IEA (2020), Renewable energy market update, IEA, Paris https://www.iea.org/reports/renewable-energy-market-update, License: CC BY 4.0
The pandemic has the potential to change the priority of government policies and budgets, developers’ investment decisions and the availability of financing through 2025. This casts a great deal of uncertainty on a market that had been expanding at a rapid pace in the previous five years.
At the same time, several countries are introducing massive stimulus programmes to respond to the current economic meltdown and support their economies. Some of these stimulus measures may be relevant for renewables. The IEA has been re-emphasising that governments should bear in mind the structural benefits of increasingly competitive renewables, such as economic development and job creation, while also reducing emissions and fostering technology innovation.
There is little doubt that massive cost reductions in the last decade are one of the main reasons behind renewables rapidly transforming the global electricity mix. The cost of electricity from onshore wind and solar PV is increasingly cheaper than from new and some existing fossil fuel plants. In most countries, renewables are the cheapest way of meeting growing demand.
Wind and solar PV developers in 2020 won auction bids at record low contract prices, ranging from below USD 20/MWh to 50/MWh. Offshore wind has achieved significant scale-up and cost reduction over recent years driven by policies in Europe. This success should soon be repeated in emerging offshore wind markets in Asia and North America, with economies of scale further reducing costs.
The increasing share of VRE has opened a new horizon to maximise hydropower’s contribution to flexibility and spur investment in battery storage technologies. All these developments were mainly driven by government policies fostering competition and new flexibility sources.
While supply disruptions may lead to local transitional price fluctuations, there is no sign to date that the Covid-19 crisis will change these declining cost trends. For instance, in the case of solar PV, manufacturing overcapacity is expected to reach record levels in the coming years (see next chapter), which will put further downward pressure on module prices.
The continuing decrease in cost trends alone will not shelter renewables projects from a number of challenges. The pace of economic recovery, heightened pressure on public budgets and the financial health of the energy sector as a whole further exacerbate already existing policy uncertainties and financing challenges.
For renewable electricity, we can distinguish three main categories of projects: (i) those already contracted and/or financed and under construction; (ii) those driven by government action (e.g. auctions, FITs, other incentives); and (iii) those mainly driven by market forces (e.g. corporate power purchase agreements, merchant projects). Each project category will face different challenges and opportunities, depending on two key variables: renewables cost trends and policies in place.
Looking at the project pipeline through 2025, almost one-third of wind and solar PV projects are already contracted and/or financed. Those have limited risk of cancellation and thus are expected to become operational in 2020 and 2021, with some facing further delays carrying over to 2022 or beyond.
In the next five years, almost half of wind and solar PV projects in the pipeline are tied to planned, but not finalised, government-backed auctions or other incentives such as tax credits, rebates and FITs. The Covid-19 crisis poses challenges to the timely implementation of previously announced government plans. For instance, the implementation of projects under government-backed auctions will critically depend on whether countries maintain their planned schedule of tenders. This may be unlikely in the context of stalling or decreasing electricity demand, and low fossil fuel prices.
Planned renewable electricity projects with long-term contracts will be mostly shielded from low natural gas prices. Although in the short term, governments may delay scheduling new renewable capacity auctions and turn to existing natural gas plants to meet new demand, in the medium and long term the economic case of wind and solar remains strong thanks to expected continuing cost reductions and to the long-term price predictability over project lifetimes.
Some impacts on policies are already visible. Initial government policies to tackle Covid-19 challenges have focused mainly on extending project-commissioning deadlines and postponing planned auctions. France, the United Kingdom, Greece and Germany have provided some flexibility for developers who are not able to meet policy-related final commissioning dates. While these measures protect deployment in 2020 and 2021, the delay of auctions will also have an impact beyond 2021. In some countries the postponement is indefinite, creating significant uncertainty and increasing risk for investors and finance.
Recent policy changes affecting renewables beyond 2021
|Country||Policy change||Impact year|
|Brazil||Postponement of 2020 electricity auctions indefinitely||2023-2025|
|Chile||Delay of auctions from June 2020 to December 2020||2024-2026|
|China||Postponement of subsidy-free project application from February 2020 to April 2020||2022-2023|
|France||Delay of some solar PV auctions by 6 months||2021-2022|
|Germany||Delay in the selection of bidders in previous auctions||2022-2023|
|Portugal||Delay of 700 MW solar PV auction||2022|
With the declining cost of renewables, corporates have increasingly signed power purchase contracts directly with wind and solar projects outside the main government policy schemes to meet their private decarbonisation goals and also to hedge against future price volatility. Developers of wind and solar projects entering these agreements have accepted additional risk from shorter contracts and greater exposure to wholesale electricity prices. While project development tied to private agreements accounts for about a quarter of projects in the pipeline, lower electricity demand, plummeting power prices and a weaker financing environment may lead to such projects being reconsidered.
At the same time, the hedging value of renewables to both electricity price volatility and climate liabilities remains intact. Most renewables for electricity generation, especially wind and solar PV, have high investment costs but low operating and maintenance costs. Once operational, renewables projects with long-term power purchase contracts can provide stable revenues to investors while sheltering buyers from future electricity and fuel price volatility. The willingness of corporates to continue procuring renewables in a low fossil fuel price environment will also strongly depend on the ambition of their own climate change mitigation policies and on carbon pricing regimes implemented by governments.
In the case of the EU policy framework for biofuels, the Renewable Energy Directive dictates that member states may increase the contribution of conventional (crop-based) biofuels to renewable energy in transport by no more than one percentage point over levels achieved in 2020. As such, any Covid-19 market disruption this year that alters the share of conventional biofuels consumed would affect the maximum permitted share in member states well beyond 2020.
A sustained period of low oil prices heightens the possibility of policy makers delaying or abandoning increases in biofuel policy support. This has already been evident in the ASEAN region, where governments have paused action to bring higher biofuel blends to market as low oil prices compromise the budget available for biofuel support measures. In Indonesia and Thailand, revenues for the funds used to support biofuels have reduced at the same time that low oil prices have increased the cost of biofuel subsidy. Low oil prices also test the willingness of fuel suppliers to blend biofuels in markets without strong enforcement of blending mandates.
Brazil, India and Indonesia, among other countries, have long-term ambitions to increase the contribution of biofuels in transport. Scaling up production to meet such ambitions will require the delivery of new production capacity, which in turn is dependent on the financial health of the industry to invest in new plants. The impact of an extended period of low biofuel demand and prices in 2020, and possibly beyond, could undermine the ability of the industry to deliver increased production capacity. This is particularly relevant to India and Brazil, as concurrent low sugar and ethanol prices negatively affect producer balance sheets. In Brazil the situation is already precarious, with numerous producers in a fragile economic condition.
Conversely, the significant impact of the Covid-19 crisis on aviation opens the door to the scale-up of aviation biofuel use through the inclusion of environmental conditions in bailout packages. This is demonstrated by the 2% sustainable aviation fuel requirement proposed in a rescue package for the Air France-KLM group.