supplier to Coca-Cola, will complete an 8.5MW PV  solar project in March to replace diesel-fired output at its processing plant in Maharashtra, at a cost which the company expects to recoup in as little as five years.

Iran awakens to renewable energy

Back to Iran, where the dilemma started, renewable energy has come under spotlight. A recent statement revealed its interest in alternative energy, which is has yet to be exploited in the republic. 

“Reliance on hydrocarbon resources in the long run is neither possible nor meets national interest. Gradual reduction of oil consumption, and a revolutionary and swift move towards using renewable energies, are the only appropriate mechanisms which can help the country”, Iranian energy minister Rostam Qasemi said.

In the past few years, solar costs have plunged dramatically; the prices for photovoltaic components dropped due to economies of scale, supported by government initiatives and massive solar equipment production in China. In Germany, solar has almost reached parity with conventional energy.

“It is expected that subsidies for solar energy will disappear within a few years in Germany; this success can be replicated in other areas of the world”, says Dargin, who concludes that concern over climatic change, along with oil price volatility, and plunge of solar prices could emerge as a “perfect storm” for integrating much more solar energy in the global energy mix over the coming decade.

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Rikki Stancich: rstancich@csptoday.com