Will coronavirus change the energy market?

Understand the bigger picture

According to the IEA, in most economies that have taken stringent confinement measures in response to the coronavirus, electricity demand has declined by around 15%, largely as a result of factories and businesses halting operations.[2]

When energy consumption went down in Europe following the coronavirus outbreak, the energy produced with fossil fuels went out of the grid first. The share of renewable energy grew exceptionally high. For instance, Germany produced more than half of its electricity with renewable power in the first three months of 2020.[3] The same situation can be seen elsewhere, as well. In India, the production of coal energy has gone down dramatically, while the use of other energy sources has been relatively stable.[4] After developing a range of technologies in the 2010s and scaling up the renewable energy business, renewable energy is more competitive than ever before. After the initial investments, the renewable energy production costs are extremely low, because wind, sunshine and geothermal energy are, in essence, free.

The immediate impact of the current crisis on the construction of new renewable energy production sites has also been minimal. Even though there have been some problems with the supply chain, Chinese production of missing components has in most cases now restarted.[5]

Unless governments intervene, in the current climate it will be difficult to access money for renewable energy investments. However, the same difficulties will be faced by the fossil fuel industry. In fact, the situation will be much worse for that sector.

Coal in troubles

The coal industry has the most significant problems. Coal, the dirtiest and usually the cheapest option for energy, is now the world’s most expensive fossil fuel.[6] According to think tank Carbon Tracker, nearly half of all global coal plants will run at a loss this year.[7] Even before the coronavirus, it was very difficult for the coal industry to compete with other fuels, and it has quickly lost its market share to gas and renewables in Europe as well as in the USA. It is also becoming more difficult to get new production financed. Globally, almost 130 significant financial institutions across banking, insurance and asset managers/owners now have in place policy exclusions or restrictions on investments in thermal coal mining and coal-fired power plants.[8]

We are currently witnessing coal-based energy production, especially in China, but this is not because coal energy represents a low-cost option. Nearly 60% of China’s existing coal plant fleet is running at an underlying loss.[9] Most of all, in China and in some other places, coal is seen as the most easily available fuel. It is easy to transport by train from existing mines to the production sites. It takes much longer to build new pipelines and other infrastructure for gas, for example. This kind of pressure will decrease with time.

Other fossil fuels having also issues

In a similar manner to the coal industry, it doesn’t make sense for shareholders to invest in oil production given the current oil prices. At least 10 per cent of present global oil production could become uneconomical if crude prices hold at the present level, which is the lowest for 17 years.[10]

Even gas production is taking a hit. LNG prices are usually connected to oil prices, and that is also why the LNG industry is now facing significant difficulties. For instance, up to 42% of Australian gas resources have become uneconomical at the current LNG netback prices.[11] Decisions on more than $80 bn of investments in the Australian LNG industry have now been delayed.[12] Globally, more than a dozen proposed LNG export projects from the U.S. to Mozambique are at risk of being delayed or scrapped as crude sunk to levels that make most of them unprofitable.[13]

Fossil fuels are also in a vulnerable situation in the market. This is because in many cases governments substantially subsidize fossil fuel consumption. According to the IMF, the fossil fuel industry received $5.2 trillion in subsidies in 2017. This amounts to 6.4 percent of the global gross domestic product.[14] After the stimulus packets, governments will need to cut budgets. This encourages governments to end expensive fuel-subsidy regimes.

People feeling more vulnerable than for a long time