What is Happening (skip to next section if you are a “market pro”)
The Covid-19 pandemic is strongly impacting all forms of consumption, as a generalized shutdown on a planetary level in a bid to contain the outbreak has already shown a severe slowdown in economic growth, with the IMF forecasting a 3% global GDP contraction, much worse than during the 2008-09 financial crisis. How is the energy sector going to be affected?
Our previous article explained how the Oil & Gas industry is hitting rough weather amidst plummeting demand and therefore prices. This combines with a greater attention to environmental concerns, with conspicuous divestment trends from the most polluting sectors in favour of greener (and increasingly profitable) programs and initiatives, as last April’s major investment by French financial services giant AXA in Acciona’s overseas renewable energy assets proves it.
A key question that must be posed is whether this also means that all energy sectors will be equally affected. As it turns out not at all. Many storms have a silver lining and rather surprisingly in the energy sector it is renewables and electric mobility that are a noticeable countertendency.
Much has been said of the growth potential of renewable energy and electric mobility as governments and many citizens push for reaching ever more ambitious climate targets. These sectors are certainly not immune to the general economic disruption but despite all, they could prove a long-term resilience.
This trend has been particularly clear in Europe. Despite a drop in overall demand, in two months of a full-blown health emergency, the production of green energy has further grown compared to the same period a year ago, while the traditional share of gas and coal plants has collapsed. For the first time in their history, renewables from hydroelectric, wind and solar sources, have come to cover an average of 50% of the aggregate demand of electricity. In Italy for example, during the weekend between the 2nd and 3rd of May renewables came to cover up to 64% of the day's electricity needs and has kept well beyond 50% for the whole month.
There is a similar trend in green mobility. If petrol cars sales sharply dropped during this year’s first quarter, on the other hand, hybrid and electric models experienced an unexpected growth. According to ACEA, the European Automobile Manufacturers’ Association, sales of these models have increased of a staggering 110.7 %, for a total of 167,123 new registrations. If the EU responded with an important bn €22 stimulus package for electric mobility, as of now, nothing comparable has been proposed in the United States. In the US, it almost went the other way with the recovery plan for the energy sector substantially oriented to supporting the domestic fracking industry, currently in dire straits.
Nonetheless, social distancing policies are going to hit photovoltaic companies more than others, as door-to-door product education, sale and installation processes come with close consumer-supplier interaction. This will likely remain a short-medium term distress factor, yet in perspective, the renewable energy sector could be comparatively less affected by the health emergency and indeed have a great chance of growth in front of it.
Why is it happening
The reasons behind the increasing share of renewables and electrical mobility are multiple and complex but can be grouped in three levels of analysis.
- The improved performance of the renewable sector is rather relative than absolute. It has likely to do with widespread production standstills, preventing power grids from receiving peaking demands, situations in which thermoelectric power plants would normally step-up activities to ensure supply. Renewables were thus protagonists, as these sources are usually the first ones to feed into the power grid.
- Higher sales of electric vehicles, especially in Europe, can be explained by the fact that car manufacturers have been steadily boosting their electric programs following stricter regulations on CO2 emissions alongside with substantial tax cuts.
- Governments are resorting on eco-incentives to encourage Green private investment in a bid to stimulate a shrinking aggregate demand and support the automobile industry and,
This is true especially for the European Union, where the combination of strict emission regulations and substantial green stimulus plans is strongly incentivizing investments into Renewables and electric mobility.
US and China: back to back in the Energy transition scramble
Besides political chaos and spectacular propaganda, ultimately investments speak the truth about real economic trends.
After a long time in second place behind China, the US have just become the most attractive country for Renewable Energy investments, according to the RECAI index. The main reason behind this may not be related to a significant clean energy landscape transformation but rather in a surprising stumble by the Chinese Renewables sector. As a matter of fact, the central government announced a subsidies reduction, in preparation of a post-pandemic spending review and in a bid to gradually direct the sector towards financial autonomy. While the short-term forecast for domestic capacity expansion seems cloudy, Chinese companies continue to invest and position themselves for the global low-carbon transition.
