Article

Everything Is Disrupted

The coronavirus is crashing the oil economy and reducing emissions, but a recession also isn’t good news for clean energy.

by Christian Roselund
March 2020

The global effects of the coronavirus are already severe. In addition to the nearly half a million cases and over 22,000 deaths globally at the time of writing this article, the world economy is reeling. Due to widespread disruptions of commerce, mandates to close businesses, and stay-at-home orders, unemployment has skyrocketed and stock markets have crashed.

The effect on the oil industry has been particularly intense. The market capitalization of leading companies collapsed in a matter of weeks, and smaller firms across the globe are facing bankruptcy. Other sectors, including air travel, restaurants, and tourism are also in dire straits.

The cessation of travel, business and industrial activity has also meant a decline in carbon emissions and air pollution. Oil demand is expected to fall over the full year 2020, as are emissions, similar to the fall in 2009.

There are already indicators that the world economy is entering a recession of unknown depth. With demand falling across the economy, the deployment of clean energy technologies will inevitably be affected. And this opens up a number of questions regarding what this crisis means for the energy transition.

Production-side Dramas

As explored in our previous article, “Oil Shock,” the first big global impact of the coronavirus has been a fall in oil demand, initially driven by a slowdown in industrial activity and travel in China. The International Energy Agency first estimated in February that this would lead to a year-over-year decline in oil consumption during Q1 and has since been revising forecasts further downward.

Lower demand has caused oil prices to plummet and has hit the stock prices of oil companies hard. This didn’t come at a good time for the oil industry, as it followed a decline in the market capitalization of the sector over the previous 16 months. And the price collapse has been exacerbated by decisions in Russia and Saudi Arabia to not reduce oil production in response to the decline in demand.

With the coronavirus going global, the fall in demand has also spread across continents. Oil prices have fallen further to multiyear lows, with no end in sight; oil sector stock prices are similarly grim.

But the disruption that began in China is not limited to oil, as the nation is the world’s largest manufacturer. The clean energy sector is particularly concentrated in China, which represents roughly two-thirds of global solar PV and lithium-ion battery production. The nation also makes large volumes of wind turbines and is important in supply chains for everything from automobiles to air conditioners. This means that any effect on China’s manufacturing will inevitably hit not only oil markets, but also the solutions that can reduce demand and ultimately replace oil and other fossil fuels for many applications.

Fortunately, the impact has been relatively minor. Solar panel factories have been returning to operation in March after roughly six weeks of downtime. On a recent webinar, Miguel Prado of EDP Renewables estimated that capacity utilization in Chinese solar panel factories fell 60 percent in February, but other developers and manufacturers have noted that these same factories have come roaring back in March.

In China, the factories that supply lithium-ion batteries for electric vehicles (EVs) and stationary energy storage were also affected. However, according to Bloomberg New Energy Finance (BloombergNEF) the impact on supply was less than might be expected due to overcapacity in lithium-ion battery production. Tesla and General Motors EVs sold in the United States do not rely on Chinese batteries, but Panasonic is now closing its portion of the Tesla Gigafactory in Nevada.

In terms of other components, BloombergNEF has noted that while there are “short-term bottlenecks” to delivery, the pressure on clean energy supply chains in China has generally started to ease in recent weeks.

Trouble in the EV Market

Contrary to decades of “peak oil” theories, the danger for the future of petroleum is not in the form of constrained supply, but demand. Similarly, there are causes for concern about near-term clean energy deployment in the current environment, and they come more on the demand side as well.

Casual observers often draw a link between oil prices and the EV market. And if oil prices stay low over a long period of time, BloombergNEF says that this could affect the decisions of those who manage fleets—including buses and delivery vehicles—to switch over to EVs.

But the price of gas is less relevant when it comes to the market for personal vehicles. “For most consumers, high up-front prices are the biggest thing that’s holding EVs back,” explains Colin McKerracher, the head of advanced transport at BloombergNEF. “Battery prices matter more than oil prices.”

