In a major new report, global investment bank Citigroup has defined the current battle between cheap oil, and renewables like wind and solar, to be so fundamental it will define the future of energy.

But it says that while the slump in oil and associated gas prices may provide some road-humps for wind and solar, renewables will win out because of basic economics, as well as energy security and environment issues. And, Citigroup says, because renewables are the cheapest way to substitute coal-fired power.

Oil is the single largest source of primary energy globally, and the seismic shifts in the oil market can send shockwaves through the world’s energy markets.

Citigroup says that two common statements have dominated recent dialogue: 1) that cheap oil will deal a serious blow to renewables, and 2) because oil and renewables rarely compete in the power sector, the impact will be minor.

It says neither is strictly true. Citigroup believes the fall in the oil price is terminal – it says the days of triple figure oil prices are over – meaning the end to some high-risk, high-polluting oil ventures in marginal regions such as the Arctic, tar sands and deepwater.

On the other hand, the long-term outlook for renewables remains bright. “Fundamental factors – increasing economic competitiveness, energy security, and environmental goals – all remain potent forces driving ever more rapid adoption of renewable energy globally.”

Wind and solar costs have fallen dramatically, and these cost declines should continue. On an unsubsidised basis, wind farms are getting built at costs below $40/MWh in some regions. Recent solar auctions in the Middle East have produced prices below $60/MWh.

“The straightforward answer to whether cheap oil threatens renewables is no – at first glance, oil poses few direct threats to renewables.”

Oil competes directly against renewables in only about 5 per cent of the market – those places where oil is used in generation – particularly the Middle East (Saudi Arabia uses oil for 55 per cent of its electricity needs, and the Middle east as a whole 36 per cent), and in the Caribbean (Jamaica 91 per cent).

But, as we noted in this report about low solar costs, and the assessment by the National Bank of Abu Dhabi, oil can no longer compete with solar and wind in electricity economics.

“Even with greatly reduced oil prices in the $50-60/bbl range, more mature renewables like wind and solar have little trouble competing with new oil-fired generation in the Middle East,” Citigroup writes.

Read more: RenewEconomy.au