We are pleased to launch “The Energy Transition – Post-COVID 19”, a series of articles on some post-pandemic trends in the renewable energy sector. This first article provides an overview of the general developments in the energy transition that were already underway and have since accelerated after the global COVID-19 crisis swept across the world.
When the COVID-19 pandemic hit, government and societal responses around the world – such as lockdown measures, social distancing and increased reliance on telework and e-commerce – led to a fall in global energy demand, an estimated 6% contraction in 2020, according to the International Energy Agency (IEA). The resulting downward pressure on oil prices (which were further depressed in 2020 due to a price war between Russia and Saudi Arabia in March and an oversupply in April), and negative employment effects in the fossil fuel industries, were atypical, given that it was a largely demand-led crisis with unprecedented speed and scale of decline.
The silver lining however, was that the pandemic hit at a time where renewable sources of power were already seeing their market share increase due to innovation and incentives, as well as relatively well thought out and balanced renewables policies and regulations in many countries.
Innovation driving down costs
Renewable energy costs have been declining due to technological advancements, with studies by Bloomberg New Energy Finance finding that solar and onshore wind are now the cheapest sources of new-build generation for at least two-thirds of the global population. Further, the International Renewable Energy Agency (IRENA) reported an almost 50% average fall in costs of power generation across solar and wind sources in the last 10 years, with solar photovoltaics (PV) alone accounting for an 82% decline in costs in the same period.
IRENA further reports that the prices of onshore wind and solar PV energy generation have now fallen below five US cents per kilowatt hour – with fossil fuel power generation estimated to cost between 5 to 18 US cents per kilowatt hour. As innovation in the sector persists, it is almost certain that renewables will continue getting more and more cost competitive.
Supportive policies and regulation
Even prior to COVID-19, many countries have increased support for renewables through favourable policies and market regulations. The IEA reported recently that in the first half of 2020, 13 countries commissioned a record quantum of new generating capacity of almost 50 gigawatts which are to become operational during 2021-24. Fast forward to the end of 2020, and the economic uncertainties brought about by the pandemic have not appeared to have induced governments in major markets to reverse previously announced policy support.
Looking forward, major economies such as the EU and China – the two largest markets for renewables – have, in line with their Paris Accord commitments, recently set ambitious long-term decarbonisation goals and are not likely to be deterred by the crisis. In fact, with many governments focusing on economic recovery through fiscal stimulus, there may be some that will take this as a chance to accelerate their transition to renewables. The EU for example, which aims for a net-zero carbon economy by 2050, appears to have identified the transition to renewables as a key sector for stimulus support. In July 2020, EU countries pledged 30% of the Next Generation EU Fund's €750 billion fiscal plan and the EU multiannual budget towards green projects. This is on top of the €225 billion dedicated to the energy transition from the post-pandemic recovery fund recently approved by the European Commission. In the APAC region, in addition to Mainland China, Taiwan, Japan, South Korea and Vietnam have all established fast growth offshore wind sectors.
The recent political shift in the United States also appears to support this move. The new Biden administration, now with a higher probability of Congressional support from a bare Democratic majority, has repeatedly proclaimed commitments toward green initiatives, with one of his first executive orders being to bring the US back into the Paris Accord. Targets for a carbon-free power sector by 2035, and a recovery-focused stimulus package that includes robust incentives for green energy and transition technologies, are some of the near-term measures said to be prioritised. Prior to his election, President Biden had also previously announced plans to spend US$2 trillion over four years to escalate the use of clean energy with economic recovery from the pandemic.
Increasingly attracting investment
Probably not unrelated to these developments, renewable energy has become a preferred choice for investors in recent times, already accounting for about 72% of all new power capacity in 2019. With reports by Goldman Sachs providing that financial institutions have been redirecting financing away from fossil fuels towards renewables, investments in renewable energy has reached unprecedented levels. According to IRENA, over US$23 billion of cross-border renewable energy investments were announced at the start of 2020, the highest amount recorded in the last ten years.
Investors also appear to be looking to renewables in the context of the COVID-19 recovery – a recent Oxford survey of global economic experts indicates that investment in clean infrastructure, renovations and retroﬁts to improve building efﬁciency, investment in education and training, and clean R&D spending, rank as top-performing pandemic recovery measures.
It is clear that COVID-19 has had a profound impact on the energy sector and has drawn some attention to climate policy in the midst of the global focus on economic recovery. There are already some positive trends towards digitisation and low-carbon technologies, with continuing innovation and stimulated investments into cheaper and cleaner energy. If post-pandemic stimulus around the world continues to be conditioned towards a green recovery, the COVID-19 crisis could well end up being the catalyst for the ultimate transition to clean power in the energy sector.