Editorial

What crashing LNG prices mean for renewables

Gas and LNG prices have dropped to new lows. But renewables remain a bright spot in the power market

With analysis from Matt DaPrato, Miaoru Huang, and Dan Shreve. 

The coronavirus crisis hit gas and LNG markets at the worst possible time. Even before OPEC+ failed to agree to a deal on March 6, sending oil markets into turmoil, global gas and LNG prices had collapsed. Mild winter weather and an oversupplied market combined with the loss of demand due to lockdown restrictions now in place for over half the world’s population mean the market is now in unchartered territory.  

We asked our experts what falling gas and LNG prices mean for solar, wind and energy storage markets around the world in the short and long term.

If you have an hour to spare, listen to the webinar.

If you have only three minutes, scroll down to read the three things you need to know today about the outlook for renewable energy.

1. Renewables aren’t going away

A global recession is all but certain. But the bush fires in Australia are a reminder that climate change can have stark consequences. Our forecast for both wind and solar remains strong – both are on track for record years in 2020. The current crisis will have a minimal impact on future demand.

Over the next 20 years, the importance of thermal, coal, gas and nuclear in the global power mix will fade gradually, and renewables will step in to fill the gap. While investment in clean energy may temporarily slow down, these delays won’t derail the progress of renewables altogether.

The stage has been set for renewables to play a prominent role in the global power sector, regardless of where we are in terms of natural gas prices.

How do the economics of renewables stack up against gas?

The price of gas has fallen significantly: North East Asia stock LNG prices have dropped below $3 per million BTU and Henry Hub prices are below $2 per million BTU.

Can renewables compete against these low prices? Major strides have been made to reduce the levelised cost of electricity generated by wind and solar in the last five to ten years as the technology has evolved. And renewables no longer rely on government subsidies to be competitive. With levelized cost of electricity falling below US$30 per megawatt-hour, renewables compete extremely effectively with combined cycle gas turbines, even at prices as low as $2 per million BTU. As the market comes back into balance over the next few years, renewables will still gain the edge over fossil fuels.

2. But the clean energy sector faces immediate daunting challenges

Lockdown measures are having an immediate impact on solar as demand declines and construction and development slow. Even as lockdown restrictions are eased, cash-strapped households are unlikely to opt for solar installations. The corporate and industrial (C&I) sector will also come under pressure as customers focus on managing cash flow.

We forecast a 17% drop in solar installations for 2020 but expect this to recover in 2021. Similarly, the storage market will take a hit from project execution delays, although the sector is still positioned to record year-on-year growth.

Onshore wind will be less affected in the near-term. However, cascading lockdowns across the globe have pinched global supply chains, especially in the turbine blade sector.. Furthermore, travel restrictions have delayed wind farm installation and commissioning activities in emerging markets where foreign worker engagement is critical. The combination of labor and supply issues results in a 10% reduction in 2020 installations.

At the current oil price, returns from oil and gas are now in line with what investors can expect from low risk solar and wind projects.

3. Renewable investments look good at US$35/bbl oil

The oil and gas sector is in turmoil and cuts to discretionary spend are expected as companies go back into survival mode. But most investment in renewable energy comes from outside the oil and gas sector, which accounts for less than 2% of global solar and wind capacity. And at US$35/bbl oil, oil and gas projects are now in line with average returns from low risk solar and wind projects.

There’s no doubt that budgets for projects such as carbon capture and storage will be cut and investment decisions will be delayed. But at this low oil price, renewables suddenly look as attractive as upstream projects.