The impact of Covid-19 crisis on global energy sector
Over the past few months, the Covid-19 pandemic has caused an unprecedented global economic and social crisis. The pandemic has significantly affected all aspects of life, including the energy sector.
The energy sector has already felt the impact of Covid-19. The outbreak has contributed to a dampened demand for oil, resulting in plummeting prices and declining production, especially in the wake of the Russia-OPEC price war. According to the IEA Oil Market Report – April 2020, global oil demand is expected to fall by a record 9.3 mb/d year-on-year in 2020. Demand in May is estimated to be 29 mb/d lower than a year ago, down to a level last seen in 1995. Covid-19 has also accelerated the continued drop of gas prices.
A similar trend of falling demand and price reduction can be observed in the electricity sector. Europe has faced a record collapse in electricity prices. In many European countries, power prices have turned negative. This is evidenced by the data from Nord Pool (Europe’s leading power market) and HUPX (Hungarian Power Exchange) regarding prices in the day-ahead market. Such a situation is considered normal in some countries during weekends or holidays, but now negative figures are also fixed on weekdays.
Unsurprisingly, the strictness of confinement measures correlates with drops in consumption: 25% in Italy, 20% in France, 12% in the United Kingdom. Another concern is the impact of the reduced demand on utility companies’ cash flows and the spillover effect this has on the energy sector.
New energy facilities delayed or stopped
Many companies across different sectors globally have ceased or decreased capital expenditures where possible, and the energy sector is no exception. For example, Distribution System Operators (DSOs) are delaying most initiated projects, resulting in a substantial decrease in the procurement of goods and services. Non-critical investments have been suspended. The fulfillment of investment programs by Transmission System Operators (TSOs) and DSOs is also at risk.
Covid-19 is having an especially negative impact on the renewables sector. One of the main problems relates to the delivery of equipment to power plants. China, which is among the countries most heavily affected by the coronavirus, is the main global producer of many clean energy technologies, such as solar panels, wind turbines and batteries. Since coronavirus has delayed deliveries from China, renewable energy companies are not able to comply with deadlines for equipment installation. For instance, in India alone 3,000 MW of solar and wind energy projects face delays, due to the coronavirus lockdown. BYD, the world’s leading producer of rechargeable batteries, was unable to complete tests of new models of rechargeable batteries due to the pandemic, and this has led to a reduction in delivery volumes of rechargeable batteries for the European market.
Default of payment
In many countries (including all but two Contracting Parties of the Energy Community), customers have been advised by energy regulators and governments to delay the payment of utility bills. Defaults on payments cause cascade effect and impact the whole sector.
Although there is widespread tolerance of non-payment by end-users, policymakers did not explicitly define if leniency towards non-payment would be applied further along the supply chain (to DSOs, TSOs, suppliers and producers). So far, none of the Contracting Parties of the Energy Community have explicitly defined who will bear the costs of financing this debt.
The waiving of interest and bans on disconnection will most likely increase costs for DSOs. Consequently, their revenues will be decreased and, if the crisis continues, their financial status will deteriorate. It is inevitable that all this would negatively impact the cash flow and short-term liquidity of DSOs. A lack of working capital to finance short-term liabilities for regular operation is expected within two to three months if the situation persists.
Response of policymakers, regulators, and market participants
Countries around the world are taking steps to support the energy sector and to mitigate the negative effects of the crisis. There are myriad challenges that policy makers, regulators, TSOs and DSOs need to address to ensure energy security.
Europe’s energy regulators have already taken special measures to ensure a safe and reliable energy supply by guaranteeing essential services such as gas, heating and power, as well as measures aimed to ease financial requirements on consumers who face economic difficulties during lock down (bill-paying measures for vulnerable consumers to avoid disconnections).
In some countries, certain measures have also been taken to support the renewables sector. For instance, Poland’s government has developed a draft of the so-called Anti-Crisis Shield Act, which provides the President of the Energy Regulatory Authority with the right to extend deadlines for renewable energy producers for commencement of sales within the auction system.
DSOs have implemented a number of organizational measures related to the safety of personnel, ensuring maintenance activities, securing supplies, etc. The security and safety of dispatch centers is ensured by means of: isolated teams in dispatch centers with back-up teams in isolation on stand-by; restricted access to dispatch centers and to stand-by units; and standby teams composed of retired staff, in order to maintain the safety and prevent the exhaustion of key staff, and address the issue of the lack of qualified and trained key staff.
Regular maintenance activities and fieldwork are restricted to a minimum, with repair and restoration being prioritized. Planned interruptions for regular maintenance are either suspended, postponed, or implemented with a limited duration. Mobile intervention teams have been established as a back-up for field units. The quality of service, however, may be at risk if planned repairs and maintenance works are postponed for too long. According to the document summarizing issues of concern based on discussions at the ECDSO-E meeting held on April 21, 2020, DSOs reported that current supplies of vital spare parts, tools and equipment are sufficient for repairs and urgent remedial maintenance; some DSOs have a central warehouse or a centrally managed stock system, enabling more efficient use of available vital spare parts, materials, tools and equipment. Nevertheless, should the crisis continue, there is a risk to network and staff safety if supplies are not replenished in time.
As was rightly pointed by the International Energy Agency, the sharp decline of the oil market may put clean energy transitions at risk by reducing the impetus for energy efficiency policies. Without measures by governments, cheaper energy always leads consumers to use it less efficiently. It reduces the appeal of buying more efficient cars or retrofitting buildings to save energy. Thus, policymakers should keep the “green” agenda in mind.
