|Borrego solar farm in California. All energy sources have felt the impacts of falling demand, but green power will be buoyed by policy support while oil is facing a steeper challenge due to sluggish demand recovery, according to S&P Global Ratings and S&P Global Platts Analytics.
Source: San Diego Gas & Electric
The events of 2020 have changed much of the world beyond recognition, and the fall-out from the coronavirus pandemic will have lasting consequences on the energy sector, according to a new report from S&P Global Ratings and S&P Global Platts Analytics.
People are travelling less, many industries are operating below normal capacity and trade flows have slowed. Global GDP is set to contract 3.8% this year, mainly due to a deeper and longer hit to emerging markets including India, Ratings analysts said. Demand for energy from all sources is falling alongside macroeconomic indicators, but green power looks set to weather the storm better than other types of energy.
Battered by falling demand from transport and shipping, oil is seeing the greatest impact from COVID-19 so far this year, with the pandemic wiping out six years of growth in the sector.
Platts analysts see lasting repercussions: "As long as there are fears of coronavirus transmission, there will be reductions in demand for air travel for business and pleasure, and many business will either mandate or allow working from home to continue," Dan Klein, head of scenario planning, wrote in the report.
"However, even if or when these fears subside, demand for travel will not return to its previous state," he added, with many businesses signaling their intent to continue holding certain meetings and engagements online after the pandemic.
The use of coal and natural gas have also declined this year, by 5.7% and 3%, respectively, compared to pre-COVID-19 forecasts. Delays in renewable energy project installations in key markets are set to curb production by 3.6% in 2020, Ratings and Platts said.
But despite the plunge in fossil fuel generation and associated emissions, global economies remain out of line with targets agreed under the Paris Agreement on climate change, the authors said. While the pandemic will lower energy sector emissions by 27.5 billion tonnes of CO2 until 2050 — equivalent to one year's emissions — more than 10 times that will need to be curbed to meet the 2 degree C warming target.
Looking ahead, there are reasons for optimism for renewables players but downside risks also loom. Global policy support and continued investor appetite remain strong, and particularly in Europe lawmakers are paving the way for more renewables on the system. Around a third of the European Commission's €750 billion Next Generation EU recovery fund will be added to the bloc's green spending arsenal already allocated in the European Green Deal climate plan from January.
"European policymakers have signaled their intent to skew stimulus packages toward green initiatives, such as a greater push for electric vehicles, renewables, and hydrogen. These policies are also seen as an additional impetus for Europe's wider ambition to achieve net zero carbon emissions by 2050," Klein wrote.
Some member states, such as France and Germany, will go beyond what the EU is asking of them in terms of greening their economies, spending more on the energy transition than they can receive through the Next Generation EU fund, the report said. And there is still work to do for most of the bloc's members, along with the U.K., if they are to meet their renewable energy targets by 2030. While the Nordic nations are beginning to close in on their ambitious renewables targets of 50% or more, other countries like Germany, France, the Netherlands and Poland will need to add significant renewables capacity to reach their goals.
Several multibillion-euro budget allocations to develop green hydrogen production capacity in Europe will help promote renewables growth until 2030, the report said. As a storage solution, hydrogen could also help address challenges from renewables' intermittency and seasonality, and increase demand for decarbonized energy from sectors such as heavy vehicle transport and heavy industries.
As renewable energy subsidies shrink with falling technology costs and rising competition, merchant risk will become a higher hurdle for developers, the report's authors found. While the market is looking to power purchase agreements to step into the financing gap, a lack of contractual standards and diverse legal systems are stunting potential in Europe. Economic uncertainty is also weighing on participants' willingness to close long-term deals and take counterparty risk.
US election to decide green power trajectory
Utilities, with their integrated strategies and large balance sheets, are expected to navigate these rising risks more easily, and there are also opportunities for Big Oil players given their size, existing trading operations and offshore expertise.
British oil major BP PLC, for example, wants to inject 20% of its capital in energy transition businesses, leapfrogging many of its European peers let alone U.S. competitors like Exxon Mobil Corp. which have few policy incentives to decarbonize their operations. Still, "Given highly competitive asset prices for renewables and power retail opportunities, we expect the oil majors to face a long and challenging journey along the energy transition," the report said.
Across the Atlantic in the U.S., the green spending trajectory will be set by the upcoming presidential election. Democratic challenger Joe Biden has pledged to spend $2 trillion to eliminate greenhouse gases from the country's electricity grid by 2035, a measure which would require congressional legislative approval. The Trump administration has not signaled its intentions to support green power initiatives.
For now, state mandates, tax incentives and corporate initiatives continue to be key drivers of U.S. renewables installations. "With a phaseout for wind credits in 2021 and step-downs for solar Investment Tax Credits, we do expect a decline in installations," Aneesh Prabhu, senior director at Ratings, wrote.
S&P Global Market Intelligence and S&P Global Platts are owned by S&P Global Inc.