IEA (2020), The coronavirus pandemic could derail renewable energy’s progress. Governments can help., IEA, Paris https://www.iea.org/commentaries/the-coronavirus-pandemic-could-derail-renewable-energy-s-progress-governments-can-help
As the world deals with an unprecedented global health crisis, the economic shock waves have rippled through the renewable energy sector, threatening to derail its progress.
Renewable technologies such as wind and solar PV have experienced spectacular growth over the past two decades, creating whole new global industries and helping avoid significant amounts of greenhouse gas emissions. Even faster deployment of renewables will be vital if the world is to meet its climate goals and other long-term sustainable energy objectives. But without government action, the crisis caused by the coronavirus (COVID-19) could considerably disrupt their momentum.
How the situation affects renewables will depend on two key areas: the duration of confinement and social-distancing measures in different countries, and the scope and timing of economic stimulus packages in response to the economic downturn.
Falling costs and strong policy support have made renewables increasingly attractive and competitive in many economies, but they now face three main challenges from the coronavirus crisis: supply chain disruptions that can lead to delays in completing projects; the risk of being unable to benefit from government incentives that end this year; the likely decrease in investment because of pressure on public and private budgets combined with uncertainty over future electricity demand.
More than ever, governments will be central in tackling these challenges and determining the pace of deployment of renewables in the near future. Economic stimulus packages aimed at getting the global economy back on track will be particularly important. When designing these packages, governments should bear in mind the structural benefits that renewables can bring in terms of economic development and job creation while also reducing emissions and fostering technology innovation.
In October 2019, several months before the scale of the coronavirus pandemic emerged, the IEA forecast that 2020 would be a record year for renewable electricity additions. Global installations of solar PV and wind were set to outpace 2018 levels by over 20%. Renewable policies in China, the European Union, the United States and India were expected to drive this rapid expansion.
However, in several key markets that have been considerably affected by the coronavirus crisis, major incentives to invest in renewable projects are set to expire at the end of 2020. In China and the United States, developers have to connect wind and solar PV projects by the end of December in order to qualify for expiring incentives. In the European Union, 2020 is a milestone year for member states to reach binding renewable energy targets. And in India, the financing and deployment of renewable projects need to accelerate this year to reach the country’s ambitious policy targets by the deadline of March 2022.
Factories in China manufacture about 70% of the global supply of solar panels. Another 10% to 15% of it comes from Chinese companies operating in Southeast Asia. In February, solar PV manufacturing facilities in China paused or reduced production because of coronavirus-related lockdowns in several key provinces. At the same time, most plants in Southeast Asia, India and the United States remained open. Despite some shipment delays, the solar PV supply chain in China is now ramping up production again, with most factories slowly resuming activities by taking necessary health precautions.
The wind energy supply chain, on the other hand, is much more globally interconnected compared with solar PV. Europe is a major manufacturing hub for wind turbines, and European factories initially experienced disruptions to the supply of parts coming from China in February. Manufacturing facilities in Italy and Spain have been closed since mid-March due to strict confinement measures. In addition, the recent lockdown in India required most non-essential manufacturing facilities – including wind turbine and solar PV component manufacturers – to close until mid-April. The effects are already being felt in the United States where multiple projects have received “force majeure” notices from suppliers warning developers about possible delivery delays. Uncertainty over the timing and impact of potential lockdown measures in other countries could further delay the completion of many projects worldwide.
The impact of the pandemic is also slowing down construction activity on renewable projects. Lockdown measures in multiple European countries, India and some US states require non-essential workers to stay at home. This will further affect developers who need to complete utility-scale renewable projects by the end of 2020 to meet contractual obligations under policy programmes. In China, all wind projects need to be commissioned by the end of 2020 in order to qualify for feed-in tariff subsidies. In the United States, wind developers are in a similar situation, as they are required to ensure projects are operational by 2020 to receive production tax credits. Any delay in components or construction puts companies at risk of missing these deadlines and thus important financial incentives.
Large developers with strong cash positions may be able to handle these construction delays or additional costs they incur in the short and medium term. However, the situation remains more uncertain for small project developers with less cash at their disposal. For them, delays may require the restructuring of existing debts. Ensuring adequate access to low-cost debt and other financing mechanisms will be key to ensuring that developers can maintain operations now and in the long term.
