As the economies were locked down due to the pandemic, global energy demand tanked to levels not seen in 70 years. The International Energy Agency (IEA) has estimated that overall energy demand contracted by 6% and energy-related emissions will decrease by 8% for 2020. Oil demand is expected to drop 9% and coal 8% for this year, while crude oil is at record-low prices.
In an exclusive fireside webinar organized by The Blue Circle on ‘Renewable Energy in a more uncertain world’, Paolo Frankl, Head- Renewable Energy Division, International Energy Agency (IEA) and Pavan Choudary, Author, CEO and Public Intellectual, discussed the resilience of renewables during COVID, headwinds, and tailwinds for the sector and the role of government in ensuring the progress of clean energy.
Renewable Sector Pre-COVID
The renewable sector was progressing at a rapid pace, setting a new record every year before the countries announced lockdown due to the pandemic outbreak. Renewable energy has been transforming the power sector in many countries by providing clean energy and becoming more digital and more distributed. “Last year was a record year in terms of new additions, and before the crisis, everything was set for 2020 to be another record year of all times in terms of new additions of the renewable market in actually all sectors,” said Paolo. However, renewables only represent 10-11% of total consumption which shows that a lot of work still needs to be done.
Paolo said it’s clear that inefficient and uncertain policies are the reason why the sector could not acquire higher magnitude before COVID. He believes that sudden changes in incentives and policies are the biggest enemy for investors around the world. The other headwind for the sector is the variability of wind and solar energy which needs to be integrated in a cost-effective and secure way in the grid (Variable RE plants produce power only when the wind is blowing or the sun is shining. Grid operators don’t control VRE, they accommodate it, which requires some agility).
The investments in this space have failed to catch up with the actual or possible evolution of wind and solar. There is a lack of access to finance for investments in countries such as Africa that hold a lot of promise. Paolo reckons this to be the main barrier in the growth of renewables.
Minerals and Supply Chain
The solar industry is concentrated in China and the world faced a supply chain disruption after the country went into lockdown. But, the supply chains corrected quickly as China was the first to open its industries. Whereas, the wind industry, which has a more globalised supply chain has been caught flat-footed. Construction sites were shut and workers were not allowed to work which has delayed the projects across the world. The clouds of uncertainty are looming over the market which could hurt the investments. For instance, Brazil has stopped auctions because of low demand growth.
Renewable energy is more dependent on rare materials than traditional sources that find alternatives quickly. Paolo said that access to these resources relies on the amount of resources available and their geographical distribution.
Pavan added that an electric car requires five times the minerals of an ICE car and an offshore wind plant requires 8 times more minerals than a common gas-fired plant. Rare metals are not plentiful everywhere. Another factor is that even if rare-earth materials are available in several countries, refining facilities are concentrated in very few. Renewable energy prices may be coming down because of technology learning and economies of scales but the price of minerals is going up. It is imperative that all the resources are not concentrated in a particular region so if one country bans the export of a certain mineral, that does not hurt the world. “The more alternative routes you have, the better the world is placed in terms of security and prices and competition. This is a challenge for competitors of renewables,” said Paolo adding that it is also critical that industry closes the material cycle. All the precious metals need to be recycled. .
The Incumbent Concern
Currently, the demand is low and the wholesale electricity price is falling. So, the investors are clueless about generating funds. Paolo said that utilities are telling the governments they have no money to pay Independent Power Producers(IIPs).
However, the upstream sector is looking to diversify in renewables in a very serious way. One, because the costs are going down and second because they can be under pressure from the investors on their accountability for carbon emissions. But, there are a few reasons that have put their investments on hold.
The lower prices of renewable energy is not enough to shelter from the storm, on the other side, the price of gas is incredibly low. Even if all costs are going down, nobody is investing anymore which introduces subsidies, and If the wholesale market price is going down and the cost of renewables is constant, the subsidies go up. The present functioning of the market is based on the design of the 90s era which needs a transformation as per current needs. “Challenges are so daunting that we need more collaboration, making a wall between renewable and incumbent will not be a good move,” said Paolo.
Energy Security Paradigm
The renewables will bring more diversification. But, as the system becomes more decentralised, the points of attack increase and raises the issue of energy security. Another point is the extreme weather effects. All energy sources are points of extreme weather components. So there is a complete paradigm shift with positive and negative sides, particularly in terms of electricity security which needs to be taken into account.
IEA’S Report on Sustainable Recovery
The report says that there is an unprecedented opportunity for clean energy transmission if the government, stakeholders, and citizens work together.
It adds that with an expenditure of $1 trillion per year for the next three years, three important objectives can be achieved — around 9 million jobs can be created and saved, GDP could be boosted 1.1% which is 1.3% for developing countries, (an estimation done with the IMF) and carbon dioxide emissions could be reduced by 4.5 gigatons, putting 2019 forever as the year where emissions peaked. “It is an investment of opportunities in the range of almost 200 billion dollars per year and it would create a phenomenal acceleration of deployment of solar and wind,” said Paolo.
Role of Government post-COVID
There is a worrying trend not only for utilities but for the private market as well. There is an unwillingness to sign PPAs due to risk perception, uncertainty about future demand, and competition from other sources like ultra-low gas prices.
The policies need to reassure the investors of the long term targets. This is not the time for the government to introduce more policy uncertainty. The governments can plan the auctions and let the investors know well in advance so that businesses can do a sustainable pipeline of projects. While doing this, regulation needs to be maintained and stimulus packages aimed at reviving the economies should give more space to the renewables sector. “The current package has only 10% dedicated to the renewable sector, this fraction can be increased,” said Paolo.
Most large funds in recovery packages have been allotted in the US, Europe, and China. “To make sure that no country is left behind, we are pushing a lot in advanced economies to make an extra effort to combine recovery packages with development funds with more collaboration between rich and less developed countries,” said Paolo.
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