Clean energy challenge and opportunity
Over the past few weeks the novel coronavirus pandemic has caused significant macroeconomic turbulence, prompting many to ask, not if we are on the brink of global recession, but when will global recession set in.
While the clean energy and environment-focused sectors have so far fared slightly better than their fossil fuel-driven counterparts, cracks are starting to emerge. Investment in the clean energy sector has been slowing since peaking in 2017. This situation is likely to worsen as the impact of the pandemic continues to squeeze liquidity conditions. Energy research company Rystad Energy has warned that this could lead to a complete halt in the growth rate of renewable energy installations.
We also expect to see delays in project execution, postponement of auctions (which accounted for up to a staggering 80 GW of capacity procurement in 2019) and difficulties in operating and maintaining existing projects, especially when it comes to complex assets like offshore wind.
Project financing may impact clean energy projects
While the good news is that banks are much better capitalized than they were during the 2008 global financial crisis, and a downturn in the oil market is likely to drive more liquidity into the clean energy sector, the fact is that liquidity has become scarcer since the outbreak of the pandemic. We are increasingly seeing investors moving away from riskier opportunities.
This could have a knock-on effect on the financing of projects in frontier markets as well as newer technologies where risk-sharing practices are not as well established. Smaller developers with projects not yet off the ground could also be hit hard, as their financing becomes scarce.
As market shutdowns continue around the world, daily energy consumption has fallen. New York is just one example of this. It remains unclear what impact this type of shock will have on subsectors like renewable energy, which are somewhat protected by longterm power purchase agreements (PPAs). What we should be aware of, however, is that PPA prices are in many cases higher than market prices and, as the demand declines, there could be higher risk of curtailment coming through.
Assets market could see some repricing
Over the longer term, we can also expect some repricing in the asset markets as investors grapple with higher off-take risks, as the wave of sovereign downgrades has now hit the headlines from Mexico to the United Kingdom to Oman.
Greenfield projects are already experiencing disruption as a direct impact of the coronavirus pandemic. In the solar energy sector, a shortage of installation components including inverters and modules is pushing prices up by as much as 15 percent in markets like the United States.
In our (Standard Chartered’s) view, this may spell adversity for greenfield project bids that have already been awarded — some of these will be salvaged by higher quality bidders, but a number of these situations are likely to result in stranded projects which may never see the light of day.
Energy procurement contact prices likely to increase
Given the risks associated with executing new projects at this time, we expect to see energy procurement contract prices increase in the near to medium term. We could also see resource companies, particularly in the oil and gas sector, materially reducing investment in clean energy value chains, at least in the near term.
These companies have historically opted to be in the riskier part of the business (direct PPAs and technology, for instance) given their preference for higher returns. But the pandemic seems to have shifted the conversation from business diversification to protecting core cash flows and liquidity.
Such a situation was unthinkable even three months ago.
In the near term, the pandemic is expected to have a significant impact on energy storage and electric vehicle sectors, as ongoing production disruptions and the restriction on the movement of people, and therefore laborers, in Asia has disrupted production and supply.
We also expect a significant and longterm impact on the speed of adoption of electric vehicles since the sector faces a perfect storm in the form of lower oil prices, which will delay the break-even point for electric vehicles, and the upcoming recession, which will reduce the overall demand for cars as well as prevent consumers from paying the material premium needed for electric vehicles.
While the negative impact of the pandemic on the clean energy sector is clear, some opportunities are emerging. Industry
insiders have long complained of short-term build and flip investors bringing returns down to unsustainable levels. The current crisis offers an opportunity for long-term capital providers to enter or expand their presence in the clean energy sector.
Opportunities of clean energy is still there
But the biggest challenge and the opportunity for all are the unprecedented amount of stimulus spending that has been announced globally. A total of $7 trillion (and counting) has been announced across tax breaks, government spending, money printed by central banks, and more.
The fossil fuel sector enjoys more than $400 billion of subsidies each year — and the International Energy Association estimates that 70 percent of the world’s energy investments is driven by governments.
As such, this stimulus funding offers a once in a generation opportunity for all industry participants, including developers, investors and financiers, to use the spending to accelerate the energy transition and low-carbon agenda.
Industry insiders have long complained of shortterm build and flip investors bringing returns down to unsustainable levels. The current crisis offers an opportunity for long-term capital providers to enter or expand their presence in the clean energy sector.