The real danger to EVs is that in a recession, people buy fewer cars. And while BloomberNEF says that it expects EVs to fare better than internal combustion engine (ICE) vehicles, it notes that EV sales are starting to follow patterns in the larger auto market, and expects to downgrade its US and EU sales forecasts. “The big questions are how bad will it get in Europe and North America, and whether vehicle demand is deferred or destroyed,” notes McKerracher.

This comes after a difficult 2019 for the EV industry. In contrast with the track record of EV sales doubling in less than 18 months for most of the last decade, the market barely grew in 2019. While European EV sales were robust, the end of tax credits for several key automakers in the United States and incentive changes in China negatively affected two of the world’s largest markets.

With sales of both ICE vehicles and EVs limited this year, the result will likely be more older cars on the road longer, and a degree of stagnation within global auto fleets.

Solar and Wind Woes

Unlike EVs, the impact on deployment of other clean energy technologies is more complex. As solar, wind, and stationary batteries are often deployed at large scales, consumer behavior and decision-making is not as important as other factors.

Restrictions on travel and closure of non-essential businesses in the United States and Europe have already meant less demand for electricity and shifting load profiles. In competitive electricity markets, which cover much of the United States and Canada, this is more likely to hit coal and gas-fired power plants. These will run less often and earn less money, and this is expected to accelerate the already rapid retirement of coal-fired power plants.

Nearly all large-scale solar and many wind projects hold long-term power contracts, insulating these from the effect of the low wholesale prices that come with falling demand. Under these conditions, grid operators may curtail wind and solar more for economic reasons (i.e., when other plants find it to be more trouble to shut down than to run at a loss). However, many markets and contracts limit the hit that the owners of wind and solar projects can take due to curtailment.

New projects are in more trouble. While there is no one damning factor that will make it so that wind and solar don’t get built this year, there are a number of potential problems that could delay or stop any given project. A recent webinar moderated by Keith Martin of law firm Norton Rose Fulbright looked at many of the challenges for clean energy deployment that are intensified during this crisis, which can include difficulties in raising capital and getting labor to the site, as well as concerns about delivery of components.

This last problem is not as significant for solar developers. Delays in the delivery of modules won’t typically ruin a project, but wind projects are more sensitive to timing. The heavy equipment to install wind turbines is often rented well in advance for a very specific time window, meaning that a delay in delivering components interferes more fundamentally with getting steel in the ground. However, for rooftop solar deployment, the market disruption and stay-at-home orders could both have big impacts on deployment, and Solar Energy Industries Association is warning of massive potential job losses.

It is hard to weigh all of these factors, but BloombergNEF has already lowered its global forecast for solar, expecting 2020 to be the first year since the 1980s in which there is a year-over-year global decline in the capacity of solar installed. Likewise, the firm has warned of a “major downside risk” in its forecast for wind. Meanwhile, analytics firm Wood Mackenzie has lowered its global forecast for wind deployment 6.5 percent to 73 gigawatts.

An over-riding concern in the United States is completing projects in time for the step-down of the main incentives for solar and wind, the Production Tax Credit (PTC) and the Investment Tax Credit (ITC), both of which decline at the end of the year. Due in part to a rush to build projects to beat these deadlines, 2020 was expected to be a record year for both solar and wind in the United States.

Stimulus

Another big question looming over the economy and the uptake of clean energy technologies is what degree and kind of government stimulus will be deployed to fight the economic fallout from this pandemic. As this article went to press the US Senate had passed a $2 trillion stimulus bill, and a variety of actors are attempting to influence the course of this and other relief efforts. This includes the solar and wind industries, but despite heavy lobbying heavily there is no extension of the ITC or PTC in the current stimulus bill.

This will not be the first measure the US federal government has taken to tackle the economic fallout and may not be the last. And in the crafting of these policies, there is a certain tension between short-and long-term needs.

Cleantech investor, writer and futurist Ramez Naam, who serves on the Energy Transition Magazine advisory board, maintains that the first thing that should be focused on today is helping those that are hurting from this crisis. However, when looking further to the future, he notes that the American Recovery and Reinvestment Act of 2009 (“the 2009 stimulus”) provides an example of how measures to support economic recovery can accelerate the energy transition.

