Will COVID-19 put the brakes on the energy transition?
Within the right incentives, it could be quite the opposite
With industrial production falling due to COVID-19, it would appear that companies seeking to slash greenhouse gas emissions will be able to meet their targets more readily. However, companies financially harmed by COVID-19 are now under pressure to cut capital expenditures on projects, including those to reduce greenhouse emissions. Does this mean the COVID-19 crisis will stop the progress of the energy transition?
There is the added challenge of a low price of carbon credits traded on the ETS, and with that less incentive to curb emissions. Also, with oil and gas prices depressed, switching to renewable energy has lost some of its appeal. On top of that, some renewable projects have also been hampered by lockdowns and disrupted supply chains.
Does this mean the COVID-19 crisis will stop the progress of the energy transition?
We think not.
From the discussions we are having with our clients, it is clear that the Future of Energy is a very important topic for them at boardroom level. They feel the increased investor and regulatory pressure and changing customer demands. They realize there is a need to transform their business models to remain relevant and competitive. Their emission-reduction goals will most likely not change dramatically as a result of what will probably be short-term price movements caused by COVID-19.
Does the COVID-19 crisis also offer opportunities?
The crisis has heightened the awareness that we need to change the way we treat our planet. With the increased focus on low-carbon by investors, corporates and citizens, decarbonization is perhaps the most significant longer-term issue to be factored into the recovery.
This is helped by the fact that the costs per kWh for renewable sources are falling sharply. As TNO stated in a recent paper: a few years ago, offshore wind energy was seen as a cost item of ten billion euros, driven by subsidies. Wind energy is now profitable. The costs of generating solar energy have fallen spectacularly and the revenues have increased accordingly. Most of the costs related to the energy transition are in fact investments. Currently, a lot of money goes to Saudi Arabia and Russia without providing us the long-term advantage in areas such as employment and innovation. Fossil fuels are also a permanent part of the power politics of countries on which we do not really want to depend. This is an opportunity to break that dependence. A new system in which we generate more energy ourselves can create tens of thousands of jobs.
So, nothing standing in the way of a bright, renewable energy future then?
Political and regulatory risk remains one of the biggest problems for making long-term investments. Uncertainty about upcoming regulation increases the risk and lowers the appetite of investors to fund new projects. The current regulatory environment is largely based on fossil fuel generation capacity. We are used to a world where energy supply follows demand. In a world full of renewable energy it is exactly the other way around. Renewable energy is being produced when the wind blows and the sun shines, independent of the demand at that point in time.
And we need to be realistic: the energy transition will create opportunities, but it will also pose challenges and risks. Not everybody will come out on top because the opportunities will not necessarily be available to the same sectors and companies as the challenges and risks. For instance, demand for oil is under severe pressure from the coronavirus. And although this is not the first time that we've had a shock to the oil market, it is the first time that we've had a supply shock and a demand shock at the same time.
And then there are the costs. For example, the costs of the energy agreement calculated by the PBL (Netherlands Environmental Assessment Agency) amount to about 8 billion a year in the Netherlands. This could easily be higher after 2030. However, It is important to put this number in perspective: it only amounts to a few percent of GNP. And recently TNO calculated that the total investment costs for the energy transition can be reduced by more than 10 per cent solely through innovations in solar and wind energy.
Can we make sure the COVID-19 crisis is a catalyst for the energy transition?
With the right incentives in place, yes, we can!
As Dr Fatih Birol - Executive Director of the International Energy Agency – recently said: “The crisis has brought lower emissions but for all the wrong reasons. If we are to achieve a lasting reduction in emissions, then we will need to see a rapid increase in clean energy investment. The response of policy makers – and the extent to which energy and sustainability concerns are integrated into their recovery strategies – will be critical.”
The energy transition is a public-private transition challenge that inevitably will be accompanied by largescale investments. These investments are characterized by complex business cases with relatively high risk and uncertainty. Investments will be required in for example (residual) heat networks, geothermal energy, increased network capacity, hydrogen, alternative raw materials for industry, etc. The paradox is that these investments are necessary in order to reach government targets to reduce greenhouse gas emissions with 49% by 2030. In our opinion focused (regional) public investment capital will be essential for boosting and accelerating the energy transition. We argue a change in focus from reactive financial instruments (e.g. subsidies) towards proactive investments in key projects focused on accelerating the energy transition. Regulators should also adopt the new supply-based reality, since grid congestion could be a major barrier in the move to renewables. Government is already helping to keep the transition going by extending the duration of the SDE subsidy by one year. That way renewable energy companies will have more time to complete renewable projects without losing money. And if the market needs even more stimulation, government could provide loans with favorable conditions.
As said earlier, the energy transition will offer new opportunities in all job categories. But some people will need to be retrained for these jobs. During their training they may earn less or actually have to pay for their retraining. This requires suitable labor-market mechanisms and collaboration between (civil) government, educational institutes, employers and corporates.
Of course we understand that in the short term, companies must be helped to survive. But we must not lose sight of the long term, and renewable energy is both a necessary and economically viable long term goal.
In short: in order for the transition to succeed - and certainly to accelerate it - it is important that parties dare to invest and take risks by anticipating the outcome instead of the existing market. This requires clear laws and regulations and a predictable, enabling government. If ever there was an opportunity to rebuild our economy in a more sustainable way, it is now. We are ready to connect all the relevant players and seize this opportunity!
An industry perspective
Energy, Resources & Industrials (ER&I)