The renewable energy industry, which until recently was projected to enjoy rapid growth, has run into stiff headwinds as a result of three era-defining events: the COVID-19 pandemic, the resulting global financial contraction and a collapse in oil prices. These are interrelated, mutually reinforcing events.
It’s much too early to be able to assess how large their economic, environmental and policy impacts will be, but expect a significant short-run contraction followed by a catchup period over the next few years that returns us to the same long-term path – perhaps even a better one.
The most obvious result of these shocks is clear: Economic contractions reduce power demand because every form of economic activity requires electricity.
U.S. electricity use on March 27, 2020, was 3% lower than on March 27, 2019. That difference represents a loss of about three years of sales growth. Electricity use will trace the same path as total economic output as the crisis unfolds, but it will drop much less in percentage terms. That’s because electricity use is a necessity, and essential services and households will continue to use power.
Industry revenues will also suffer because most utilities are voluntarily halting shutoffs due to bill nonpayment and deferring planned or proposed rate increases.
Replacing dirty diesel generation ... will not look nearly as attractive now as it did a year ago.
Economy-driven demand reductions, which are likely worldwide, will hurt new renewable installations. Utilities will tighten their budgets and defer building new plants. Companies that make solar cells, wind turbines and other green-energy technologies will shelve their growth plans and adopt austerity measures. For example, Morgan Stanley’s highly respected clean-technology analysts project declines of 48%, 28% and 17% in U.S. solar photovoltaic installations in the second, third and fourth quarters of 2020, respectively.
Countervailing factors will partly offset this decline, at least in wealthy countries. Many renewable plants are being installed for reasons other than demand growth, such as clean power targets in state laws and regulations, and are already under contract or construction.
Government policies and public pressure are also forcing utilities to retire coal-fired power plants. Despite the current crisis, there is long-term pressure from many directions to add carbon-free energy. Fifty U.S. utilities have already committed to carbon reduction goals.
Voluntary green-energy purchases by U.S. companies increased by almost 50% in the last year, to 9,300 megawatts – almost 1% of all U.S. power capacity. And residential customers are choosing to buy more renewable energy through options such as community solar programs.
Since early 2019 crude oil prices have collapsed, declining almost 64%. This collapse has also reduced U.S. natural-gas prices by about one-third from year-ago levels. Like electricity and oil, natural-gas use rises and falls with economic activity; it is less sensitive to economic trends than the highly reactive oil sector, and more sensitive than comparatively stable electricity use.
Ordinarily, cheaper natural gas – which is widely used for generating electricity – would stimulate electricity demand by reducing the price of power, thus increasing economic growth. But in this unusual era, the effects of lower oil and gas prices on renewables will be somewhat murky and complex, and will probably differ substantially by market and region.
For some new plants in places where policies do not effectively mandate renewable energy, continued or even new use of oil and gas generation will look cheaper. For example, replacing dirty diesel generation with solar power plus some form of energy storage will not look nearly as attractive now as it did a year ago.
The most significant near-term impacts on renewable plants that are already contracted or under construction may be felt through supply chains. Renewable industry executives are anticipating delivery and construction slowdowns, either because nations shutter industries to slow the spread of coronavirus or because workers get sick.
Many parts for large-scale renewable projects come entirely or partially from China, other parts of Asia or the United States.
The COVID-19 outbreak has already slowed Chinese production of solar panels and materials. Manufacturing disruptions in China could contribute to a significant one- or two-year dip in renewable additions.
All in all, a slowdown in renewable energy growth likely will be one of many deeply tragic effects of the COVID-19 pandemic.
But these effects will not be uniformly negative, and nothing about this crisis will change the long-term trend toward carbon-free energy. Once the global economy bounces back, perhaps this episode will persuade world leaders to accelerate climate policy efforts, before the next climate-induced disease vector or weather event triggers yet another global economic shock.
Peter Fox-Penner is a professor of practice in the Questrom School of Business and the director of Boston University’s Institute for Sustainable Energy. Distributed by The Associated Press.
