The Covid-19 Economic Crisis: Impact on the Energy Transition

Event summary by Bianca Pasca

With a lot of uncertainty as to how our lives might change after the pandemic, the hit the economy has suffered could affect the energy transition in many unpredictable ways. The energy transition refers to the transformation from a fossil-fuel based energy system, to one that depends on sustainable, clean energy. The first OCS talk of Trinity Term brought together two distinguished guests to provide some insight into this important issue.

Laszlo Varro is the Chief Economist for the International Energy Agency (IEA), a leading authority on energy, which provides data and analysis and advises governments and industry on energy policy.

Michael Liebreich is the founder of Bloomberg New Energy Finance and the Chairman and CEO of Liebreich Associates, which offers advice on clean energy and transportation, smart infrastructure, technology, climate finance and sustainable development.

How will the economic downturn caused by the current crisis affect the transition to clean energy?
Laszlo started the discussion with a general analysis. He described how, depending on the severity of the restrictions in various countries, economic activity during lockdown declines by approximately 20 to 30% in most countries.

• The oil industry suffers a hit unseen in previous recessions, when oil demand wasn’t particularly affected and a drop in prices would generate additional consumption. Even after a gradual recovery after the crisis, there is an expected 9% decline in global oil demand.
• Although the lockdown tends to make household electricity consumption increase, the service sector is usually the biggest energy consumer in Europe and the US. With so many energy-demanding businesses closed, there has been an overall 20-25% drop in electricity consumption in a lot of countries, with an expected decline of up to 5% in global consumption.
• There is an expected 5% global decline in gas demand, and an estimated overall 8% decline in global coal demand.
• Taking all this into account, the level of CO2 emissions is likely to drop by more than 8%, a historically unprecedented decline which is expected to be more than the declines after all the recessions since the Second World War all added together!
• However, this reduction in emissions should by no means be celebrated. This is not a sustainable way of reducing emissions and we must find ways to manage this without shutting down the world economy.

The energy transition can be considered as consisting of 3 important steps:
1.     Pushing wind and solar production
2.     Electrifying those things that can be cut off from fossil fuels, like cars or heat pumps
3.     Have an appropriate plan B (e.g. carbon capture and storage) for those things that cannot be electrified. 

Renewable investments will likely remain robust even after the crisis, as a lot of them are based on long-term contracts. However:

• The record-low gas and coal prices might affect investments in energy efficiency programs.

• Low consumer confidence after the recession might mean people will continue to use their old cars and not invest in new electric vehicles
• Carbon capture storage and other new technologies require investing in large projects which are quite capital intensive. A recession is not the right moment for such investments.

Michael shared his optimism before Covid-19 that the 2020s were going to see the peak of CO2 emissions, with a subsequent drop. He argued that there has been a relative decoupling of GDP growth from emissions growth due to energy efficiency, the shift from coal to natural gas, and the shift to renewables.

• He believes that even after lockdown is raised, a bounce back to previous levels of activity will not be likely until we either have a viable vaccine or have gained immunity, such that there is no further looming danger.
• Even if governments take short-term measures that increase emissions in the attempt to restore the economy, overall there will be a more rapid decrease in emissions by 2030 nonetheless.
• We can expect to see behavioural change: less business travel, as people realise conferences can be held online, perhaps more home working, a different outlook on resilience, or even on the risks of climate change.
• However, some people may adopt the attitude of wishing to protect themselves by domesticating their country’s economy more, instead of looking for better international co-operation after the crisis.

What can governments do? What would a good stimulus program look like?
Michael warns against thinking that after the crisis there could immediately be a green stimulus to ‘build back better’. 

• Recovery should be prioritized, with shorter-term projects that can help people recover from the economic shock quickly, in contrast to large scale projects.
• The starting point for a green stimulus programme would be distributed energy efficiency programs
• The transition to electrical vehicles can be achieved by stimulating demand from companies that actually made a profit during the virus, like home delivery companies. For example, governments can set targets for these companies to be off internal combustion delivery vehicles by a certain date. This would also help the car industry to recover from the crisis.
• The fossil fuel sector shouldn’t be immediately abandoned, as that might engender push-back from workers and lobbyists. Instead, jobs can be created from projects that ‘clean up’ after the fossil fuel industry, such as removing flaring or remediating orphan wells. Thought should be given to reskilling workers from the fossil fuel sector.

 
 
Laszlo said that governments are the only actors that can stimulate economic activity in this situation, creating demand for goods and services. 

• Clean energy projects are capital intensive, such that a transition to a sustainable development trajectory will actually be profitable given the current crisis.
• We should think big and scale up the existing policies, as that has historically been more efficient than creating new ones. We must also be wary of big projects that might get bogged down by licensing or management issues.
• We should use this opportunity to finance research and development and innovative technologies. 
• We need to focus on modular scale energy efficiency technologies. After the 2009 financial crisis, a much bigger change was seen in electricity and use efficiency, which offered modular technologies like LED lights, than in gas consumption efficiency.

How might Covid-19 impact COP26?
Laszlo thinks the crisis will have an impact on climate negotiations. 

• Avoiding speculation about how the virus might affect geopolitical relationships, close cooperation with China is vital for solving the global environmental crisis. In the past several years, China has been the largest investor in all relevant clean energy technologies.  

Michael is optimistic about postponing COP26, as coming up with a proper plan will not have to be rushed. 

• He hopes that, by the time COP26 happens, there will be a greater understanding of the progress we are making. Hopefully, we will be able to recover the spirit of the Paris Agreement, although he expressed worries about the possibility of Donald Trump’s re-election, which could impact the negotiations. 

What could the impact of the green transition in developing countries be?
Laszlo mentioned that the risk of mortality in India and some African countries could be lower, given the younger population. Some African countries, having had previous experiences of epidemics, have managed the situation well.

• However, while the US and Europe can benefit from quantitative easing (adding money to the economy) developing countries suffer from capital flight, which will make it difficult for these countries to focus on energy efficiency.
• Development banks will play an important role in designing contracts that will enable large scale mobilization of institutional capital into developing economies’ energy projects. Michael is worried about how the financial strain will affect lending. 

What will the implications be for the oil and gas industries?
Laszlo remarked that this is a historically unprecedented shock for these industries. Even if the oil industry will see a price spike, the price of capital for the fossil fuels sector will go up, while that for the renewable energies will be lower.

There are 3 different groups to consider:

• The North American shale oil industry, which had had easy access to capital, now hard to retain. There will be a reduction of expenses in the North American industry and a sharp decline in American production in the foreseeable future, up to 2 million barrels per day. There is a possibility that these shale companies will face difficulties in the future, although Michael believes that they may recover, as the low prices make them competitive
• Large international oil and gas companies, a lot of which are focusing on gas now, and are investing a growing minority of their capital budget in cleaner energy (eg. BP, Total). They are in a better position than the North American independents, but they are also cutting investment quite sharply. They have been protecting their renewable investments, with sharper cuts in the conventional oil and gas parts. Michael believes there will be mergers and acquisitions even among these major companies
• National companies in countries where the national economy is critically dependent on oil and gas export revenues (Saudi Arabia, Russia, Iraq, Nigeria etc.). These countries will face a very challenging period. Low oil prices will mean they won’t be able to fund the social programs they are running. Michael sees the possibility of regional conflicts due to this. Laszlo believes they should use the crisis as a wake-up call to develop a non-oil sector and diversify their economic base.

Michael also discussed a fourth group, Canadian oil sands producers, who he believes have had one of the most substantial wake-up calls.