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The Outlook for Corporate Renewables in a Volatile Energy Market

Author: Jay Pawlak has more than 9 years experience helping corporations enter the renewable energy market.

Since the 2016 election, there have been concerns as to what the future holds for cleantech and the renewable energy market.  It’s becoming evident, however, that the sweeping changes proposed for the power sector under a Trump administration may not be that dramatically different from the current state of business-as-usual.  There are multiple reasons for this:

Policy Changes

At the state level, policies for clean energy market development and renewable generation will continue through established renewable energy standards (RES). State-level RES requirements have proven to be an effective piece of legislative action over the years. It has been well documented that states with aggressive renewable energy standards celebrate many benefits – such as job creation, increased economic development, improved air quality, and lower utility bills for ratepayers.

In the absence of a National RES, which does not even exist at this time, states are on track to continue to drive clean energy development.  According to the National Conference of State Legislatures, wind, solar, and other renewables represented a $36 billion dollar industry in 2015.  Today, the state of California employs 431,000 people in the cleantech industry according to a report published in December 2015, by the Advanced Energy Economy.   Also in 2015, US job growth in the solar industry outpaced those in oil and natural gas extraction for the first time ever.  In fact, solar industry employment in the United States grew 12 times faster than overall job creation, according to a recent report published by the International Renewable Energy Agency.  Given the job creation and positive economic impact the industry generates for many states, it would be unlikely that local politiciansregardless of which side of the aisle they represent would be unsupportive of clean energy market progress.

Proposed Revival of Coal

The possibility of a coal revival of any significance also seems minimal.  The long-term economics of fossil fuel extraction no longer compare to the favorable position of renewable energy.  An example is the continued retirement of ageing coal-based generating assets.  According to the Energy Information Administration, 94 coal-fired power plants closed in 2015, with an additional 41 coal-fired plants scheduled to close in 2016.  

Demand for coal is dropping, too. On a global scale, the International Energy Agency (IEA) recently reported that renewable energy surpassed coal as the world’s biggest source of power generating capacity – worldwide –  in 2015. 

The Role of Natural Gas

Another business-as-usual scenario will be the role of natural gas. More favorable policies for the fossil fuel extraction industry could be forthcoming in a Trump White House, but the Obama administration also took a rather supportive position towards this segment of the fossil fuel industry. With low fuel costs and dropping O&M-related expenses, gasification will garner increased market share at the expense of coal.  Consequently, natural gas will continue to heavily influence electricity prices.

Even though access to low-to-moderately priced natural gas will remain relatively stable, there are a number of critical variables that will make the natural gas market unpredictable and more costly over time compared to renewable sources of electricity:

Supply and Demand – Prices for natural gas are strongly correlated to energy market supply and demand. There are few short-term alternatives to natural gas as a fuel for winter heating and electricity generation during periods of peak demand, such as a summer heat wave.  Unexpected and/or unplanned short-term changes in supply or demand often result in considerable price fluctuations.

Weather – Weather can heavily influence the price of natural gas.  Cold winter temperatures increase demand on the consumer side for heating, while hot summer weather creates demand for natural gas on the supply side for air conditioning. However, given that extreme weather is becoming the norm and not the exception, we can anticipate severe weather events to lead to increasingly unpredictable fluctuations in natural gas prices.  The polar vortex of 2013 is a clear and recent reminder of how extreme weather can increase costs quickly and dramatically.

Pipeline Development – The recent decision by the Army Corps of Engineers to block construction of the Dakota Access Pipeline is an example of the strong resistance that exists among a broad group of stakeholders opposed to pipeline development. There are an additional 12 on-shore pipeline developments currently under review by the Federal Energy Regulatory Commission (FERC). Should construction of any of these pipelines be rejected, curtailment of pipeline development will limit supply and lead to greater price risk.

So, what can we expect from the natural gas industry, and how will it impact energy market risk associated with long-term renewable energy agreements by commercial, industrial, & institutional (C&I) enterprises via power purchase agreements (PPAs)?  

Energy is historically the world’s most volatile commodity. Given the numerous inputs that affect natural gas prices, it’s likely that costs for natural gas – and subsequently the cost of electricity – will remain unstable, unpredictable, and more expensive than renewable sources of generation.

Many C&I clients have addressed this question using renewable energy PPAs, cumulatively adding 5,428 MW of new renewable generating capacity to the grid since 2015. We’ve seen evidence that, even in the face of capricious federal energy policies, corporate buyers will remain bullish about climate action, and renewable energy PPAs as a key tool.

Ready to take the next steps in implementing your organization’s carbon-free strategy? Reach out to our team of experts to explore your options.

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