Episode 1: Five Lessons from COVID-19 for renewable energy

Renewable energy had a steep growth curve in the last ten years. In 2019, renewable energy⁽¹⁾ accounted for 10% of worldwide electricity supply as shown in Figure 1.

How will the COVID-19 crisis impact the growth of renewable energy? If you are in the business of selling electricity, it is not very encouraging to learn that worldwide demand has plummeted 10% year-on-year.  

It is only after more thorough analysis that one can be more optimistic. This first episode of the ultra-mini-series on renewable energy post COVID-19, will dive into five lessons that the renewable energy industry can learn from COVID-19 and the related economic crisis.

1. Grids were “forced” to work with an unprecedented share of renewables and they are doing just fine

Some electric grids worldwide are using a record amount of renewables. This is not the most important point however. The key takeaway is that many experts doubted that this amount of solar and wind electricity in the mix was even possible since both types of electricity are variable⁽²⁾. Grid operators have shown that they are now equipped with advanced technology to better predict and manage the variability of solar and wind. Cross-border transactions of electricity, with increasingly interconnected electric grids, also helped to balance domestic supply and demand – particularly in Europe where system operators are very used to these transactions. 

Why have solar and wind increased their market share? Unlike coal and gas power generation, solar and wind have one clear advantage: free fuel. Solar and wind power plants are not worried about the volatility of coal or gas prices. They are also not concerned about the logistics of getting the fuel on-site. Plus, they are run with low operating costs (imagine solar panels sitting in rural areas or huge wind turbines in plainlands or at sea with very little on-site presence). The bulk of the investment is made up-front and then they are cheap to run.  

If the regulation in any given location is set in a relatively competitive market, when demand goes down, prices also go down. When electricity prices go down, only those that generate at a low marginal cost are able to supply the market ⁽³⁾. As you might be guessing, when demand plummeted due to COVID-19, the low marginal cost of solar and wind allowed them to remain online when others sources could not.  

Germany is a good example given that they already had a significant share of renewables. Figure 2 shows the daily market share of renewables during April. The UK had also a record share of renewables and went without coal power for two months in a row. This phenomenon has repeated in many other countries.

This forced empiric test has opened up the possibility of renewables being a bigger share of the total electricity generation with relatively minor adjustments.

2. A halt in the economy is not the answer to align us with the science of climate change

During the past months, most planes stood idle in airports without burning any fuel. Car, truck and motorcycle traffic was minimal. Some cities in highly polluted areas were surprised to see blue skies for several days in a row. Does this mean the world is (painfully) back on track to meet climate change goals? Unfortunately not. The International Energy Agency expects emissions to only fall by 8% in 2020. 

To align our economic and social life with the science of climate change, the answer is not to put the world on pause. It is actually the opposite. It is to go full-speed but in a different direction. Particularly on the power and electricity markets, which is the sector with the most potential to impact climate change in that it accounts for 27% of global GHG emissions and where technology challenges are no longer the greatest hurdles. 

As pressure mounts to decarbonize the economy, the power sector will be seen as low-hanging fruits. Renewable energy will be standing on the sideline, ready to get in the game of reducing the carbon footprint⁽⁴⁾ and quickly increasing their global share of the electricity market. Regulation could be the greatest barrier in some countries, and that will be part of an upcoming episode.

3. Governments are scrambling to act – but some have taken the lead

Since the beginning of COVID-19 in early 2020, governments have poured billions of dollars of public money into the economy to fuel an economic recovery. A high-caliber coalition of international organizations, with the support of Columbia University, are tracking how public money is spent (i.e. your money). So far, G20 countries have spent more in support of fossil fuels than in the support of renewable energy (US$ 170 billion vs. US$ 137 billion as of 5 August 2020). But the debate on how to rebuild the economy post-COVID-19 is heating up. The European Union, the region that historically led the action on climate change, is tapping EUR 750 billion for a low-carbon economy build-up. No other region in the world has been bolder in their efforts to reduce greenhouse gas emissions – though others such as Chile and the UK are quickly getting in the game. Governments will be pressed to act. Some will act and some won´t. Some will say that GDP growth and job creation are not aligned with a renewable energy agenda. But that debate will be harder to sustain given that research increasingly shows the opposite. 

