Capital is expected to grow strongly in the coming time for the renewable energy industry. But it also cannot go beyond the COVID-19 crisis.
Reduced electricity demand is a clear demonstration of these shocks. Previously, the 2008-2009 economic downturn reduced demand for electricity in the United States for about 10 years and by 2018, electricity sales in this country exceeded 2008 levels. At this time, US electricity use on March 27, 2020 was 3% lower than the same period last year. The decrease in electricity demand from 2018 – 2020 corresponds to the loss of about 3 years of sales growth.
When a crisis strikes, the electricity sector’s revenue will generally be affected by most utilities that are voluntarily suspended due to the coronavirus crisis. But electricity is still required, essential services and households will continue to use electricity. Some services such as health care use even more electricity.
Reduced demand due to lockdown and social distancing has affected the new renewable energy installation. Investors tightened the budget and delayed the construction of new factories. Companies that produce solar cells, wind turbines and green energy technologies will temporarily postpone growth plans to apply austerity measures. For example, Morgan Stanley’s prestigious clean technology analysis project decreased 48%, 28% and 17% of U.S. photovoltaic installations in the second, third and fourth quarters of 2020, respectively.
Clean energy is motivated
Luckily, this decrease in renewable energy installation will at least be offset in rich countries. Many renewable energy plants are being built for reasons other than increased demand, such as clean energy targets prescribed by law, and are either contracted or under construction.
Despite the current crisis, there is still long-term pressure from many directions toward the need for more carbon-free energy. Government policy and public pressure are also forcing companies to stop operating coal-fired power plants. And most will be replaced by wind, solar and hydro. 50 US companies have pledged to meet carbon reduction targets, of which 21 companies pledged not to emit carbon by 2050.
Since the beginning of 2019, crude oil prices have fallen by nearly 64% due to the market turning away from fossil fuels, using clean fuels instead. Voluntary green energy purchases by US companies increased nearly 50% last year, to 9,300 MW – nearly 1% of the nation’s total electricity capacity. And residential customers also choose to buy more renewable energy through community solar programs.
The sharp drop in oil prices has led to a drop in US natural gas prices by about a third from the previous year. Usually, cheaper natural gas stimulates electricity demand by reducing electricity prices, thereby increasing economic growth. But in this extraordinary era, the impact of oil and gas prices on renewable energy will be faint and complex, and probably will vary significantly for each market and region.
However, it is worrying in developing countries with an urgent need to expand the supply of electricity as cheaply as possible.
These economies are always undercapitalized and very sensitive to energy costs. When oil prices are cheap, switching the burning diesel to solar-powered with some form of energy storage won’t be as appealing as it was a year ago. If countries choose cheap fossil fuels, that would be bad for both air quality and climate policy.
The fact that central banks are pushing for extremely low-interest rates or even negative interest rates to cope with the economic crisis can mitigate this risk by supporting renewable energy (which requires high capital costs) for cheaper installation costs. It is important to avoid changing to electricity production using new fossil fuels.
Shortage of material supply from China
The most significant short-term impacts on contracted or under-built renewable energy plants can be felt through the supply chain. Shipments and construction speeds are reduced because countries close production to prevent coronavirus spread or infection by workers.
Many components for large-scale renewable energy projects depend entirely or in part on supply from China, Asian countries and the United States. These are specialized supply chains without many substitutes.
The COVID-19 outbreak has disrupted the production of materials and solar panels in China, causing projects in India and Australia to stall. And it will take a year or two to compensate for the production disruption in China.
In general, a slow increase in renewable energy will be one of the many negative effects of the virus and falling oil prices. It is especially worrying that a new fossil fuel plant will be generating and emitting CO2 for decades. But these effects will not be merely negative and this crisis cannot change the long-term trend of carbon-free energy. Once the global economy grows again, perhaps world leaders accelerate their climate policy efforts, before the next climate or weather disaster causes another global economic shock.