The Comeback of the Renewal Subsidies - Alpcan Efe Gencer

The price crash of oil not only shook the oil producers globally but also created new market conditions for other fossil fuels and renewables. While it had been on the table of numerous policymakers’ agendas to slowly phase out the subsidies that were given for supporting the developing renewables industry, the recent oil crash will inevitably change the course of many of those plans. For making an accurate analysis of how the role of renewables might play out in the future, we should individually examine oil, gas, and coal markets. It should be noted here that the presumptions of this analysis are based on a prolonged slump in the oil prices.

In our scenario, cheap oil prices could disincentivize consumers from buying electric-powered vehicles and stimulate the demand for internal combustion engines, thus lowering potential future demand for electricity intended for usage in EVs and increase the demand for gasoline. Oil prices also serve as a vector for linking the prices of other commodities such as natural gas to and also as a prime intermediate input for operations of other fossil fuels.

Natural gas, on the other hand, has a more direct effect on the renewables. The unique blend of our current oil crisis from both supply and demand viewpoints creates a more complicated picture. Being used extensively for heating and electricity production, natural gas prices have historically moved in conjunction with oil prices. Still, this time, U.S. Marcellus gas producers are pointing out to the possible reality of Permian shale producers cutting output in the mid-to-long term, and it would be a good time to recall that these producers have also been extracting an ever-increasing amount of associated-gas from their unconventional wells causing the existing supply glut in the U.S. to get even worse. The decrease in the Permian production could also help wane the gas glut in the U.S., but the effects could also only stay domestic. The LNG prices at U.S. export terminals are linked to the price of crude oil, and at the current prices and market structure, a shift in moving towards liberalization in these price structures seems unlikely. Globally speaking, the natural gas prices could follow suit with oil prices and remain competitively low for electricity generation.

The ‘infamous’ coal stands to gain from the current crisis. Being heavily fuel-intensive in its extraction process, the slump in prices will lower a significant input cost factor and potentially reduce the commodity’s price. Another important cost that is embedded in coal’s global trade flows is the transportation cost. Luckily for coal producers, the downturn in global economic growth will result in decreased vessel traffic and lower the shipping costs for the exporters.

Given the fragile economic situation the world is in from China to the U.S., the public may be less inclined to pay a premium for utilizing the greener choices, as it had been in certain European countries within the past decade. With a forecast of household spending to subdue and government spending to increase in the upcoming years, displacing the added costs of renewable generation in the face of cheaper fossil fuel alternatives could be an undesirable choice by policymakers.

What waits then, for the stricken renewables industry? Good news is that it still remains a strong contender for the future of power generation, but the bad news is that fossil fuel production companies even make up a considerable amount of the global economy and any scenario that would lead to them heading into a crisis, such as the current one would be heeded by the governmental/intergovernmental institutions and intervened in with great force to keep the economic harm to a minimum. An unorthodox action by the policymakers would be to make an even greater push for incentivizing and supporting the global renewables industry to enable them more reliable access for the next cycle of global economic growth that is to succeed the current slump. Based on past precedents, such an action would likely come from European Institutions but is again a scenario with a low probability of occurring.

What form and shape might the upcoming incentives come in? Had it not been for the combination of the coronavirus and the price war, then a directed loan package explicitly targeting the industry might have been probable but under the current conditions subsidies such as tax expenditures (credits, deductions, deferrals, etc.), loan guarantees and long-term guaranteed feed-in tariffs could be more viable choices. If these will be newly issued vanilla packages or extensions of existing ones is another matter of debate. In addition, whether these new subsidies will target the production or consumption side is also another controversial topic. The correct answer will likely change case-by-case, and navigating the rough waters of our modern-day will depend on more than just saving a single industry, and then the approach should be constructed based on mixing the inclination towards the preservation of status-quo with that of the new age of heightened volatility.

2020 All Rights Reserved