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Energy at the COVID-19 crossroads: the future of energy investment

How the pandemic brings future energy investments sharply into focus

Briefly negative oil prices. Unlikely peaks and troughs in energy use. These headline grabbing phenomena shouldn’t be seen as simply short-term impacts of the coronavirus crisis.

Investors, governments and public consumers were already driving changes in our energy systems, the virus has merely accelerated these trends. Given the likely length and depth of the post-COVID-19 economic downturn, it’s vital that the energy industry makes the right choices at this crossroads. Here are five clues as to the different roads ahead. 

The end of the oil industry

The oil and gas majors had already signalled that unabated fossil fuel use was coming to an end, with BP and now Shell announcing a net zero ambitions by 2050. While we wait for the others to follow suit, perhaps just a matter of time, eyes are on the exact solutions these companies will use to achieve this. They are investing in renewables, developing hydrogen and the recent announcement of the Northern Lights Carbon Capture and Storage investments provide further indications of their future direction. 

Market watchers have been predicting the last decade of the oil industry for almost a century. This time is different. The era of $100+ per barrel seems truly over. The investment cost of finding more oil, in harder to reach places, at the current price has reduced exploration to a minimum. It’s a shrinking circle: less investment in oil development today, means jobs, skills investment moving to new markets, and a less profitable commodity tomorrow. 

And fossil fuel subsidies, which have been substantial for decades, whether in direct support or tax incentives, are likely to come under increasing threat. With the enormous bill for the pandemic to pay down, governments finally have a reason to end these now unnecessary encouragements. Renewables like wind and solar are competitive per kilowatt hour and as new-build investments. And the pivot to electrification in transport also seems a lot more possible now. For example, Wood Mackenzie are predicting a 27% year on year growth in offshore wind additions, despite a dip in 2020.

Investors have more appetite for new energy initiatives

Investors had already begun divesting from coal and other industries. There is likely to be appetite for investment in the power systems of a new world, not the one left behind. We might see growing popularity in hydrogen as a clean source. Certain renewable projects might seem more feasible and offer greater return on investment now that fossil fuels profitability and relevance are dropping.

Zero carbon initiatives and targets are likely to be intensified. While predicting winners is always difficult, investors are likely to look hard for something new to support in the post-Covid world. Sustainable energy already has some of the lowest borrowing costs in the energy space, could we start to see a wholesale switch and early write-down of assets in the fossil fuel industry? 

We are likely to see different rates of growth in different regions. In Southeast Asia, Vietnam is seeing renewable energy rocket as energy demand growth continues to outstrip GDP growth.  Other areas where energy demand growth is weaker, we anticipate renewable energy penetration will be slow until liquidity of investors improves.  

Air quality and home working costs are changing behaviours

Many city populations have just had a two-month experience of the cleanest air for decades. Many have also been taking to our parks, forests and natural surroundings in a bid to get out of the house while maintaining social distancing. A renewed focus on air quality and the way we feel about our environment is likely to drive further support for decarbonisation. 

Another unforeseen lesson of this strange period: in the home office, you are the building manager. While energy demand has significantly reduced globally, even across developing regions such as Southeast Asia where energy demand growth has been outstripping GDP growth, domestic energy use has increased significantly. And those energy bills are yours, to monitor and to pay. With working from home likely to become a new part of business as usual, energy users’ behaviour will bring additional awareness of costs and bring their consumer interest in renewables to bear on the business market for energy.  

Smart money will invest in distribution innovation

Investors’ move away from fossil fuels also has implications for transmission and distribution operators. The long-recognised need for more flexible energy distribution systems, ones that can blend renewable energy and storage, is also likely to receive more focus and investment.  

Our existing mono-directional transmission and distribution systems are having to adapt to changing patterns of energy use and supply. These systems will need to become ‘smart’, and incentivise demand reduction, if not increased generation, at a distributed scale. This could take the form of a more sophisticated ancillary energy services market that incentivise storage, flexible generation and demand reduction. 

Global stimulus sets a new direction

Today, governments around the world are developing huge stimulus packages, to relieve the shock of the pandemic and inject a new sense of direction into their economies. There is an appetite for new solutions and the parallel threat of climate change is setting the context for much of the debate. As they consider whether to incentivise investment in sustainable long-term energy solutions or prop up historical solutions with a limited future, governments have a rare opportunity to think long-term and tip the scales. The energy industry should watch closely and act fast.