The COVID-19 pandemic and ensuing lockdown measures across the globe have thrown the global economy into a severe crisis with massive job losses, slashed incomes and bleak economic prospects around the world. With all major economic activity halted, energy demand has also tumbled, leading to the steepest drop in oil prices in two decades. Simultaneously, there has been a significant but temporary cut in greenhouse-gas emissions with a major drop in global industrial emissions. However, this temporary drop in carbon emissions due to COVID-19 only highlights the fact that there has been very little actual progress in decarbonization across the globe. Thus, as governments worldwide prepare their national recovery plans, they should align policies and investments with energy transitions to tackle both the current economic downturn as well as the climate crisis.
Against this backdrop, International Renewable Energy Agency’s (IRENA’s) new report titled “The Post-COVID recovery: An agenda for resilience, development and equality” analyses the impacts of the pandemic and outlines holistic recovery options based on scaling up energy transition technologies. It outlines investment opportunities, along with policies and programmes for job creation, industrial development and energy access that could form the core of national stimulus policies. Following are the key highlights from the report.
COVID-19 and its impact on the global energy landscape
The COVID-19 crisis has exposed the weaknesses of complex global supply chains based on lean manufacturing. Supply chain disruptions have reduced the availability of raw materials, intermediate goods and final products almost everywhere. An estimated 436 million enterprises in the hardest-hit sectors face risks of serious disruption while sharply reduced economic activity translates into job losses. With pandemic response measures introduced in many parts of the world leading to an economic slump, the energy sector has also been hit hard. Weekly energy demand had fallen 25 per cent for countries in complete lockdown and 18 per cent for those in partial lockdown by mid-April 2020, with energy needs for transport plunging as well.
Fossil fuels have taken the brunt of the demand reduction in transport and industry. Estimates suggest that oil and coal use could fall by 8-9 per cent in 2020. In fact, the drop in price of crude oil in April was the largest since 2002 with Brent crude prices falling to an 18-year low of USD 19/barrel amid weakening demand. However, the long-term effects of the crisis on the energy sector remains to be seen as governments could face pressure to bail out fossil-fuel companies while countries not firmly committed to scaling up renewable energy may be tempted to take advantage of low-cost oil. Yet not all effects of the economic slowdown are negative, as the renewable energy sector has fared better than coal and oil. With more governments pledging to decarbonize their energy sector, faster deployment of renewables is on the horizon in the near future. Still, the crisis has affected the ongoing global development of renewables in a variety of ways.
- Operational and planned projects: Renewable power projects operating in liberalised markets without a price hedge were confronted with lower electricity prices. Meanwhile, those with 100 per cent price hedges in the form of power purchase agreements with fixed remuneration levels were sometimes unexpectedly curtailed as demand for electricity fell. There were significant defaults on payments as offtakers that assumed the burden of honoring contracts were strained due to their own revenue losses. Meanwhile, some projects under development face delays, and some risk missing deadlines to qualify for support. In solar PV, lockdown measures, permitting challenges, supply chain delays, the tightening of tax equity markets, and homeowners’ reluctance to spend have placed pressure on the industry. Similarly, supply chain disruptions, and restrictions on labour availability and construction activity have severely affected the onshore wind segment. In fact, Wood Mackenzie (2020) expects new solar PV and onshore wind capacity additions in 2020 to be about 18 per cent and 15-20 per cent below earlier expectations respectively.
- Investment: Renewable energy investment dropped slightly in the first quarter of 2020, down 2.6 per cent from the same period in 2019, with new commitments further declining in April and May. The financial impact of the pandemic is even more severe in emerging markets and developing economies (EMDEs) than in developed countries, which could see a decrease in new renewable energy projects with their reduced project financing options. However, on the other hand, the pandemic has sharpened investors’ interest in sustainable and resilient assets, including renewables due to their impact on long-term profitability. Thus, larger investment in renewable energy assets can be expected. Despite the uncertainty caused by the pandemic, foreign direct investment in renewable energy reached an all-time high in the first quarter of 2020, with over USD 23 billion of cross-border renewable energy investment according to fDi Markets (2020).
- Employment: While jobs in the renewable energy sector have been affected, the impact has been less than fossil fuel jobs. Construction of large-scale utility projects will proceed, though with some delays. Meanwhile, jobs will be impacted due to temporary disruptions in the supply of pieces of equipment, components or raw materials, either because of factory shutdowns or border restrictions. Jobs appear less affected in operations of utility-scale wind and solar plants than in solar rooftop installation and off-grid solutions. The effect is even less pronounced in the offshore wind segment as most projects for 2020 and 2021 are partially commissioned or in advanced stages of development.
- Supply chains: The COVID-19 crisis has brought severe disruptions to cross-border supply chains. Factory shutdowns in China, which accounts for half of the global wind power supply chain, have led to a global “ripple effect” slowing down capacity additions across the globe. Similarly, Ecuador produces around 90 per cent of global balsa supply, a key component of many wind turbine blade cores, and lockdown in this country has led to a global shortage of this essential raw material. Transport and logistics are being impacted by a combination of lack of parts availability, social distancing measures and border controls, which can delay the timely delivery of equipment in turn impeding the project development.
