Covid-19 and the Energy Transition Industry

The Covid-19 pandemic has generated an unprecedented global macroeconomic trauma that has put all energy sectors in the grey zone. This is true not only for oil and gas, but also for other industries essential to the energy transition, such as renewable energies and electric vehicles, among others. 

The sharp drop in the price of crude oil - triggered by the double shock of a collapse in demand linked to the macroeconomic impact of Covid-19 and an oversupply resulting from the market share dispute between Saudi Arabia and Russia - has all the potential to cause serial disruptions in the energy sector supply chains. For example, the situation has already led European oil companies to reduce their expenditure and commit less capital to renewable energy and other low-carbon technologies, essential for their transformation into multi-energy companies.

In fact, industry analysts predict significant drops in activity in the clean energy sectors, which until recently had been expanding rapidly and are now concerned about the expected damage associated with the economic downturn, falling electricity demand, and low natural gas prices. Rystad Energy, for example, has forecast that the commissioning of renewable energy projects worldwide this year will be affected, downgrading its pre-coronavirus prediction to a total growth of 126 gigawatts (GW) of solar PV and 71 GW of wind capacity. A negative impact that will apparently be much more acute in the US than in Europe, as according to the American Wind Energy Association, Covid-19 has put at risk more than half of the 44 GW of new projects planned for this year - and some 35,000 jobs - at the same time as the head of the Solar Energy Industries Association stated that their sector was also already experiencing the effects of the pandemic.

On the other hand, analysts warn that plummeting oil prices could hurt demand for electric vehicles and slow progress in improving energy efficiency. Ultimately, cheap petrol is likely to diminish, at least in the short term, the attractiveness of EVs to consumers. The global market for such a vehicle had already experienced a slowdown last year due to weaker demand in China and the US, but this trend could be accentuated by the spread of the coronavirus and its negative effects on global economy.

Another obstacle to the energy transition is that low energy prices often reduce the economic incentives to save energy and to find more efficient ways of using it. As Fatih Birol, Director of the International Energy Agency, recently recalled, "cheaper energy always leads to less efficient energy use" and therefore "low energy prices, particularly for oil and gas, will make the economic motivations for savings less attractive and this is certainly not good news".

In any case, beyond the short term, the main question to be answered is how the energy transition and clean energy industries emerge after the pandemic and what market prospects they will have. As Yuval Noah Harari wrote in a Financial Times article on the possible geopolitical consequences of Covid-19: “We should ask ourselves not only how to overcome the immediate threat but also what kind of world we will inhabit once the storm passes". And in this regard, as Fatih Birol says, "these issues - coronavirus, market conditions - are important, but they are temporary; maybe in a few months or longer, the market will recover, but the challenges that climate change poses to us will still be there".

Article published in La Vanguardia.