Osama Isawi – 27 Jul, 2020 Unkategorisiert

We’ve seen energy shocks before…

50 years ago, more than 90% of Denmark’s energy came from imported oil. When oil prices quadrupled in the 1970s Danish industry was shut down and people struggled to heat their homes. It was a wake up call for the Danish government, who implemented an energy revolution. Ultimately they put their windy climate to use, building the first off shore wind farm in 1991; now over 40% of Denmark’s electricity comes from wind and Danish equipment produces a third of the world’s wind power. Today, two in three Danish homes are warmed by waste heat from power plants, factories and transport. Buildings in Denmark use 50% less energy than they did 40 years ago and over that same time period, Denmark’s total emissions fell by 30% even while its GDP has doubled.

 

…But this time it’s about demand

If the 1970s oil price shocks were on the supply side, the impact of the Covid-19 pandemic on the energy sector has been mostly about demand. Though hardware supply chains have been affected, more significant has been the fall in energy usage as large sections of the economy shut down. Overall demand for energy between March and May fell 10%-30% across Europe and with renewables taking up a larger share of this total, the Covid-19 lockdown saw the largest fall in emissions on record.

Wholesale electricity across Europe is priced on an hourly basis for the day ahead, so abundant supplies and weak demand saw prices go below zero at times. In Britain, the price of power plunged into negative territory 66 times in April, more than twice as often as in any previous month in the last decade.

 

With top down pressure…

And yet even while energy prices remain depressed, the price of carbon credits (permits to emit carbon in the EU) has surged in recent weeks. From an initial low of 6 euros per ton as lockdown hit, the price rallied to 14-year highs of nearly 30 euros per ton in early July.

What explains this apparent contradiction? In a word: politics. The market’s expectation is that the European Commission will further restrict the supply of carbon credits next year. It no longer expects the recovery to be a return to business as usual because political pressure is mounting to squeeze harder and rebuild cleaner.
With taxpayers supporting economies to a degree never seen before in peacetime, an opportunity has presented itself for governments to dictate the terms of their backing.

Examples include:

• Renault: The European Commission has approved a EUR 5 billion loan guarantee by France to the Renault group to provide liquidity to mitigate the economic impact of Covid-19. In its approval, the EC noted the importance of Renault’s research, development and production of electric vehicles.
• Air France: The EC approved EUR 7 billion in loan guarantees and loans by France to Air France to provide urgent liquidity with green energy strings attached.

 

…And bottom up pressure

It is not only governments demanding change. On the consumer side, some behavioural substitutions look set to be permanent – there is a difference between demand reduction and demand destruction. By some estimates, up to 50% of those working from home may continue to do so even when lockdown restrictions have been lifted. And those who do return to the office may do so under their own steam: according to an ICM poll, 17% of Brits plan to cycle to work, while year on year sales of some commuter bikes have surged by 600%.

Meanwhile one of the main obstacles to renewable energy transition is the potential mismatch between supply and demand: it may not be sunny or windy at the times of greatest power consumption. However, an increase in micro-generation (by individual households and businesses) and developments in storage technologies are steadily eroding this barrier. Worries about grid stability are also abating. With Germany producing 60% of its demand from renewables, the UK 43% and Spain 49% during the pandemic, the grid infrastructure has proven capable of taking on a greater load from renewables without compromising stability which has surprised the people working in the field. A pleasant surprise that will quicken the transition into green energy and technology adoption.

 

Opportunities in the market

As a result, renewable energy is proving to be a resilient sector for the post-Covid recovery. While it did take a hit – the world is set to add only 167 gigawatts (GW) of renewable power capacity this year, 13% less than in 2019 – this is mainly due to supply chain issues and not investor confidence.

With government ambitions to increase the number of green jobs and combat climate change, it is estimated that each million dollars invested in renewables or energy flexibility would create at least 25 jobs, while each million invested in efficiency would create about 10 jobs. Compared to current plans, an accelerated energy transition could add 5.5 million more jobs by 2023. The UK government recently announced £2bn in grants for home-efficiency upgrades and £1bn for green financial aid measures funding public buildings, such as schools and hospitals, both of which are to be spent this financial year.

The digitalisation of the energy system follows the wider trend of digitalisation and big data in other sectors. Developments include:

  • Electric vehicles (EV) – FDI into EV up 184% over the last five years
  • Smart grid – Western Europe’s energy sector is forecast to commit $133.7bn to smart grid infrastructure by 2027 with a CAGR growth of 16% between 2019 and 2024.
  • Decentralised power generation – reports by the European Renewable Energies Federation predicts that by 2050, “energy citizens” in Europe could produce twice as much power as nuclear power stations produce now. Off-grid systems (mainly solar) are predicted to supply electricity services to almost 70 million more people in Asia and sub Saharan Africa by 2022, illustrating the global nature of this trend.

Will Covid-19 prove to be a false dawn for clean tech? That seems unlikely. In many ways the pandemic has only served to strengthen trends that were already in evidence. And as Denmark discovered fifty years ago, a crisis can be the catalyst for a revolution.

This is an exciting time for Clean Tech: for companies looking to export or expand abroad and for governments and investment promotion agencies looking to rebuild greener following the Covid-19 economic shock. OCO Global operates in five of the top six markets identified in the EY Top Countries list for Renewable Energy. If you are interested in market entry or investment attraction in the Clean Tech sector, please get in touch with us at Osama.alisawi@ocoglobal.com.