IEA (2020), Global Energy Review 2020, IEA, Paris https://www.iea.org/reports/global-energy-review-2020
The Covid‑19 crisis and measures taken to slow its spread have had a profound impact on energy demand, the likes of which have not been seen for 70 years. The full impact of the current situation, as yet unknown, will be determined by the duration of lockdown measures and the recovery paths taken around the world. This unprecedented situation and the stimulus packages that governments are putting in place will shape the energy sector for years to come, with significant consequences for the energy industry at large, energy security and clean energy transitions.
The energy industry is feeling the financial impact throughout value chains, with most energy companies losing substantial revenues. In effect, they are being hit twice, first by lower demand for their products – including oil, gas, coal and electricity – and again by lower prices for these products. Average oil prices fell sharply, with West Texas Intermediate hitting negative prices for the first time in history as excess storage became scarce. LNG prices have declined to all-time lows in European and Asian markets, which were abundantly supplied even before the Covid‑19 crisis depressed demand. Natural gas prices have gone negative in parts of the United States, where storage is full. The smallest impact is on coal: as the supply chain is less affected by logistical constraints than oil and natural gas. A combination of cheap gas and weakening demand have also led to power prices declining by one-third to one-half in liberalised wholesale markets. Market prices for electricity have dipped below zero in the United States and a number of countries in Europe, including Germany, Denmark, France, Belgium, Sweden, Finland and Switzerland.
The energy sector that emerges from the Covid‑19 crisis may look significantly different from what came before. Low prices and low demand in all subsectors will leave energy companies with weakened financial positions and often strained balance sheets. Business lines that are insulated to a degree from market signals, including those with renewable electricity projects, will emerge in the best financial position. Private firms that are the most exposed to market prices will experience the most severe financial impacts. Market concentration and consolidations are likely.
Across the energy sector, the Covid‑19 crisis will have a significant impact on investment. This could raise concerns about energy security because investment is necessary even if global energy demand takes a long time to return to the pre-crisis trajectory. A considerable proportion of global energy investment is devoted to just sustaining existing levels of energy supply: maintaining oil and gas production at current levels, replacing aging power generation capacity – often with a capital-intensive combination of renewables and flexibility sources – and reinvesting in aging electricity networks. Investment in these activities will have to remain robust even with a subdued recovery.
Energy security has been put to the test in new ways by the crisis, including in oil and gas markets. Simultaneous supply and demand shocks have sent oil markets into turmoil. Oil plays a central role in global macro finance, both as a share of international trade and as a critical source of government revenues for several major producers. Lockdown measures have caused unprecedented demand declines, whose speed and magnitude greatly exceed the normal market flexibility of supply. As a result, even with attempts at coordinated management, a disorderly production shutdown is likely in some places. The consequent macroeconomic and financial disruptions could undermine the industry’s ability to ramp up production as the world economy and oil demand recover.
The supply of natural gas is critical to operations in all sectors, including industry, residential and services heating, and electricity supply. Due to large investments in recent years and the slump in demand because of Covid‑19, global gas markets are abundantly supplied and storage levels are very high. At the same time, intense financial strain is hurting the industry, including companies who own and operate critical infrastructure facilities. Policymakers and regulators need to ensure that operational, maintenance and safety expenditures are prioritised and appropriately maintained. US LNG has played a major role in improving energy security and market efficiency in several regions, but the ongoing challenging market conditions risk significant shut-in of US LNG facilities.
Electricity security’s place at the heart of modern economies has been underscored by the Covid‑19 crisis. A robust, uninterrupted electricity supply is a key precondition of both the functioning of the health care system and the maintenance of social welfare and online economic activity. Robust power systems have enabled adaptations to the ongoing crisis, including a huge expansion of teleworking activities, particularly in advanced economies. In some parts of the world, however, a reliable supply cannot be taken for granted. In Africa, several thousand hospitals and health care facilities have no access to electricity. In both Africa and South Asia, electricity reliability problems limit social distancing.
Electricity security has remained robust as the Covid‑19 crisis has accelerated the shift to renewable energy in the power mix. The share of renewables has jumped several years ahead of pre-pandemic expectations, including the shares of wind and solar, curbing CO2 emissions and air pollution. The rise of renewables has posed some problems for electricity security, however. In advanced economies, the main cause of blackouts is the inability of the system to manage sudden changes in power flows and various network problems. Lower electricity demand paired with continued growth of wind and solar PV has stepped up the share of variable renewables, calling for more flexibility to keep the lights on. At the same time, available flexibility has been limited by the shutdown of industrial facilities that provide demand response and because dispatchable power plants are idle because power prices are extremely low. As the energy industry’s financial challenges grow, the cost of restarting dispatchable power capacity that had been mothballed could emerge as a significant energy security concern as economies and electricity demand recover. To date, electricity systems in major economies have maintained robust reliability, but continuous vigilance will be needed from system operators, regulators and governments.
The Covid‑19 crisis is also influencing the path for clean energy transitions. Global CO2 emissions are set for the largest year-to-year reduction on record, but a sustainable energy pathway calls for continuous efforts and commitment. The unprecedented decline in emissions in 2020 may only be temporary without structural changes. Recoveries from past crises have caused immediate rebounds in CO2 emissions, including the highest year-on-year increase on record in 2010.
Governments will play a major role in shaping the energy sector’s recovery from the Covid‑19 crisis, just as they have long been in the driving seat in orienting energy investment. In particular, the design of economic stimulus packages presents a major opportunity for governments to link economic recovery efforts with clean energy transitions – and steer the energy system onto a more sustainable path. While the clean energy transitions and stimulus discussions are gathering momentum, a co-ordinated policy effort will be needed to harvest its opportunities and lead to a more modern, cleaner and more resilient energy sector for all.