Implications of COVID-19 for the sector and for energy transition

Rendered illustration of renewable energy in a lightbulb (climate 10x)
Image: Shutterstock

By Dr Tracey Dodd and Dr Alan Rai [1]

The global outbreak of COVID-19 has disrupted economies and supply chains across the world, including in the energy market[2]. The evolution of the disease, and its impact for the sector and for energy transition, is highly uncertain, which presents a challenge for policy makers and renewable energy developers. In the face of this uncertainty, decision makers can take some direction by considering the risks (i.e., things that are not yet known but knowable), as well as predictions about what might happen.

So what are the risks? The first is supply chain disruptions[3]. PwC[4] reports that solar projects are experiencing delays in the supply of key equipment, as well as short-term price increases. These supply chain disruptions are due to reliance on manufacturers in South-East Asia and the US, as well as Chinese component suppliers.

The second disruption is to funding markets, especially for bank loans and corporate debt. Most renewable projects use a degree of financial leverage[5]. Renewables are also capital-intensive; unlike coal- and gas-fired plant, the vast bulk of wind and solar plants’ costs are incurred upfront, so even small changes in financing costs have big implications for renewables’ overall costs. In recent times credit markets have been highly dislocated, with corporate debt costs more than doubling[6] between February and April 2020.

These disruptions have negatively impacted the pipeline of renewables projects. For example, between January 2020 and April 2020, the pipeline of wind and solar PV projects fell by 1.7GW (or 4 per cent)[7], a decline due at least in part to the effects of COVID-19. This change is consistent with feedback from developers who are typically waiting for the disruptive effects of COVID-19 to abate. The third disruption is to electricity demand, namely the risk of reduced demand.  There are both near- and longer-term risks. In the near-term, Energy Networks Australia reports an overall 6.7 per cent operational reduction in the National Electricity Market (NEM). While energy demand will likely return to post COVID 19 levels these turbulent times bring many challenges for the transition to renewables.

Related article: COVID-19 puts brakes on global emissions

For the NEM, AEMO estimates[2] COVID-19 has reduced electricity demand, with the effect varying by time-of-day and by weekdays vs weekends. The greatest downward effect has to date been seen on weekdays in NSW and Queensland, with declines of eight to 10 per cent during the morning, and declines of three to four per cent in the evenings. However, COVID-19 has had a lower effect on electricity demand in other states, to date.

Outside of electricity, demand for other energy has also fallen, especially for transport fuel. For example, jet fuel demand is down 20 per cent[3], with many airlines facing insolvency[4]. Thus, one of the hardest hit areas in the energy transition will be renewable jet fuels; with development plans in this already struggling industry likely to be shelved.

The fourth disruption is to oil and gas prices, which have fallen sharply (and in some cases oil prices have turned negative[5]). There are concerns that such a dramatic drop in oil and gas prices may decrease the incentive to switch towards renewables[6] and other clean energy sources, for as long as low oil and gas prices last. An opposing view[7] is that a COVID-induced slump in energy demand may lead to a longer-term decline in fossil fuel profits such that renewables are seen as a more profitable longer-term investment than fossil fuels.

The open question for renewables, the broader NEM, and indeed Australia’s overall economy, is how long-lasting the effects of COVID-19 will be. In this regard, financial markets’ expectations for the future price of electricity is not promising: on May 4, electricity futures prices for the 2021 calendar year were 15-20 per cent below[8] CY2021 futures prices back in March. This suggests the effects of COVID-19 may be somewhat enduring, at least for the electricity sector.

Outside of COVID-19, there are other community trends that will impact the transition to renewable energy in the long run.

Related article: Solar farms, power stations and water treatment plants can be attractions instead of eyesores

The higher education sector is experiencing an unprecedented disturbance, as students’ transition to online learning and international students face the decision of whether to remain enrolled in Australian institutions for 2020. The Higher Education Relief Package[9] aims to reduce the cost of studying short, online courses and provide exemptions from loan fees under FEE-HELP and VET Student Loans. Higher education institutions are expected to release further details on approved courses under this scheme in May 2020, so it is too soon to tell if this will have a positive or negative impact on skills in the renewable energy sector.

What can be gleaned, however, is that the higher education sector is facing up to a $2 billion reduction in revenue[10], due to decreased international enrolments. It is reasonable to assume that this will reduce capacity and funds for research in renewable energy market, unless incentives are provided.

Further, the number of people experiencing energy poverty in Australia is going to rise. Research already shows[11] that people on low incomes and unemployment benefits shoulder a disproportionate financial burden from the lack of policy clarity in Australia to ensure that the transition to renewables is equitable. Australia faces an upward trend in unemployment[12], with the full implications of the pandemic yet to be seen. Ray Morgan (2020)[13] estimates that almost a million people have already lost their jobs. This will make measures to protect the vulnerable from disproportionate energy costs even greater.

However, there is some light at the end of the tunnel. Global demand for zero emissions vehicles[14] is still anticipated to grow, driven by tighter vehicle emissions regulations[15]. Australia can do more to stimulate economic activity in this area through greater commitment to reducing vehicle emissions in Australia[16].

There is an opportunity for renewables and clean energy projects to play a key role as part of any stimulus package to lift Australia’s economy out of the depressive economic state wrought by COVID-19. For Australia, bringing forward the current investment pipeline of renewable projects, by governments expediting planning approvals processes, could create over 50,000 new jobs, lower power prices, and inject over $50 billion worth of investment[17] to revitalise economic activity in regional and rural communities. Globally, strong clean energy investments could both pull the global economy out of a COVID-19 induced slump and achieve the net zero emissions goals of the Paris Agreement, generating benefits of an extra $100 trillion (A$159 trillion)[18] to global GDP above business as usual.

All this points to what will be a very interesting, albeit challenging, next 18-24 months for the clean energy sector.

Contact for full list of footnotes.

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