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Effects of
COVID-19 on Energy Investment
Energy
investment and energy projects face uncertainty as global recession looms, but
stimulus packages could help keep a low-carbon future on track by Sujay Shah,
Global Head & Managing Director, Cleantech Coverage, Standard Chartered.
Over the past few weeks the COVID-19 pandemic has caused significant
macroeconomic turbulence, with many questioning not if we are on the brink of
global recession, but when. While the clean energy and environment-focused
sectors have so far fared slightly better than their resources-driven
counterparts, cracks are starting to emerge.
Investment
in the clean energy sector has been slowing for a few years now, after peaking
in 2017. This is a situation that is only set to worsen as the impact of
COVID-19 continues to squeeze liquidity conditions. Energy research company
Rystad Energy warns this could lead to a complete halt in the growth rate of
renewable energy installations. We can also expect to see project execution
delays, the postponement of auctions (which accounted for a staggering c.80GW
of capacity procurement in 2019) and difficulties in operating and maintaining
existing projects, especially when it comes to complex assets like offshore wind.
While the good news is that banks are much better capitalised than they were in
during the Global Financial Crisis, and a downturn in the oil market is likely
to drive more liquidity to the clean energy sectors, the fact remains:
liquidity has become more scarce since COVID-19 hit. We are increasingly seeing
investors moving away from riskier opportunities. This could have a knock-on
effect for the petroleum assets domestication to grow the economy by local
investors and financing of projects in frontier markets as well as newer
technologies where risk-sharing practices are not as well established. Smaller
developers with projects not yet off the ground could also be hit hard, as
their financing becomes scarce.
As market
shutdowns continue around the world, daily energy consumption has fallen and
power demand in New York has fallen in recent weeks. It remains unclear exactly
how this type of shock will impact sub-sectors like renewable energy, which are
somewhat protected by long-term power purchase agreements (PPAs). What we
should be aware of, however, is that PPA prices are in many cases higher than
market prices and, as the demand declines, there could be higher risk of
curtailment coming through. Over the longer term we can also expect some
repricing in the asset markets as investors grapple with higher off-take risk
as wave of sovereign downgrades now hit the headlines from Mexico to UK to
Oman.
Greenfield
projects are already experiencing disruption as a direct impact of COVID-19 –
large wind manufacturers GE, Vestas and Siemens Gaemsa have all reported plant
closures. In solar, a shortage of installation components including inverters
and modules is pushing prices up by as much as 15 per cent in markets like the
US.
In our view,
this may spell adversity for greenfield project bids that have already been
awarded – some of these will be salvaged by higher quality bidders, but a
number of these situations are likely to result in stranded projects which may
never see the light of day.
The pandemic
has led to a shortage of energy investments and energy projects, given the
risks around executing new projects at this time, we would also expect to see
energy procurement contract prices increase in the near- to mid-term. We may
also see resource companies, particularly in the oil and gas sector, materially
reducing investment into cleantech value chains at least in the near term.
These companies have historically opted to be in the riskier part of the
business (direct PPAs, technology etc) given their preference for higher
returns, however, the COVID-19 situation means the conversation is shifting
from business diversification into protecting core cash flows and liquidity.
This is a situation that would have been unthinkable, even just three months
ago.
Electric
vehicle demand could be hit in the near-term, energy storage and electric
vehicle (EV) are also expected to be significantly impacted by COVID-19 as
on-going production disruptions and a restriction of labour movement in Asia
causing production and supply disruption. Battery manufacturers CATL, BYD, and
LG Chem have all warned of an impact on their business. We also expect a
significant and long-term impact on the speed of EV adoption as the sector
faces a perfect storm of lower oil prices, which will delay the break-even
point for EVs, and the upcoming recession, which will reduce the overall demand
for cars as well as prevent consumers from paying the material premium demanded
for EVs.
The clean
energy opportunity
While the
negative impact of COVID-19 on the clean energy sector is clear, some
opportunities are emerging. Industry insiders have long complained of
short-term build and flip investors bringing returns down to unsustainable
levels. The current crisis offers an opportunity for long-term capital
providers to enter into or expand their presence in the clean energy sector.
But the biggest challenge and the opportunity for all of us is the
unprecedented amount of stimulus spending that has been announced globally. A
total of USD7 trillion (and counting) has been announced across tax breaks,
government spending, money printed by central banks, and more. Stimulus could
be a once in a generation chance for the industry to accelerate the low-carbon
transition. The fossil fuel sector enjoys over USD400 billion of subsidies each
year – and the International Energy Association estimates that 70 per cent of
the world’s energy investments is driven by governments.
This
stimulus funding then offers a once in a generation opportunity for all
industry participants including developers, investors and financiers to shape
this spending to accelerate the energy transition and low-carbon agenda.
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