- Energy access: The COVID-19 crisis has raised concerns over future financing in electricity and clean cooking with utilities and off-grid enterprises in financial duress. The cash positions of off-grid companies are extremely tight, with many companies lacking operating capital. The off-grid supply chain has been affected at multiple levels as shutdowns of ports and flights will restrict the supply of imported batteries, solar panels, inverters, and smart meters. Meanwhile, restrictions on internal movements will slow servicing of existing customers in rural areas and timely delivery of projects. Thus, implementation of existing energy access programmes and initiatives, both private and public, may get delayed because of the pandemic.
Investment agenda for 2030
While it is too early to tell how quickly economies around the world will revive post COVID-19 freeze, a decade appears sufficiently long for an ambitious investment path to unfold as well as is adequately near-term to permit focused planning. The Transforming Energy Scenario set out in IRENA’s Global Renewables Outlook report requires significant investment. However, that investment will generate substantial savings and help cushion the negative economic impacts of COVID-19. The key to achieving these powerful synergies is to harmonise short-term needs with medium- and long-term transition requirements and to move toward structures that increase socioeconomic resilience.
The Transforming Energy Scenario would reduce CO2 emissions to levels consistent with global climate and energy objectives. But realising that goal will require a profound transition of energy supply and demand with scaling up electricity from renewables a prerequisite. Under the Transforming Energy Scenario, renewables would provide 57 per cent of global power generation by 2030, up from 25 per cent in 2017. Wind and solar PV would dominate, with one-third of the world’s electricity coming from solar and wind power by 2030. To this end, the share of renewables in total final energy use would have to grow at a rate of 1.2 per cent per year, which would yield a 28-29 per cent global renewable energy share by 2030.
The recovery packages now being planned or implemented provide an opportunity to achieve the needed acceleration. The Transforming Energy Scenario suggests that cumulative investments in renewable energy and energy efficiency must rise to USD 49 trillion between now and 2030, leading to annual investments of around USD 4.5 trillion per year. This is more than five times greater than the amount of USD 825 billion invested in 2019 in renewable energy technologies, energy efficiency and power grids, including storage. Thus, a change is required in not only the amount but also the type of investment needs. In addition to solar PV and wind investment, there will be substantial requirements for transmission and distribution grids along with investment in energy efficiency across all end-use sectors and EV charging infrastructure.
An acceleration of the energy transition can bring substantial socio- economic benefits, specifically the creation of much-needed jobs and economic benefits. Investing in the energy transition would lead to 100 million people being employed in the energy sector by 2030 under the Transforming Energy Scenario, up 74 per cent from today’s 58 million. Thus, policy makers need to take this into consideration and assess the job creation potential across along each segment of the value chain in renewable energy space. Owing to a wide variety of occupational groups and skill sets required in the sector, from project planning and development to the manufacturing of equipment and components, from construction and installation to operations and maintenance, renewable energy projects offer considerable potential for creating employment.
Going forward, it is important to develop domestic industrial capacities and supply chains through local content requirements, involve national development banks in green financing, adopt proper price signals, and provide adequate support for research and development. Moreover, a comprehensive set of labour and educational policies are needed to build the needed workforce and meet skills requirements. In addition, a greater engagement is required on the part of institutional investors and the use of green bonds to mobilise the necessary green investment.
Opportunities to stimulate economic recovery
While many clean energy technologies are already in use and even the necessary financial resources could also be marshalled, the actual transformation of the energy system cannot be left to markets alone. Policy measures should be taken now that could instigate systemic change for the better. These short-term policy measures should include the use of public funds to direct investment into areas related to the energy transition. Accomplishing both economic recovery as well as energy transition will require all bailouts to contribute to sustainability goals, reforms of fossil fuel pricing, and assurances that no new fossil fuel assets will be funded as old ones are retired. The short-term policy package should be aligned with the renewable energy targets and Nationally Determined Contributions (NDCs) defined under the 2015 Paris Agreement on Climate Change. Further, renewable energy facilities, both those in operation and under construction, will need to be safeguarded while supply chains will have to be diversified. Moreover, skill development will be important with emphasis on reskilling fossil fuel workers for careers in renewables and seizing opportunities for urgent job creation in the various areas of renewable energy sector.
The COVID-19 pandemic has forced a dramatic break with business as usual by exposing the vulnerabilities of the current economic system. Much is still unknown about its impact on livelihoods and thus, government interventions to promote recovery remain a work in progress. With the planning of recovery programmes in progress, governments have an immense opportunity to have more ambitious plans for energy transition. Ambitious renewable energy targets consistent with long-term strategies can give a boost to investors’ confidence. Going forward, it is important that the recovery phase triggers a decisive shift toward a sustainable future.
The full report can be accessed here.