How is COVID-19 Impacting the Energy Transition?
New research from S&P Global's Energy Transition Research Lab
The COVID-19 pandemic is one of the most severe economic and energy shocks in modern history. On top of the massive disruptions to business, mobility, and everyday life, there clearly will be longer-lasting implications for the energy transition away from fossil fuels. While the shocks from the pandemic are leading to reductions in fossil fuel consumption and emissions, they won't be enough to put the world on a path to meet 2 degree global warming target, nor bring forward peak oil demand, nor drive coal consumption to near zero.
To achieve the targets under the Paris Agreement and limit global climate change, the energy transition will need to include a mosaic of solutions beyond just renewables and fossil fuel demand destruction: Hydrogen, carbon capture utilization and storage, and biofuels are all likely to play roles in decarbonizing the interconnected global energy system. Recent announcements from policymakers, leading energy companies, and end users illustrate the many kinds of climate solutions. While we continue to regularly publish our views and outlooks on all of the key pathways comprising the decarbonization mosaic, this report focuses on the impact of the COVID-19 pandemic on trends in the fossil fuels and renewables sectors.
- The COVID-19 pandemic has drawn increased attention to climate policy and economic resilience.
- More than 10 times the emission reductions resulting from COVID-19 will be needed to meet the 2 degree target through 2050. However, the pandemic's effects will cumulatively lower energy sector CO2 combustion emissions by 27.5 gigatons over 2020-2050—equivalent to almost one full-year of emissions.
- COVID-19 has reduced long-term world oil demand by 2.5 million barrels per day. Not all adjustments to the demand outlook were downward. That decline is, however, not enough to substantively bring forward the year of peak oil demand that S&P Gobal Platts Analytics projects for the late 2030s.
- Lower global energy demand threatens gas more than other fuel sources as gas is squeezed between the decline in primary energy demand, the increasing penetration of renewables, and the stickiness of coal demand--particularly in Asia. Still, we do not expect global gas demand to peak over the next 20 years, owing to growing industrial use, led by China, India, and the Middle East.
- We believe the global growth outlook for renewables generally remains intact, but not all lights are green. Notwithstanding the increased cost competitiveness of renewables and supportive policies, we also see important headwinds: decreasing subsidies and tax credits, lower power prices and competing traditional fossil fuels, as well as rising merchant risks, and ongoing integration needs with storage.
Does COVID-19 Bend the Curve to 2 Degrees?
Quantifying the impact of COVID-19 on energy demand and its associated emissions in both the short and long term requires a three-pronged approach, examining macroeconomics, behaviors, and policies individually and holistically.
The COVID-19 pandemic has not only altered energy supply, demand, and prices in the near term, but also to some extent their long-term trajectories. Looking just at demand, the repercussions from the pandemic have changed three primary drivers: macroeconomics, behaviors, and policy. As a result, S&P Global Platts Analytics Future Energy Outlooks see the outlook for CO2 emissions by 27.5 gigatons (GT) over 2020-2050. However, this represents only a minor step in the direction needed to meet the 2 degree target under the Paris climate accord, which would require more than 10 times that reduction over the period. Nevertheless, the emissions reduction achieved in 2020 is equivalent to the decline required by 2027 in a 2 degree scenario, illustrating that sizable emissions reductions are possible.
- COVID-19 has altered three fundamentals drivers of emissions: macroeconomics, behaviors, and policy, that combined will lower energy sector CO2 emissions by 27.5 gigatons over 2020-2050.
- However, this is only a minor step in the direction needed to meet the 2 degree target, which would require more than 10 times that reduction over the period.
- While changes in travel behavior typically do not meaningfully affect natural gas or coal demand because those fuels are not commonly used in the transportation sector, there will likely be second-order effects.
Crisis As Opportunity? COVID-19 Economic Recovery Policies Could Help or Hinder the Energy Transition
The COVID-19 pandemic has taken a heavy economic toll on the global economy. We forecast global GDP will contract by 3.8% this year, compared with a 0.1% contraction in the 2009 global financial crisis. While all major economies reacted in the short term with large monetary stimulus, not all will accelerate the energy transition as a consequence. In the EU, which targets a net-zero carbon economy by 2050, policy support is significantly pushing renewables’ growth in Europe. The recovery fund approved by the European Commission in July 2020 dedicated €225 billion to the energy transition, to be invested in the next three years.
- The European, U.S., and Chinese economies all reacted to the COVID-19 economic crisis with large monetary stimulus, but not all recovery policies will accelerate the energy transition.
- The EU recovery fund, agreed in July, dedicated €225 billion to the energy transition, to be invested in the next three years.
- The U.S. federal government has not provided any new support for green initiatives in stimulus measures to date beyond current tax incentives. The November election outcome will be pivotal for future climate change policies.
- In China, warning signs abound that the energy transition has stalled as policy stimulus ripples through the economy even as a new commitment is made to achieve carbon neutrality by 2060.