Meanwhile on the other side of the ocean, the fate of a Renewable Energy acceleration in the US seems related to future developments in the White House. Trump’s hostility towards any decarbonizing attempt is no mystery and the recently approved Recovery Plan confirms it. These upcoming mid-pandemic elections are still a conundrum that pose great political uncertainties. However, they could beset greater transformations for America’s energy sector should Biden win the elections and push forward with the Green New Deal.
Given the current oil prices havoc, oil dependent economies are sailing through choppy waters. This problem is particularly relevant for MENA oil-exporting countries: reduced oil prices are expected to lead to a decline of 230 billion US dollars in annual revenues. This has a dramatic effect on economic growth. The IMF expects the economies of MENA oil exporting countries to shrink by at least 4.2% of GDP in 2020, compared to the 2020 world average of 3%.
Despite few observers hoping for a V-shaped recovery, this global economic recession will have a long tail. Lockdowns may be temporary, but their effects are more likely structural, as bankruptcies and lingering risk aversity will weaken investments and expenditures.
Better off countries like Saudi Arabia, Qatar, Kuwait and UAE have enough financial reserves to face short-term disruptions.
Others such as Algeria, Oman, Iraq, Bahrein, Egypt, Lebanon, Morocco, Jordan or Tunisia are much more vulnerable and financially constrained. This could accelerate shifts in the regional balance of power as financially solid countries hunt for cheap assets around the region, including key strategic infrastructures.
How can renewables benefit from this situation?
Amidst highly fluctuating oil prices, both sides could take full advantage of the region’s extremely favourable wind and solar exposure and substantially increase investments in renewables in the attempt to diversify their heavy dependency on oil revenues, with the strongest side aspiring to Energy predominance, and the weaker side to gain Energy security.
Energy security is the possibility of a reliable and convenient access to energy resources to meet domestic needs. Energy Predominance, on the contrary, consists in the control of various sources in such a way as to ensure both the greatest possible autonomy from other States and the possibility of exporting one's energy to third parties - thus increasing influence.
Renewables can offer advantages for both scenarios.
There is growing concern among investors about environmental, social and governance (ESG) issues, especially when these can be the cause of potential health emergencies in the future. Prominent scientific studies (including Harvard) show how people living in polluted areas are more likely to die from coronavirus. This correlation is having quite an impact on European decision-makers. Almost half of Italy’s deaths occurred in its most polluted regions and a study of 66 European regions found that 78% of deaths occurred in just 5 densely populated areas, that also happen to be heavily polluted by NO2. As pollution causes respiratory and cardiac pre-conditions, it also increases people’s vulnerability to Covid-19. Decision-makers around the world could exploit this evidence to further upscale CO2 emission reduction schemes and encourage investment in the Renewable Energy sector.
A substantial obstacle in achieving a rapid transition towards a widespread use of renewables seems to be the lack of an energy infrastructure capable of accommodating the demand of entire populations, from domestic consumption to electric mobility, that have – until now – belonged to the realm of eco-luxury.
Governments incentives into green technologies and electric mobility can be positive impulses for lethargic domestic consumptions.
The downward forecast has so far proved to be mild, whereas a risk of oversupply and deflation might encourage private investors to benefit from lower prices.
Global investors could exploit these times of uncertainty to lay the foundation of a future recovery that could meet climate commitments and carbon-neutrality goals.
Greater structural investments in the Renewable Energy sector cannot come without the design and the set-up of an extensive and adequate energy infrastructure.
Despite current political chaos, investors remain confident about the long-term picture for clean energy. Climate change remains a persistent threat and the post-pandemic need to ensure greater economic and social resilience will work in favour of distributed power sources, such as wind and solar, and the applications offered by battery storage. Large companies will be keen to demonstrate that they are responsible corporate citizens, encouraging them to source clean energy.
These developments won’t ease the unprecedented challenges posed by this Pandemic. Nonetheless, recognizing the importance of clean and low-carbon energy generation, is essential in understanding the future of global economy.
Energy Voices is a democratic space presenting the thoughts and opinions of leading Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.