Even green energy needs lower oil price to be effective

As a lengthening economic slowdown bites, the antidote for the renewable energy sector may come as a surprise – a lower oil price.

Government subsidies and record prices for competing fossil fuels have underpinned the alternative energy boom, but now they are starting to work against the sector.

Reliance on subsidies exposes the likes of wind and solar power to the whim of governments grappling with wider voter priorities during a global economic slowdown.

As oil and energy bills have soared consumers have become less tolerant of the extra costs passed on to them by utilities for the greener option.

"Government priorities in the past five years or so have been very clearly environment, security of supply, and way down the list has been price... all of a sudden affordabilty has shot to the top," said Citigroup utilities analyst Peter Atherton.

"If oil drops back to $80 then government can probably live with it [the extra cost of climate policies]."

Higher oil prices have made onshore wind competitive with natural gas, making continuing subsidies there less important, but more expensive renewable energy sectors and especially solar will be hurt by a policy pull-back.

Europe, the United States, China and India want to ramp up power production from low-carbon wind, solar and biomass to battle climate change and source more secure, domestic energy. But goals to produce power from the sun or wind stoke energy costs because utilities pass on the higher price to consumers.

"We've seen a worsening more to do with economic weakness than anything else, it's much harder to push through or in some cases even maintain support packages that push up energy costs when consumers are under pressure," said Michael Liebreich, chairman of research firm, New Energy Finance (NEF). "If oil comes below $100... the consumer will bear it," he said, adding that a prospective US cap and trade scheme, which would impose an extra cost on carbon emissions from industry, looked less certain.

Global investment in clean energy from April to June was less than the same period last year, and at $33 billion (Dh121bn) barely half the last quarter of 2007, initial NEF figures show.

Most Californians will not support the state's ambitious efforts to fight global warming if they raise energy costs, a survey conducted by a pro-business group found last week.

The overall result globally is less clear climate policy.

Beijing's efforts to rein in rash lending and curb inflation are hurting wind power project financings, in a country poised to become the world's fastest growing wind energy market, said Steve Sawyer, secretary general of the Global Wind Energy Council.

An EU deal fleshing out how to get a fifth of energy from renewable sources by 2020 may now be delayed amid horse-trading to ease targets, said Sawyer. Britain has suggested for possible inclusion in the target technologies which trap carbon emissions from coal plants, called carbon capture and storage.

The US election is delaying other measures. United Nations talks to agree a new global climate treaty are dragging as negotiators await the stance of a new US president. Extension of current US tax credits in return for generation of wind, solar and geothermal power may not now meet a December 31 expiry date, after becoming embroiled in an election dispute about links to fossil fuel subsidies.

Other sources of electricity besides renewables, including gas, coal and nuclear, also get subsidies, environmentalists point out.

The long-term future of renewable energy looks assured, as scientists and economists warn of catastrophic climate change if the world continues to rely on fossil fuels.

The sector has drawn big hitters, such as oil tycoon T Boone Pickens, who is building a $10 billion wind farm in Texas. Wind power this year passed a global milestone of 100 gigawatts installed power, and may be helped further by a succession of offshore wind projects planned in Europe.

And momentum could snow-ball if $148bn clean energy investment last year spurs cost cuts which make the likes of solar power compelling energy alternatives. But in the meantime cost concerns are paramount. The high price of solar power reflects a bottleneck in the raw material, solar grade silicon, and is threatening to choke policy support and demand, forecast to grow at 35 per cent a year.

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