EFFECTS OF COVID-19 ON ENERGY INVESTMENT
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EFFECTS OF COVID-19 ON ENERGY INVESTMENT
Impact of Covid-19 on Energy Investment
Energy investment and projects risk uncertainty as the global recession approaches, but stimulus packages could help keep a low-carbon future on track, according to Sujay Shah, Global Head & Managing Director, Cleantech Coverage, Standard Chartered.
The COVID-19 pandemic has generated major macroeconomic turmoil in recent weeks, with many speculating not if but when we will enter a worldwide recession.
While the clean energy and environment-focused industries have performed slightly better than their resource-driven rivals, cracks are beginning to appear.
Investment in the sustainable energy sector has been declining for several years, after peaking in 2017. This predicament is only going to become worse as the impact of COVID-19 continues to tighten liquidity circumstances. Rystad Energy, an energy research organisation, warns that this might bring the rate of increase in renewable energy installations to a halt.
We should also expect project implementation delays, auction postponements (which accounted for around 80GW of capacity procurement in 2019), and difficulty in operating and maintaining existing projects, particularly for complex assets such as offshore wind.
While the good news is that banks are far more funded than they were during the Global Financial Crisis, and an oil market slump is expected to bring additional liquidity to clean energy sectors, the fact remains that cash has grown increasingly tight since COVID-19. Investors are progressively shifting away from risky alternatives.
This could have a knock-on impact for the domestication of petroleum assets to stimulate the economy by local investors, as well as the financing of projects in frontier markets and newer technologies where risk-sharing procedures are less well established. Smaller developers with unfinished projects may also suffer as funding becomes scarce.
As global market shutdowns continue, daily energy consumption and power demand in New York have decreased in recent weeks. It is unknown how this type of shock would affect sub-sectors such as renewable energy, which are partially shielded by long-term power purchase agreements (PPAs).
What we should be mindful of, however, is that PPA prices are often higher than market prices, and if demand falls, there is a greater possibility of curtailment occurring.
Over the long term, we should expect some repricing in asset markets as investors cope with increased offtake risk as a wave of sovereign downgrades hits the headlines from Mexico to the United Kingdom to Oman.
Greenfield projects are already being disrupted as a result of COVID-19; big wind producers GE, Vestas, and Siemens Gaemsa have all announced plant closures. In solar, a shortage of installation components such as inverters and modules is driving up prices by up to 15% in regions such as the United States.
In our opinion, this may mean disaster for greenfield project bids that have already been won; some of them will be saved by higher-quality bidders, but a number of these circumstances are likely to result in stranded projects that may never see the light of day.
The pandemic has resulted in a lack of energy investments and projects; given the risks associated with executing new projects at this time, we anticipate that energy procurement contract costs will rise in the near to medium term.
We may also see resource corporations, notably in the oil and gas sector, significantly reduce their investment in cleantech value chains, at least in the near term.
These companies have traditionally chosen to engage in the riskier parts of the industry (direct PPAs, technology, etc.) because they want better returns; however, the COVID-19 situation means that the focus has shifted from business diversification to protecting core cash flows and liquidity. This was inconceivable even three months ago.
COVID-19 is projected to have a substantial impact on energy storage and electric vehicle (EV) demand in the near term due to ongoing manufacturing difficulties and labour movement restrictions in Asia, causing production and supply interruptions.
Battery makers CATL, BYD, and LG Chem have all expressed concern about the impact on their businesses. We also anticipate a significant and long-term impact on the rate of EV adoption as the sector faces a perfect storm of lower oil prices
which will delay the break-even point for EVs, and an impending recession, which will reduce overall demand for cars while preventing consumers from paying the material premium demanded for EVs.
The Clean Energy Opportunity
While the detrimental impact of COVID-19 on the clean energy sector is undeniable, some opportunities emerge. Industry insiders have long complained that short-term build and flip investors are driving down returns to unsustainable levels.
The current crisis presents an opportunity for long-term finance sources to invest in or grow their presence in the renewable energy sector. But the most significant problem and opportunity for all of us is the extraordinary amount of stimulus expenditure that has been announced worldwide.
A total of USD7 trillion (and counting) has been announced for tax breaks, government expenditure, central bank money printing, and other initiatives. Stimulus could be a once-in-a-generation opportunity for the industry to expedite its low-carbon transition.
Every year, the fossil fuel sector receives more than USD400 billion in subsidies, and the International Energy Association estimates that governments drive 70% of global energy investment.
This stimulus money provides a once-in-a-generation chance for all sector actors, including developers, investors, and financiers, to influence expenditure to advance the energy transition and low-carbon agenda.
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