Since 1900 only three events had a greater impact on global energy demand than COVID-19: The Spanish flu, the Great Depression and World War II. So now COVID-19. Can we already predict the near and/or long term impact? Likely not. But we need the discussion, the exchange of thoughts. This should cover this questions:
- How will recovery look like?
- What might be the role of energy efficiency and renewables?
- And what does that mean for business today?
The following summarizes thoughts triggered by recent publications and activties of the IEA and the resulting discussions and responses as well as direct interaction with Resource and Energy Intensive Industries as well as global suppliers from EEIP network. As said, this are thoughts and not answers. I am looking forward receiving your comments on EEIP LinkedIn or EEIP Twitter (Greencog).
Supply / fossil fuels
Emily Chasan, the sustainable finance editor from Bloomberg, commented on her latest article "Stranded Assets Are Now Everywhere" on the aspect of oil and gas assets for the first time starting to lose economic value. And that this is not only driven by the current drop in demand combined with crashing oil prices - an unprecedented situation. But also - or even more - by the longer term effect this crisis has on investors. Their reduced appetit on fossil fuel investments which might accelerate diverstment decisions.
Supply / renewables
Interestingly, the IEA in their report "Global Energy Review 2020 - the impact of the COVID-19 crisis on global energy demand and CO2 emissions" (released 30.04.2020) found out that electricity production from renewables is the only source that showed a growth in demand, driven by larger installed capacity and priority dispatch. This will not remain overlooked by investors and might also trigger an increase of investments in renewables as well as related smart grid infrastructure.
While rapid and large stimulus packages are in deployment or development, the big question is: will they support the status quo or accelerate the path to a more sustainable economy? A clear driver for policy will be their impact on job creation. And exactly for this the IEA refers to energy efficiency. “Experience has proven the effectiveness of including energy efficiency in stimulus programmes,” said Dr Fatih Birol, the IEA’s Executive Director. “Targeted investments now can create jobs immediately and also bring long-term benefits for consumers, businesses and the environment.” On 21st of April the IEA coordinated a meeting of the Global Commission for Urgent Action on Energy Efficiency to discuss the role that energy efficiency can play in improving the effectiveness of stimulus packages. Results wll be published in the coming months and form basis for recommendations to governments.
Business / Supplier
In a recent discussion between global energy efficiency technology supplier and EEIP about the short to medium term effects on business for aplications such as decentralized power generation - reciprocating engines CHP, ORC systems and wind power, temperature control - Industrial heat pumps/chillers and compressed air - air compressors, the following challenges and opportunities emerged:
- Right no cash flow is a key figure for most companies purely to survive - which likely results in postponements of non-necessary investments, especially for the fiscal year 2020. But that also means that EPC contracts or other contract forms decreasing OPEX (= increasing CF) could be a very strong sales argument.
- Oil prices are very low at the moment currently leading to less financial attractiveness of a number of energy efficiency and power system projects. And although the supply side already seems to react (OPEC, Russia etc), the demand is still very low and huge reserves are currently build. Nevertheless, once demand picks up, oil and gas prices could quickly increase - at least there is high uncertainty about future price developments causing huge business risk. Energy efficiency investments could be placed as a hedge, especially when they also adding value on the CF side.
The biggest uncertainty still. A fully back to normal is only expected after availability of vaccine - which might be the case in the 2nd half of 2021. An announcement of a vaccine breakthrough in Q4-2020 (?) would likely be a game changer. Eventhough it takes another 6-12 month before vaccination is broadly available, it would bring back trust in the market.
Risk, uncertainty, trust - this is likely what drives business in the next Qs. From a technology perspective, that would mean those solutions with the shortest time from signing contract to become operational, the biggest opportunities for OPEX decrease and the less (perceived) technological risks (= no innovation but “tested” solutions) will have the biggest opportunities in the market.
There is likely a need to make a distinction between “necessary” replacement business (baseline) and upgrade business. Even for the baseline, companies will likely have to calculate a cut of 50% for 2020 as clients will try to postpone investments at least to 2021. 2nd angle is likely the “contract structure” in place which links back to the CF considerations above. This two angles will have to form the basis of short to medium business planning simulations.
We will very likely see disruptions in the oil and gas markets much earlier than predicted in simulations such as the a number of 2050 simulations. And the "local" job intensity of energy efficiency and renewable measures makes it thinkable, that this sectors will see a push much stronger than anticipated or planned in the current 2030 Climate Change simulation.
What do you think?
About Jürgen Ritzek
Juergen Ritzek is co-founder and Business Director of EEIP. Juergen is responsible for strategy, marketing and business development of EEIP and drives the growth of EEIP towards an energy transition platform. Juergen leads EEIPs B2B communication and relations and ensures EEIP relevance for value chain challenges (inter-company) and internal decision-making processes (intra-company). Following an international career at Unilever he founded European network consultancy GBC (2009) and EEIP (2011).