With Covid-19 throwing the global order into disarray this year, the oil business is going through the wringer again. Plummeting oil demand amid the pandemic and the subsequent lockdowns and travel restrictions saw rapidly declining prices, exacerbated by disputes among the OPEC countries (primarily Russia and Saudi Arabia) concerning the extent and nature of production cuts. Brent crude lost more than half its value in March, while in April the US benchmark, West Texas Intermediate (WTI), slipped to -$37.63, the first time in history that US oil prices have slipped below zero.
While a recent OPEC agreement to extend supply cuts has seen oil prices recover somewhat, they are still hovering at around $39 for Brent crude and just over $38 for WTI, at the time of writing, with demand remaining low and set to recover slowly.
The traditional thinking is that investment in renewable energy sources suffers during an oil price slump, as cheap petrol undercuts electric vehicles and energy investment switches to natural gas for power generation, which competes strongly against wind, solar and other sustainable energy sources. But the unprecedented context of a global pandemic, along with other factors, suggests that the current crisis could have a long-term silver lining for renewable energy investment and the global clean energy transition.
Short-term chaos for fossil fuels and renewables alike
In terms of immediate impacts during the Covid-19 crisis, oil majors are likely feeling the sting more keenly than utilities and power generators. The broad trends show that electricity usage has fallen by around 15-20% in the US and many European countries, while consumption of petrol and diesel has plummeted by 70-90% in some cases.
Oil is not alone however the global outbreak has dampened the short-term investment outlook across the energy board. The International Energy Agency’s (IEA) recently-published ‘World Energy Investment 2020’ report predicts that 2020 will see a global energy investment slump of 20%, which equates to almost $400bn, compared to the 2% growth that was forecast before the crisis. Renewables will not be spared from these headwinds in the near term.
“The slowdown in spending on key clean energy technologies…risks undermining the much-needed transition to more resilient and sustainable energy systems,” said IEA executive director Dr Fatih Birol at the end of May. “The crisis has brought lower emissions but for all the wrong reasons. If we are to achieve a lasting reduction in global emissions, then we will need to see a rapid increase in clean energy investment.”
While established utility-scale clean energy technologies, such as wind and solar farms, are proving relatively resilient, consumer-driven sectors are being hit much harder. According to Wood Mackenzie, electric vehicles and rooftop solar installations are expected to “struggle as customers come under significant economic pressure” .
Clean technologies that are at an earlier stage of development and deployment, including battery storage (a key enabling tech for intermittent renewables), are also likely to suffer from investors’ more stringent risk analysis in the wake of Covid-19. Cornwall Insight research partner Daniel Atzori noted: “Investors are set to examine more meticulously the risk profile and performance of less mature assets, such as battery storage, whose revenue streams are not yet seen as always predictable.”
Will oil majors hold firm on transition plans?
Another potential turning point for renewable investments revolves around the oil majors themselves, many of which have had billions knocked off their share prices in the last three months. ‘Greenwashing’ accusations aside, in recent years most of the multinational oil firms have committed to be part of the global energy transition through decarbonising their operations and investing in renewable energy. Foremost among these has been former Danish national oil company DONG Energy, which changed its name to Ørsted in 2017 after selling all of its oil and gas assets and committing to offshore wind.
While no other oil company has made a transition as completed as Ørsted’s, many of the supermajors – BP, Royal Dutch Shell, Total, and Eni this year – have made commitments to play their part in meeting decarbonisation targets under the Paris Agreement, including renewable energy investments. The risk posed by Covid-19 and the subsequent oil crash is that the industry could delay or withdraw from these commitments as they slash capital expenditure and focus solely on their core business.
This does not yet appear to be the case, as large oil companies seem to remain committed to diversifying their investments and supporting clean energy. In March, Total CEO Patrick Pouyanné told employees that while the company would cut capital spending by more than 20% and massively increase planned cuts in operating costs, it would leave its $2bn worth of investments in new energy sources in 2020 untouched. This means that around 13% of the company’s capital expenditure for the year will be earmarked for renewable energy and storage technologies.
Other oil firms have made similar statements around protecting renewable energy investments, while Italian oil giant Eni is reportedly restructuring to accelerate the growth of its clean energy business.
