Decarbonisation will ride the pandemic wave

Advances in low carbon technology, shifting consumer preferences, shareholder scrutiny and government policies will see the energy transition continue post-coronavirus, argues Georgina Hayden
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One of the most immediate impacts of the Covid-19 pandemic on the power sector will be a significant reduction in electricity demand, in line with rising macroeconomic headwinds and reduced business activities.

Markets with large energy-intensive sectors like manufacturing, construction and extractives will see power demand fall most severely. An uptick in residential electricity demand will only partially offset this.

The International Energy Agency expects global electricity demand to witness its largest drop since the Great Depression in the 1930s.

This will have a knock-on impact on electricity generators in terms of their revenue streams, lowering returns of power generating units. This will be a particularly pertinent issue for thermal and nuclear power facilities as they can more easily adjust their output to match demand, while renewable energy projects often benefit from priority dispatch and will be given preferential access to the grid.

Georgina Hayden, energy consultant and co-founder of North Shore Analysis

For major electricity exporters, a downturn in power demand from regional neighbours will threaten export revenues. This has already been seen in Europe, whereby measure taken to curb the spread of Covid-19 have eroded demand for French nuclear electricity exports to markets across Western Europe, primarily to Spain, Italy, the UK and Switzerland.

In fact, Électricité de France (EDF) has revised its nuclear output estimate for France in 2020, to take in consideration the fall in electricity demand domestically and across its major export markets in Europe.

EDF expects output of around 315-325 TWh, a reduction from an initial expectation of 375-390 TWh before the coronavirus outbreak.

Pandemic frames IEA forecasts in World Energy Outlook

The ongoing global outbreak of Covid-19 has the potential to threaten power and renewable energy projects under development for several reasons. Domestic containment measures are restricting construction works and disrupting labour force availability.

In addition, overcapacity brought about by the erosion of power demand could undermine the economic feasibility of planned projects. In line with this, it may prompt governments to cancel procurement mechanisms such as auctions, given that new capacity, whether renewable energy or conventional power, will no longer be required.

Furthermore, disruption to the manufacturing and trade of renewable energy components has led to supply chain bottlenecks across the construction industry.

This will be a particularly pertinent issue for the solar energy sector, given that Chinese manufacturers supply over 60% of the world’s solar photovoltaic panels and stringent shutdown measures seen in the country over H120 has reduced production and exports.

“Low hydrocarbon prices could undermine the investment appeal of renewable energy projects over the near-term”

While industrial production is now ramping up across China, the backlog in orders will mean that supply chain constraints in the global solar sector will likely linger throughout the year.

A handful of countries have postponed capacity auctions over the first half of 2020, including solar tenders in France, the Renewable Electricity Support Scheme (RESS) in Ireland and a 700MW solar auction in Portugal. Outside of Europe, Brazil and Ecuador have also delayed tenders for renewable energy capacity in light of the pandemic.

Demand destruction, in line with the prolonged global economic weakness, and in the case of oil, a breakdown in the OPEC+ deal, has seen energy commodity prices collapse over the first half of 2020.

Brent crude prices more than halved at one stage to a multi-year low of $19 per barrel, compared to just under $69 on January 1. LNG prices have largely tracked oil, while seaborne thermal coal prices fell 25% between January and the end of April.

Abundant and low-cost supply of hydrocarbons and coal is likely to weaken the economic rationale for developing renewable energy projects in some markets over the near-term.

In particular, cheap coal and gas – which dominate the global electricity mix, accounting for around 60% of total generation combined – will threaten the cost-competitiveness of utility-scale renewable energy and likely slow deployment of capacity in 2020 and into 2021.

Dilute support
Governments in those markets that are heavily dependent on thermal power sources and have easy access to feedstock may dilute renewable energy support in order to capitalise on cheap energy costs and redirect investment into more pressing areas such as healthcare.

In addition, lower feedstock prices for coal and gas will result in lower electricity prices, which will lower the potential savings to consumers from decentralised renewable energy systems.

Will Covid-19 derail global decarbonisation efforts? Unlikely.Renewable energy investment and deployment will likely rebound quickly after the near-term headwinds associated with Covid-19 have dissipated. This is because the drivers behind global decarbonisation will remain largely in place over the longer-term.

These drivers include advances in low carbon technology, shifting consumer preferences, greater shareholder scrutiny on sustainability and conducive government policy in place for renewable energy.

Furthermore, the financing environment for energy intensive sectors is becoming increasingly restrictive, with numerous lenders limiting funding for fossil fuel industries.

Most recently, JPMorgan Chase announced plans in February 2020 to limit financing for global coal mining and coal-fired power projects. At the same time, lenders are increasing financing lines for low-carbon initiatives, supporting investment into renewable energy and other green technologies.

Interconnectivity on the rise
Alongside a continued focus on renewable energy, it is likely that governments across the world will increasingly look to boost cross-border electricity interconnectivity over the coming years.

The outbreak of Covid-19 and the external shock this has had on the global electricity system and supply and demand dynamics will elevate interconnectivity projects up the political agenda.

The pooling of electricity resources can reduce an individual country’s exposure to supply risks, through economies of scale, reduce operating costs and electricity prices.

Furthermore, it enables much greater flexibility in the power system and would therefore help balance the intermittency associated with variable renewable energy source. This would allow for greater amounts of renewable energy to be integrated into the system.

About the author: Georgina Hayden is an energy consultant and co-founder of research and analysis firm, North Shore Analysis. She has a special interest in the low-carbon economy. Previously, she was Head of Power & Renewables Research at Fitch Solutions.

What if the global pandemic accelerated the green transition? That’s the question that will frame the Virtual Keynote of Enlit Europe later this month. Click here for more details and to register.