Moving Mountains: COVID-19 and Peak Oil Demand
Petroleum’s pre-eminence as a land, air, and marine transport fuel is seeing oil consumption drop the most of all primary energy sources amid the global economic downturn that started this year. The unprecedented collapse in worldwide mobility as a result of lockdowns and travel restrictions in March and April 2020 slashed oil demand by over 20 million b/d, or 20% of total demand. We expect global oil demand for 2020 as a whole to decline by 8.1 million b/d, wiping out six years of growth. We expect about 75% or 6.3 million b/d of demand to come back in 2021. The unprecedented cut to demand was met with an unprecedented cut to supply. After initial disagreement and delay, OPEC+ implemented decisive cuts, which allowed the market to start rebalancing and restored some confidence, although maintaining discipline may not be easy for the cartel. Producers inside and outside of OPEC+, facing their second crisis in five years, responded by slashing capex, costs, and shareholder returns.
- COVID-19's impact on the global economy and consumer behaviors has reduced long-term world oil demand by 2.5 million barrels per day, according to S&P Global Platts Analytics.
- However, some adjustments to the demand outlook were positive as weaker oil prices make electric vehicles less competitive, reduce the drive for efficiency, and stimulate underlying oil consumption.
- The weaker oil demand therefore is not meaningful enough to substantively bring forward the timing of the peak in oil demand that S&P Global Platts Analytics projects for the late 2030s. For oil demand to peak by 2025, drastic changes would need to occur to business and consumer behavior, including near full adoption of working from home, reshoring of supply chains, and widespread electrification of road transportation.
- Together with added COVID-19 concerns regarding ESG risks, weaker forecasts for oil demand are forcing oil companies to reassess investments and policies.
- The oil majors, which have the size and financial power to do so, might decide to develop renewables that would offer them options for adapting to changing energy scenarios, build different power assets, or gradually consolidate.
COVID-19 Dents Demand for Gas and Undermines its Role as a Bridge Fuel in the Energy Transition
Even though the COVID-19 pandemic has had less effect on the demand for gas than for any other fossil fuel in 2020, it threatens to have the most impact on gas over the next 10-20 years, reflected in the more than 9% reduction in our 2030 global gas demand outlook. Gas absorbed the brunt of the decline in overall energy demand after relatively small reductions to our coal and renewables outlooks. The challenge will come from the legacy contribution of gas to global greenhouse gas (GHG) emissions and the growing commercial and policy-driven motivations that strive to skip, or at least accelerate, the role of gas as a transition fuel. China and India will remain the focal points for demand growth through the decade, while the U.S., Russia, and Qatar develop a global rivalry in terms of production growth.
- Lower global energy demand due to the COVID-19 pandemic threatens the future of gas more than other fuels over the next 10-20 years. Gas will be to some extent squeezed out by lingering coal supply and growing renewables.
- Still, we do not expect gas demand to peak over the next 10-20 years globally, owing to industrial demand rather than power generation. China, India, and the Middle East will account for 61% of growth over the next decade.
- Gas demand growth has probably peaked in the U.S. power generation sector, as utilities' strategies shift to renewables and retail integration.
- Smaller U.S. independent gas producers face the greatest credit impact, as the pandemic exacerbates preexisting pressure on their profitability, credit metrics, liquidity, and refinancing ability.
- In Europe, the Green Deal is unlikely to support gas in the long term, even if gas remains an important part of the energy mix owing to the phase-out of coal and nuclear power. Uncertainty about the future role of gas is beginning to weigh on gas utilities' regulatory returns.
- Large gas producers in Europe are focusing increasingly on decarbonization and green energy, or diversifying into growing markets in Asia.
COVID-19 Could Make 2020 Crucial for Renewables
In the U.S., the presidential elections in November 2020 could portend an increase in renewables growth in the next few years in case of former Vice President Joe Biden wins, subject to Congressional support, as his plan includes $2 trillion in clean energy spending, while targeting a carbon-free power sector by 2035. In Europe, COVID-19 has accelerated policy support, with one-third of the Recovery Fund allocated to green investments, combined with ambitious 2030 objectives for green hydrogen. China's COVID-19-induced stimulus plans imply some headwinds for renewables because restrictions on new coal plants have been relaxed to support employment and the local economy. Moreover, the economy's trend to lower energy intensity has stalled.
- COVID-19 has drawn increased attention to climate policy in Europe and is playing a role in the U.S. elections.
- We believe the global growth outlook for renewables generally remains intact, even if stimulus plans will likely prioritize employment and direct support measures to the economy over green growth--especially in China and emerging markets.
- Key risks for the sector are reductions in direct subsidies and tax credits as observed in China, Europe, and the U.S.; permitting; and a cloudier outlook for long-term prices.
- On the other hand, continued strong investor appetite and declining costs are allowing renewables to compete increasingly at grid-parity prices, but with lower returns and rising market risks.
- As a result, larger renewables players, with strong balance sheets and vertical integration to mitigate merchant risks, may be better positioned and could move to consolidate the industry.
More of S&P Global's research and insights on the energy transition and climate risk:
—Transitioning to a Low Carbon Economy
—Economic Research: China's Energy Transition Stalls Post-COVID