Oil volatility puts clean energy in the investment spotlight
As the oil industry begins its slow, multi-year recovery from the events of early 2020 (assuming a second global disease peak is avoided), one of the key lessons from Covid-19, from an investor standpoint, is that the price volatility in the industry isn’t likely to go away. This positions established renewable energies – which have fallen precipitously in project costs and are now competitive with many fossil fuels – as potentially a safer and more reliable bet.
“While lockdown orders have certainly exacerbated the fossil fuel industry’s challenges, this structural collapse was a long time coming,” wrote World Resources Institute global director for energy Jennifer Layke and research analyst Norma Hutchinson in a May blog post. “Over the past decade, the fossil fuel industry has spent more money on stock buybacks and dividends than it has brought in in revenue, making energy the worst-performing since 2009 of the 11 sectors in the S&P 500.”
The pair also highlighted the societal benefits of green energy that have come into clearer focus since the global outbreak began, such as a Harvard study that linked highly-polluted urban areas with higher death rates from Covid-19. Given that fossil fuel divestment and environmental, social, and governance (ESG) principles are already broad global trends, the ravages of the novel coronavirus are likely to accelerate this movement among investors.
The theory is supported by the rush of foreign direct investment in utility-scale clean energy projects in 2020 thus far. Data from fDi Markets shows that $23.3bn was invested across 159 projects in Q1 2020, making it the strongest first quarter in a decade, and major project announcements – including Iberdrola’s $6bn investment in Mexico and the $2bn, 15GW Asian Renewable Investment Hub in Australia – have continued into the summer.
Covid-19: will the road to recovery be paved in green?
In energy more than most sectors, government spending is the keystone in the investment landscape; the IEA estimates that 70% of global energy investments are directly or indirectly driven by governments. As governments around the world scramble to put together stimulus packages to repair their ruptured economies, clean energy companies will be hoping that renewables and supporting technologies will be front and centre on the road to recovery.
“The response of policy makers – and the extent to which energy and sustainability concerns are integrated into their recovery strategies – will be critical,” said Birol in May.
The economic credentials of a clean energy-driven recovery look strong. The International Renewable Energy Agency’s (IRENA) recent ‘Global Renewables Outlook’ report highlighted the economic advantages of a recovery plan based on transforming energy systems. The total investment required would be eye-watering, up to $130tn, but “deeper decarbonisation” could “boost cumulative global GDP gains above business-as-usual by $98tn between now and 2050”, including expanding clean energy jobs to 42 million, and seeing energy efficiency employ 21 million and add 15 million jobs in system flexibility.
“In the creation of future infrastructure, energy solutions aimed at scaling up renewables provide a safe and visionary strategic investment choice,” said IRENA director-general Francesco La Camera in an April statement. “Recovery measures could help to install flexible power grids, efficiency solutions, electric vehicle charging systems, energy storage, interconnected hydropower, green hydrogen and multiple other clean energy technologies.
“With the need for energy decarbonisation unchanged, such investments safeguard against short-sighted decisions and increased accumulation of stranded assets…These should be major considerations as policymakers put together recovery measures. A purely market-driven approach will not be adequate, either to respond to the immediate crisis or to mobilise longer-term investments.”
While governments continue to support businesses through the immediate emergency, it’s still too early to say exactly how much renewable energy will benefit from the longer-term stimulus packages that emerge. But with the pandemic crystallising many existing clean energy-positive investment trends, such as ESG, there is a massive opportunity – both financial and environmental – for governments to capitalise on this pivotal moment.
“There was much discussion around ESG earlier this year and this, along with climate change, is still the dominant long-term driver for renewable investment, despite Covid-19,” commented EY global power and utilities corporate finance leader Ben Warren. “As a result of the pandemic, pollution levels have fallen dramatically through reduced fossil fuel consumption. A greater focus on a sustainable long-term energy future therefore works in favour of clean energy, in particular wind and solar, together with storage.”
The sun may be setting on oil and gas and the wider fossil fuels market, but this will be no quick eclipse – it will be many years before the industry’s last light fades from view. Amid the Covid-19 crisis and the constant shifting of economic variables, the fundamentals of clean energy investment remain relatively unchanged – a vast amount of investment is required to meet the world’s decarbonisation goals, and it needs to be delivered at a faster pace than ever before. The risk remains that Covid-19 will damage renewable investment and shift industries and governments towards a more conservative mindset, and only time will tell whether we will look back on the pandemic as a costly distraction from the global energy transition, or a milestone moment.