4. Public companies will soon be forced to disclose and manage their Climate Change risks

Individual investors and pension funds are increasingly aware of climate change risks⁽⁵⁾. Asset managers are coming under pressure to vote against CEOs of companies that do not properly disclose their climate change risks. This has pushed BlackRock, the largest asset manager in the world with over 6 trillion US$ in assets under management, to publicly ask CEOs to disclose and manage climate change risks⁽⁶⁾. Why is disclosure so important? With disclosure comes accountability, so once companies are pushed to disclose their emissions publicly, they have no alternative than to show progress. Pressure is mounting on listed companies worldwide. Soon they will be expected to disclose in some form or another their carbon footprint and how they plan to align with the goal of limiting temperature increases to 1.5-2 degrees Celsius ⁽⁷⁾. As pressure continues to build, some of the most powerful corporations have decided to turn these risks to their advantage and are looking to differentiate themselves from the pack. Morgan Stanley has recently joined a group of financial institutions that will track emissions of their loans to “…better assess risk, manage impact, meet the disclosure expectations of important stakeholders, and assess progress and pathways to global climate goals”. Apple, a very large energy user, has already achieved 100% renewable energy in 2018 and announced in July that it will bring its entire carbon footprint to net zero by 2030, not just for the company but also for their entire value chain including the use of their products (commonly referred to as scope 3 emissions⁽⁸⁾). Other large energy users such as Microsoft and Facebook have also made bold advancements in the use of renewable energy and the reduction of their emissions. Amazon has recently joined the club. They are not alone. Over 240 corporations have committed to using 100% renewable energy. Because power assets are typically built after securing long-term power purchase contracts, this will help build new renewable capacity. Fears of inflation in a post-stimulus world might even increase the appetite to lock-in fixed electricity prices for long periods of time.

5. The downturn related to COVID-19 is giving the world an unpleasant taste of a potential climate emergency

Black Swan or White Swan, COVID-19 is certainly some sub-species of swan⁽⁹⁾. The world has lost hundreds of thousands of lives and millions are suddenly without jobs. Climate scientists and other world leaders have long warned of severe consequences related to climate change. The Bank for International Settlements (“BIS”), an organization that is governed by the Central Banks of countries around the world has issued a series of warnings on climate change risks. The organization has defined climate change as a “Green Swan”: an event “Highly likely or certain occurrence but uncertain timing of occurrence and materialization. Too complex to fully understand”⁽¹⁰⁾. 

Despite the increasing importance that public opinion is giving to climate change (including in the US), scientists warn that we are way off-track, which could lead to potentially catastrophic consequences. In this brief from 2017, I explored why we have not taken sufficient action to address this challenge. Part of the explanation was that our minds are not well equipped to deal with consequences that are too far away to visualize. COVID-19 may have made extreme consequences more visual and we might now be more willing to take preventive measures.   

Note: This was the first episode of the ultra-mini-series on renewable energy post COVID-19 and covered the five reasons why COVID-19 might positively impact the growth of renewable energy. The next episode will challenge the role of gas in the electricity markets post-COVID-19. 

Opinions in this article are entirely my own. However, many professionals from diverse industries have generously contributed with their feedback to an earlier draft. I want to especially thank Csilla Monfils, Björn Ullbro, Laurent Segalen, Francesco Venturini, Matt Hankins, Robert Hemphill, Seyi Fabode, Milica Fomicov, Marek Wolek, Joris Rademakers, John Crosson, Don Green, Pascal Vinarnic, Elisa Arond and Martin Wilson.

⁽¹⁾ For the purpose of this article, the term renewable energy will refer mostly to electricity from solar and wind sources, where most of the growth has come from in the last ten years.

⁽²⁾ Some argued that blackouts in California during the heat-wave in August were a consequence of having too much renewables in the grid. This is nonsense. The unprecedented heat wave would have been more tolerable with more battery storage resources rather than with more gas-fired power plants. Robert Gross summarized the case very well in this Financial Times letter. 

⁽³⁾ This is a simplification of the dynamics in the electricity markets and does not account for other factors (e.g., not all technologies are able to easily ramp-up and down), but price is the key driver that provides incentives to market players in the long term.

⁽⁴⁾ Energy Efficiency could be a scalable solution but regulation and the private sector have not been effective in making Energy Efficiency an investable asset class despite efforts such as the Investor Confidence Project.

⁽⁵⁾ For a candid discussion check out the Aug 1st episode of the Redefining Energy show with a representative of BNP Paribas.

⁽⁶⁾ Larry Fink, BlackRock´s chairman, wrote a letter to all CEOs which is worthwhile reading.

⁽⁷⁾ In the 2015 Paris climate agreement, the countries participating in the United Nations Framework Convention on Climate Change (UNFCCC) agreed to a common target: to hold the rise in global average temperature “well below 2 degrees Celsius above pre-industrial levels and to pursue efforts to limit the temperature increase even further to 1.5 degrees Celsius.”

⁽⁸⁾ See Carbon Trust brief on scope 1 to 3 categories of greenhouse gas emissions.

⁽⁹⁾ If (unlike me) you are interested in correctly classifying COVID-19, you might want to start with this article.

⁽¹⁰⁾ BIS and the Central Bank of France have published in January 2020 a comprehensive 115-page report titled “Green Swan: Central banking and financial stability in the age of climate change”; a summarized version of the findings can be find in this article called “Green Swan 2” by Luiz A. Pereyra, BIS Deputy General Manager here.