Covid-19 has drastically impacted the energy sector across the globe. The whole range of consequences for the energy sector is yet to be revealed and is difficult to predict, however it is already clear that demand for energy resources has dropped, prices have plummeted and non-payment of utility bills by end-consumers will have a detrimental effect along the supply chain (DSOs, TSOs, suppliers and producers). Notwithstanding, the “green” agenda should not slip away from the list of national policymakers’ and regulators’ priorities.
EPG: The impact on the European Green Deal
Coupled with a drop in global oil prices, which is largely caused, this crisis is producing imbalances in the energy sector, affecting both investments and the transition to decarbonisation. The dip in carbon prices, also a result of lower energy demand, shows the adversarial impact that the coronavirus crisis can have on the recently launched European Green Deal, according to EPG Romania.
Efforts are being made to ensure that the economic recovery measures adopted at EU and national levels are in line with the long-term climate efforts. In this regard, particular attention should be given to the Southeast European member states that are both more vulnerable to such economic shocks and face distinct challenges in the energy transition.
In Romania, a drop in energy prices threatens further investments in the sector, while potentially ill-conceived governmental interventions risk creating lasting and unforeseen imbalances. In transportation, the renewal rate of vehicles is discouraged by low oil prices, while an influx of second-hand vehicles from Western Europe will further disincentivise the replacement of internal combustion engine cars. In the buildings sector, facing stricter and more costly energy performance standards, and largely dependent on shrinking public funds, the renovation rate of buildings could also be negatively affected.
In order to address this multifaceted crisis, an economic recovery plan should be designed to take into account both the more limited resources for countries in Southeast Europe and the need to safeguard long-term climate objectives. Emergency short-term solutions for combatting the immediate social and economic risks of the coronavirus crisis should be combined with a set of policy and regulatory revisions that can ensure a smooth and sustainable post-crisis recovery.
Affect on the global electric vehicle sector
Owing to the stringent emission regulations, there is an increasing demand for electric vehicles as it reduces emission and lowers fuel cost. Under the Energy Policy Act of 1992, hydrogen is considered an alternative fuel and eligible for alternative fuel vehicle tax credits. Increasing consumer awareness regarding greener alternatives has led to the adoption of electric vehicles. As per the International Energy Agency (IEA), the global electric passenger car stock surpassed 5 million in 2018, which represented a rise of 63% from 2017.
In 2018, China accounted for the largest share of nearly 45% in the global electric cars on the road, which is 2.3 million, followed by Europe (24% of the global fleet) and the US (22% of the global fleet). With the rise in the demand for electric vehicles and stringent emission norms, the automakers have shifted their focus towards the development of electric vehicles as an opportunistic approach to growth within a defined area. Hyundai Motor Group, a South Korean automotive company is focusing on electric vehicles powered by hydrogen fuel cells. In addition, Honda Motor Co. Ltd. and Toyota Motor Corp. are also focusing on hydrogen FCEVs.
However, the global automobile industry is facing a slowdown due to the lockdown in several countries amid the coronavirus outbreak, which in turn, is restricted to the production of electric vehicles. In February 2020, the automobile industry sales plunged 79% in China due to the coronavirus outbreak. Shenzhen electric vehicle manufacturer, BYD Auto Co. Ltd. sold 5,501 cars in February 2020, 79.5% decline year on year, and another Chinese electric vehicle manufacturer, Nio Inc. delivered 707 cars in February 2020, declined 12.8% year on year.
As a result, the automakers in China appealed the government to support industry-wide sales through measures, such as encourage sales in rural markets, reduction in sales tax on smaller vehicles, and decrease in requirements for vehicle emissions. In March 2019, the Chinese government had declared a plan to scale back subsidies on electric vehicles to promote domestic players to rely on innovation as compared to government support. This is also a major factor for decline in the demand for electric vehicles in the country. China Association of Automobile Manufacturers (CAAM) called for authorities to increase subsidies for new energy vehicles, increase investment in electric vehicle charging infrastructure, and reduce limitations on the number of consumers in big cities who can buy eco-friendly cars. Such kinds of measures may rebound auto sales of Chinese firms in the third quarter of 2020.
Based on types of electric vehicles, the global electric vehicle industry is classified into battery electric vehicles, plug-in hybrid electric vehicles, and hybrid electric vehicles. The production of battery electric vehicles is being significantly affected by COVID-19 epidemics due to disruption in the supply chain process. China and South Korea are some major countries with major electric vehicle battery manufacturers, including Contemporary Amperex Technology (China), BYD Co. Ltd. (China), and LG Chem Ltd. The coronavirus outbreak has significantly affected their industrial capability to produce electric vehicle batteries that may have interrupted the global production of battery electric vehicles.
The operations of some crucial companies affected by coronavirus epidemics include Nissan Motor Co., Kia Motors Corp., BMW AG, Nissan Motor Co., Daimler AG, and Tesla, Inc. Most of these companies have shut down their automobile production facilities and shifted their focus towards the manufacturing of personal protective equipment. For instance, Daimler and Volkswagen declared recently that they will temporarily shut down production of vehicle and engine at its factories in Europe due to the coronavirus outbreak.
Sources: IRENA’s Global Renewables Outlook: Energy transformation 2050, Publication of Council of European Energy Regulators (CEER) “Keeping the lights on saves lives – Energy sector and regulators guarantee energy supply during lockdown” of 14 April 2020, IEA Oil Market Report – April 2020, EPG Romania