In addition to extending the ITC and PTC, he notes that one option would be to extend these credits to technologies like energy storage, and to change from a tax credit to a cash grant. He also says that a “cash for clunkers” style program could help the shift to EVs.

However, his top proposal is something more fundamental: a nationwide high voltage DC transmission grid. “It’s not really something that the private sector can pull off today,” explains Naam. “The way that the laws work, it is totally infeasible today. Let’s unlock that.” He notes that such a project would put people to work creating a public good, and notes that such a project would greatly assist in making use of the wind and solar in resource-rich areas that sometimes goes to waste because it can’t get to market in high-demand regions.

But there are many other options as well. Rushad Nanavatty, a principal in RMI’s Cities and States Program, has proposed that stimulus funds could be used to build out a nationwide network of fast-charging stations for electric vehicles, or to resurrect the US steel industry to produce “green steel” using hydrogen direct reduction instead of coal in blast furnaces, or to make carbon-trapping concrete.

All of these proposals would create jobs while advancing decarbonization, but for massive job creation another proposal by Nanavatty, a national building retrofit program encompassing electrification, efficiency, and grid interactivity, could be even more effective. And he notes that a national reforestation and wetlands restoration program could benefit rural communities likely to be hit particularly hard by a recession.

From RMI’s Electricity Program, Principal Uday Varadarajan notes that there are other lessons to be learned from the 2009 stimulus. He says that measures like pairing auto bailouts with increases in fuel efficiency standards and loans for EV manufacturing showed that the stimulus can have long-lasting, positive effects in terms of supporting the economy while lowering emissions. However, he warns that use of recovery to boost industries that weren’t really suffering or that were seen as responsible—such as the financial sector—were seen as unfair and worked against the politics of stimulus in the long run.

“We need to be very careful not to boost unrelated industries, or to put in place barriers (like riders that are difficult or impossible to achieve) for the recovery of companies that are honestly innocent bystanders to the crisis,” argues Varadarajan.

In the present political environment, there are other barriers to “green” stimulus measures. Chiefly, the current US federal administration has been more prone to bail out fossil fuel industries than to support clean energy. But with a presidential election coming up, conditions for passing such measures may change.

After the Storm

While it may seem a long way off, China has demonstrated that at some point this global pandemic will be mostly contained and the disruption it is causing will pass. The question then becomes the long-term effects, and particularly whether or not this crisis spurs a more rapid transition or delays progress.

One key question is petroleum dependence, and whether or not demand for oil and associated emissions will come roaring back when this crisis passes and the economy recovers. As was seen in 2008 and the years that followed, temporary declines in emissions driven by crises are of little benefit when set against a long-term upward trend. Decarbonization cannot rely on economic collapse; structural change is needed.

Despite the short-term struggles, Naam expects that investment in the oil sector will resume—even in drilling new wells. While fracking operations in the United States are swing producers with short timelines, most global oil wells are long-lived assets, and the oil industry is looking at 10-year trends in oil prices, not one or two years. And while this crisis may squeeze out smaller, independent producers, when larger companies buy up their assets they are unlikely to go idle.

A much larger factor is a looming peak in global oil demand (see our article “Oil Shock” and the op-ed “Peak Fossil Demand” by Kingsmill Bond). However, this is something that will likely take years to play out, and the exact timing is uncertain. “No one is ever right about oil predictions,” laments Naam.

One of the biggest factors regarding the future is the “shape” of the economic recovery—whether it is rapid, or whether the recovery is slow. The latter scenario followed the 2008 financial crisis, and this could mean a similar period of very low interest rates. “If there is a slow recovery, I would expect central banks to keep rates low,” notes Naam. “Renewables are getting cheaper and cheaper, and this just helps them.”

Overall it is important to differentiate between short-term trends and fundamentals. Naam notes that renewables are often driven by policy and consumer choice, but that ultimately the raw cost is the most fundamental factor. “We’re still on a path from a purely economic sense to source an increasing amount of clean energy,” he states. “Maybe this changes the timeline by a few years, but these fundamentals are not going to be derailed even by a depression.”