Pandemic speeds up industry transition to renewable energy

March 17, 2022
Energy
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Big energy companies are accelerating their transition to renewable energy after two years of the highest and lowest petroleum prices of the past decade exposed weakness in the fossil fuel supply chain.

Although most of the shocks to the energy markets have been short lived, the most recent period of uncertainty caused the industry to push forward with transition plans already in place.

Demand for fossil fuels is predicted to diminish sooner than expected as public focus and funding turns more to renewables.

BPEni and Royal Dutch Shell have all made moves in the past two years to get ahead of the market.

Short lived effects of Covid-19

Per a report by consultancy McKinsey, global energy demand dropped 7% during 2020. West Texas Intermediate (WTI) crude oil traded for as low as $11 per barrel, a price not seen in more than 20 years. Natural gas traded at its lowest price since 1998, with Henry Hub prices dropping to $1.33/million British thermal units (MMBtu) during 2020.

This was followed by a year of loss recovery, as energy demand improved and WTI crude oil reached $85 per barrel, the highest since 2014. Gas prices also saw a substantial price increase, reaching $6.70/MMBtu during 2021, the highest since 2008.

McKinsey pointed out that not all commodities will have the same path to recovery. Demand for coal may take longer to reach pre-pandemic levels if at all, however the firm believes the recovery period will be short lived for most.

The revenue streams of oil and gas companies saw similar trends. For example, BP, Chevron and Royal Dutch Shell all saw revenue turn positive in 2021, after a year of losses.

The permanent effects of Covid-19

The lasting effects of the coronavirus pandemic have accelerated the transition to alternative energy sources. Behavioural changes during Covid-19 within the energy market have resulted in fundamental shifts which will have long term effects.

In order to aid recovery, governments offered stimulus packages to many industries. Much of this aid in the energy industry is going towards renewable energy following volatility in the oil and gas market paired with a focus on meeting net neutrality targets,.

Per the International Energy Agency (IEA) governments generated more than $17trn in various forms of stimulus packages in 2021 to mitigate the effects of Covid-19. The share for renewables was £45bn, or about 9%, with a majority being in the European Union.

Ernst and Young (EY) believes this shift accelerated since the pandemic due to the fact that these projects reduce emissions while also creating jobs, thus supporting economic growth. The renewables industry also has the potential to lure a significant amount of private investments

The World Economic Forum outlines in their report that this change is not only circumstantial but a result of policies already in place, continuous innovation and renewables becoming the preferred choice by investors.

Funding

In the UK, the government has plans in place to support energy companies who are planning energy transitions or supplying renewable energy. Per guidance released by the Department for Business, Energy and Industrial strategy in March 2021:

“Where UK operators or companies, whose primary business is within the activities that are in scope of this policy, have publicly committed to decarbonisation plans, more general support can be provided for that operator or company, or sponsorship allowed for government events, so long as the focus is on energy transition, low carbon or renewables activity.”

The US Department of Energy also has programmes in place to encourage energy transitions at a state level.

McKinsey reports that funding is to remain strong within the renewables sector. They expect the level of investments in the industry to grow towards 2035. Renewables are expected to become more attractive investments compared to expensive oil and gas as their cost declines.

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McKinsey expects oil and gas to be 50% of all energy investments in 15 years. This level depends on attention from governments, investors and consumers along with strategic shifts made by energy providers.

The International Renewable Energy Agency says public funding is quite important for the energy transition. IRENA says: “While providing, on average, only 14% of annual investments, the public sector remains key to lower risks, overcome initial barriers, attract private investors and bring new markets to maturity.

Demand for fossil fuels to diminish sooner than expected

Per McKinsey, the peak in demand for fossil fuels is likely to arrive sooner than expected.

The growth in demand for oil has slowed in the past decade. The firm reports that in larger markets such as the US and EU, fossil fuel demand has already peaked and has started a gradual decline. The remainder of growth in demand is driven by chemicals and aviation and is mostly in the emerging markets. McKinsey expects global oil demand to peak In 2027, followed by a gas demand peak in 2037.

IEA confirms a negative growth rate for fossil fuels in 2021 compared to 2019.

Wind and solar

Per the IEA, wind and solar were expected to provide more than two thirds of renewables growth in 2021. Wind and solar saw the highest growth rate in terms of energy produced between 2019 and 2020.

Wind and solar have high start-up costs, so it can take years to establish a farm, and only with huge amount of funding behind the project.

Movements within this area:

Hydrogen changes the game

Per McKinsey, green hydrogen is set to become cost competitive. They believe the cost reduction in the production of this renewable is what will be needed to overtake fossil fuels.

The same sentiment is shared by The Energy Transitions Commission, who in their study expects green hydrogen to become cheaper then natural gas between 2025 and 2030. This competitive pricing is expected to be a result of the falling cost of electrolysers and continued fall in renewable electricity prices.

Story Source: https://capital.com/pandemic-speeds-industry-transition-to-renewable-energy

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