The COVID-19 pandemic has affected global economies and much more. It’s also impacted the energy supply. Energy buyers and sellers, users, and generators have seen changes that may last long after the pandemic ends. These changes have created both risks and opportunities.
Organizations and businesses — while using significantly less energy — aren’t seeing decreased usage translate into lower costs. Instead, energy suppliers have taken advantage of lower demand to recoup costs associated with meeting typical needs. The supply agreement from an electric or gas company doesn’t absolve companies from paying their contracted amount.
The country has seen a widespread decrease in energy use because of the pandemic forcing many operations to slow considerably or shut down completely. A decrease in driving has led to a decline in demand for fuels — and an abundance of supply.
Decreased demand tends to lead to lower prices, and energy markets are no different. Many markets have seen price drops for electricity and natural gas. Some organizations can take advantage of the lower prices by negotiating and securing future supply agreements that yield greater savings than current expenses. Markets can allow consumers to negotiate and lock in supply contracts for five or more years. It makes good fiscal sense to sign a contract for 15% or more lower than current contract costs.
Top Concerns from Power and Utility Companies
The coronavirus outbreak has caused far-reaching issues and economic hardship for businesses, consumers, and communities worldwide. Finance leaders shared their top issues in a PwC COVID-19 CFO Pulse Survey.
- 71% worry about the financial impact, including effects on results of operations, future periods, liquidity, and capital resources
- 64% worry about a potential global recession
- 41% worry about the effects on our workforce/ reduced productivity
- 40% worry about decreased consumer confidence leading to reduced consumption
- 23% worry about supply chain disruptions
- 19% worry about funding difficulties
- 17% worry about access to reliable, accurate information to make good decisions
- 8% worry about impacts on tax, trade, or immigration
Regulator, Policymaker, and Market Participant Responses
Globally, countries have taken steps to support the energy sector and mitigate the pandemic’s negative effects. Policy makers, regulators, TSOs, and DSOs face many challenges to ensure energy security.
Europe’s energy regulators have guaranteed essential services like heating, power, and gas. They’ve implemented measures to ease financial requirements on customers facing economic difficulties resulting from the lock-down. Poland’s government created the Anti-Crisis Shield Act, which gives the President of the Energy Regulatory Authority the ability to extend deadlines for renewable energy producers for beginning sales within the auction system.
Supply Chains and Operations
A variety of issues has faced power and utility companies, who — according to PwC — have put into place steps to avoid possible shortages that result from lowered production of supplies manufactured in countries hit hard by the virus.
Clear communication between foreign suppliers about possible delays or shortages of critical infrastructures has led to companies exploring other temporary sourcing options. Companies have also shared resources like parts, components, or wires, in short supply because of supply chain disruption. And as many other industries have done, the power and utility companies have also encouraged those employees with jobs that can be done remotely to take advantage of that option.
Perhaps a silver lining to the disrupted supply chain is that the coronavirus forced the renewable energy sector to diversify its supply chain. More alternative energy sources may lead to future stabilization to critical renewable energy technologies. If so, we’ll see more independence and more competitive prices.
Risks to Projects
The coronavirus’s rapid spread has resulted in mass production shutdowns and supply chain interruptions worldwide. Its impact on the power and renewables sector includes delays in key component deliveries especially within China, which produces a significant amount of solar photovoltaic panels and turbines. International workers who cannot travel or must quarantine for significant periods have contributed to labor shortages as well.
Some projects — lacking their usual access to materials — have been forced to source supplies from more expensive markets within the US or Europe to avoid delays from China. Lenders who finance debt projects may prove wary about committing funds without the proper assessment, quantification, and mitigation of COVID-19’s implications.
Late in 2019, industry experts predicted a booming year for renewable energy. But the coronavirus has disrupted supply chains, halted production, delayed projects, and paused procurement projects.
Robbie McNamara, National Renewable Business Development Manager at City Electric Supply, says, “People in the industry are exercising caution right now. Investors are holding onto cash, projects are being delayed, and that’s having a ripple effect all the way down to the subcontractors.”
Companies have missed key milestone dates. In the US renewables sector, renewable energy developers may have lost critical tax credits because of unavoidable construction delays. The latest aid package did not extend the Investment Tax Credit (ITC) for solar or Production Tax Credit (PTC) for wind. That may change in the next financial aid package, especially with solar and wind advocates lobbying for an extension.
Wood Mackenzie Power & Renewables predicted that the US would install nearly 20 GW of renewable energy in 2020 — an annual growth rate of 47% this year. That prediction’s out the window for now, but experts predict that COVID won’t influence renewable energy’s trajectory in the long term.
Implications of COVID-19 on the Transition Away from Fossil Fuels
While fossil fuel consumption has dropped significantly during the pandemic, the decrease isn’t enough to meet the two-degree global warming target or drop coal consumption to near zero.
A new Tracking SDG 7: The Energy Progress Report, released by a coalition of organizations that includes the International Energy Agency (IEA), the International Renewable Energy Agency (IRENA), the United Nations Statistics Division (UNSD), the World Bank, and the World Health Organization (WHO), suggests that the world’s countries have a lot of work to do to meet the 2030 Sustainable Development Goals (SDGs) targets.
S&P’s report, “The Energy Transition and COVID-19: A Pivotal Moment for Climate Policies and Energy Companies” suggests that the pandemic has had the greatest effect on oil because of its use as a feedstock for land, air, and sea transport fuels. The study predicts:
- Global oil demand will decline by 8.7 million b/d (down 8.4%) from pre-COVID forecasts, zeroing out six years of growth
- Industry and power reductions, especially in developing countries, will reduce coal demand by the equivalent of 4.4 million b/d of oil (down 5.7%)
- Natural gas demand will decline by only 2.1 million b/d (down 3.0%) of the oil equivalent because of its prevalence as a heating fuel
- Delays in renewables installations in key markets may shrink renewable energy production by less than 1.0 million b/d of the oil equivalent (down 3.6%) this year
The pandemic has hit its fall wave, and while it’s reduced long-term global oil demand by 2.5 million barrels per day, the world will need to see more than 10 times the emission reductions resulting from the virus to hit that 2-degree target through 2050. The CREA United members are well-versed in current industrial trends, rules, and regulations and committed to serving their clients’ needs, including those associated with fossil or renewable energy, whether it’s as distributors and suppliers, parts manufacturers, or end users.