Finally, renewable projects require multiple meetings to take place in person at both the government and community levels. Various stages of a project’s development, including securing permits and acquiring land, requires significant human interaction. With multiple government offices and energy agencies shut down around the globe, permitting processes will be delayed unless a coordinated online system that spans multiple authorities is made available. Meanwhile, social acceptance of renewable energy projects has been a key challenge worldwide. Engaging with local communities before and during renewable energy project development has been vital to getting power plants up and running on time. Current social-distancing measures have made it harder for developers to reach these key constituents. These delays, both administrative and social, are bound to have a direct impact on projects that are due to be commissioned in 2020 or 2021.
Large utilities and independent power companies are not the only entities investing in renewable energy. Last year, an estimated one-fifth of all renewable capacity deployed globally consisted of individuals and small-to-medium-sized enterprises installing solar PV panels on their roofs or business sites. Such decentralised installations – known as distributed solar PV – accounted for over 40% of global solar PV deployment last year.
With costs falling, the installation of distributed solar PV provides reasonable returns in many countries, but investment in it is now at risk. Currently, the installation of distributed solar PV has stopped in many countries because of lockdown measures preventing access to the buildings. Households and small businesses facing financial shocks and economic uncertainty may postpone or abandon their plans to install solar PV on their property.
Renewables are a fundamental element of the global economy today, powering almost 30% of global electricity use. They reduce carbon dioxide (CO2) emissions and air pollution, and improve energy security. The renewable energy industry is a significant global employer, as well as a key source of new investment and innovation for clean energy transitions. In an increasing number of countries, the costs of generating electricity from hydropower, wind and solar PV are now comparable to or lower than those from newly built fossil-fuel alternatives.
Considering the unprecedented economic impact of the coronavirus crisis, the growth of renewable capacity additions this year may very well slow down for the first time in history. However, governments have the ability to change this trajectory with targeted policies that can enable renewables to grow sustainably in the coming years.
Right now, policy makers are naturally focused on dealing with the huge public health challenges created by the coronavirus pandemic and taking the necessary measures to prevent a widespread financial crisis. They are also stepping in to try to urgently address the rapid spread of economic difficulties affecting households and businesses. As governments continue to work on repairing the economic damage and spurring renewed activity in the week and months ahead, there are a number of actions that can achieve these goals while also helping the deployment of renewable energy.
First, policy makers can extend deadlines for commissioning projects beyond 2020 in order to account for delays due to supply chain disruptions or labour constraints. This will enable renewable project developers to avoid financial penalties that may weaken their financial situation in a difficult economic context while allowing them to keeping previous incentives for which they had qualified.
Second, governments can include specific financing measures and incentives for renewable projects in upcoming stimulus packages. These should focus on reducing the risks for capital-intensive utility-scale solar PV and wind projects under dire macroeconomic conditions, especially for small developers. This will require the continuation and extension of existing policy measures that have shown they can accelerate cost-effective deployment. Additional economic incentives such as tax credits, investment grants and specific loan schemes would be necessary to maintain demand for the highly vulnerable distributed solar PV sector. These incentives can be combined with energy efficiency policies.
Third, short-term policy actions on renewables should align with a new medium- and long-term visions that aim to achieve a rapid peak in greenhouse gas emissions this decade and a steep decline thereafter. Renewables and energy efficiency will play the leading roles in advancing clean energy transitions, but they need a continued and coherent long-term policy vision. In that sense, stimulus packages should also channel funds to new renewable energy technologies that are not fully commercialised but have significant cost reduction potential, such as floating offshore wind farms, marine technologies and low-carbon hydrogen production.
Stimulus packages also give countries a unique opportunity to prepare the world’s electricity infrastructure for a future that will require strong grids and greater sources of flexibility to accommodate increasing shares of variable renewables such as wind and solar PV.
The coronavirus pandemic poses a significant threat to the timely deployment of renewables and their vital contribution to clean energy transitions. But governments can enable these technologies to emerge from the crisis with renewed momentum and play an important role in the global economic recovery.
The coronavirus pandemic could derail renewable energy’s progress. Governments can help.
Heymi Bahar, Senior analyst - Renewable Energy Markets and Policy Commentary — 04 April 2020