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Renewable Energy

There is one part of the energy complex that is holding up reasonably well against the backdrop of the two-year slide in oil and gas prices. The renewables sector, led by wind and solar power generation, has been thriving.

While the price of crude oil has recently perked up slightly, hovering in the range of $40 per barrel just last week, financial woes continue to mount for the oil and gas sector in the U.S. With another three bond defaults coming last week, that brings us to a total of 14 defaults by U.S. oil and gas companies since the start of this year – which accounts for 35% of the total number of defaults so far in 2016.

For a large part it has been the higher cost shale producers and smaller wildcatters who have been most badly hurt by the worldwide oversupply of crude, which has driven crude prices down to the lowest level in more than a decade. And the financial strains triggered by low oil prices have begun to spread beyond the private sector, reflecting in 22 sovereign debt downgrades so far this year, mostly for countries that are heavily dependent on oil exports. Last week Moody’s added Pemex to the downgrade list, bringing the Mexican state oil company down just one notch above junk status, a precipitous drop from the Aa3 rating it held just six months ago.

But surprisingly there is one part of the energy complex that is holding up reasonably well against the backdrop of the two-year slide in oil and gas prices. The renewables sector, led by wind and solar power generation, has been thriving. As Bloomberg reported recently, the wind and solar industries attracted a record level of investment in 2015 and if anything the trend is accelerating, as investment in renewables in 2016 is so far running at twice the level of investment in fossil fuels.

This marks a remarkable turn of events. In past periods, whenever the price of oil and gas tumbled it would have a similarly depressing effect on the investment in renewables, simply because of the relatively high kilowatt cost for renewable energy driven by the upfront cost for building wind and solar generation facilities. But these economics have been transformed thanks to continuing improvements in technology and the improving fundamentals for solar and wind energy as they achieve economies of scale.

As reported by Bloomberg, solar power generation worldwide has doubled more than 7 times since 2000. Wind generation capacity has doubled 4 times over the same period of time. And with each doubling, according to Bloomberg, there is a 19% drop in generating cost for wind power and a 24% drop in generating cost for solar power. With renewables already providing the lowest cost electricity in many parts of the world, evident by recent wind and solar auctions conducted in Mexico and Morocco, these trends point in the direction of an increasing level of renewable investment in the coming years.

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