Oil Crash Leaves Renewable Energy Shaken but Unbowed

The dramatic plunge in oil prices has been a boon for some industries: Witness the recent rise in sales of sport utility vehicles. The renewable energy space hasn’t been so lucky. For example, as of late January the price of the PowerShares WilderHill Clean Energy Portfolio, a $130 million exchange-traded fund offered by Chicago-area Invesco PowerShares, had fallen 37 percent from its March 2014 peak.

But the oil crash won’t scuttle the clean energy industry, experts stress. Although some subsectors will likely suffer, they say, others will prove impervious.

Still, the market hasn’t exactly been discerning of late when it comes to renewables. “Investors can be an impressionable lot,” says Dallas Kachan, founder and managing partner of Kachan & Co., a San Francisco–based consulting firm that provides financial analysis of the cleantech sector. “When the price of oil is down, the shine is off the renewable energy apple.”

Just ask Joel Velasco, senior vice president of Amyris, an Emeryville, California, company that develops sugar-based alternatives to a variety of petroleum-based products including diesel and jet fuels, industrial lubricants, polymers, flavors and fragrances for food and perfumes, and cosmetic emollients. When Amyris went public in 2010, its strategy centered on biofuels, but since 2012 the company has moved into the range of other businesses under its umbrella today.

The close link between volatile oil prices and fickle interest in biofuels was a main driver of that shift, Velasco says. Unfortunately for Amyris, its lingering association with biofuels has left it vulnerable as oil prices retreated.

“We’ve always been conscious of the ups and downs oil prices would have on [biofuels], and that’s actually why we’ve pursued a very diversified strategy,” Velasco says. “But that doesn’t mean that’s as clear to investors as we would like; I recognize we’re getting penalized by the oil price drops.” Amyris’s stock has dipped from nearly $4.50 last August to $1.80 on January 28.

Biofuels — along with other alternative transportation technologies like electric cars — could be the subsector hit hardest by oil’s fall. “Biofuels potentially bear the biggest impact from declining oil prices,” says Vishal Shah, a New York–based managing director and equity analyst with Deutsche Bank who covers alternative energy. “They need more time to become cost-competitive.”

But the renewable energy industry extends far beyond biofuels and other emerging petroleum replacements. In 2013 renewable sources including solar, wind, geothermal and hydro accounted for 22 percent of total global power generation, according to the Paris-based International Energy Agency, versus about 18 percent in 2005.

And though many investors sour on the entire alternative energy business when oil prices sink, Shah maintains that regardless of market sentiment, certain segments have remained just as attractive as they were before crude began its descent.

“Solar is less correlated to declining oil prices and is already very cost-competitive, even at these lower oil prices,” he says. The smart grid and energy-efficiency spaces remain unaffected by oil price movements, Shah adds.

Boosting solar’s resiliency is its limited direct competition with oil. In a January report, Credit Suisse Group cleantech equity research analyst Patrick Jobin points out that oil accounts for just 1.5 percent of electricity generation in the key markets in which solar uptake is growing, such as China, Japan and the U.S. Meanwhile, the cost of installing utility-scale solar power has dropped 57 percent in the U.S. since 2011.

Equally important, strong government support for solar helps keep the subsector insulated from swings in oil prices, New York–based Jobin tells Institutional Investor. In the U.S. and elsewhere this assistance includes tax incentives, feed-in tariffs that offer long-term contracts and attractive pricing for solar and other renewables, and the benefit of renewable portfolio standards. The last requires electric utilities to produce a specific proportion of their power from renewables.

Jobin calculates that if the 29 U.S. states with a renewable portfolio standard already in place use solar power for just half of their clean energy needs, they’ll need to add 79 gigawatts of capacity — nearly 14 times last year’s demand — through 2030. “Simply having commodity prices fall does not change the returns solar projects are receiving,” he says.

Investors’ undiscriminating skittishness about renewables could mean it’s a good time to buy, Jobin reckons. “It’s clear the market has a view that [oil prices and solar company performance] are linked, but I’d say a lot of investors in solar appreciate that there is no genuine correlation,” he says. “And given that most solar stocks are trading below historical valuations, it’s actually an opportunity.”

One event that could dampen renewables investment across the board in 2015 is a pullback by the venture capital arms of big oil and gas corporations, warns Troy Ault, director of research at Cleantech Group, a San Francisco–based corporate and investor research and advisory firm. Oil producers have been tightening their belts as Brent crude has fallen, to below $49 a barrel on January 27 from more than $114 last June.

The venture divisions of companies like Chevron Corp. have traditionally invested across the renewables sector, hunting for energy technologies that could offer strategic or financial benefits. In recent years Houston-based Chevron Technology Ventures has allocated to BrightSource Energy, an Oakland, California–based solar panel manufacturer, and Ensyn Corp., a Wilmington, Delaware–headquartered company that makes renewable chemicals and liquid fuel from wood biomass and agricultural residue. Such investments can help with oil exploration and unconventional oil production; for instance, Chevron and BrightSource joined forces to build the world’s largest solar-to-steam oil recovery demonstration facility.

“The investment theses that we’re seeing are still very much interested in alternatives and efficiencies — there’s still a lot of appetite to invest there,” Ault notes of the oil majors. “It’s just that the short-term reality is, their margins are getting squeezed, and those investment programs that they had set up might have to be put on hold.”

Looking beyond 2015, investor appetite for renewables will rebound, consultant Kachan predicts. “I would expect that the largest companies and pension funds that are investing vast sums recognize that the fundamental drivers of clean technology still remain,” he says. “The world is needing more and more energy, and that energy is not just going to come from fossil fuels, regardless of what the price of fossil fuels is today.”