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Covid-19 and the resilience of renewables

This section assesses how resilient renewable energy development and deployment have been during the pandemic crisis, with analysis based on various indicators from recent monthly and quarterly data (up to end-September 2020). Overall, renewable electricity has shown strong resistance according to data on monthly installations, awarded auctions, financing of new projects and equity performance.

The world after strict lockdowns

From February through mid-May 2020, roughly 100 countries, states and provinces – mainly in Europe, Asia and North America – implemented full lockdown measures to contain the pandemic while partial lockdowns were introduced in another 100 jurisdictions. Lockdowns generally lasted from four to ten weeks and were gradually lifted starting in the second half of April. Thanks to these containment measures, the spread of new infections slowed and plateaued globally in April and May.

However, these safety regulations and mobility restrictions also disrupted supply chains and temporarily delayed construction of renewable energy installations – especially onshore wind and solar PV – in key markets. Since mid-May, renewables-based construction projects, equipment supplies, policy implementation (permitting, licensing, auctions) and financing have returned to near normal levels in many countries because project developers and manufacturers have modified their operations to adapt to ongoing social‑distancing rules.

Global Covid-19 containment measures and daily new cases, January-November 2020

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Following the first peak, the number of Covid‑19 cases reported globally began to increase rapidly again in June as more countries in Africa, Asia, Latin America and the Middle East became severely affected and testing capacity expanded in North America, Europe and the Russian Federation (“Russia”). By the end of summer, almost all European countries were recording a strong surge in cases.

Despite this, most countries and states (except Israel) had not (re)introduced full or partial lockdowns as of September because of the economic implications. Social distancing measures, however, remained in place in almost all countries and were being tightened in some to contain the second wave.

Internal movement restrictions, business closures and local lockdowns in some jurisdictions since the beginning of October have concerned mainly large and medium-sized cities. Although enhanced quarantine rules may apply to some workers in these areas, implications for renewable equipment manufacturing and renewable electricity construction activities are expected to be minimal, as facilities and sites are located mostly outside of heavily populated areas. Nevertheless, the renewed tightening of measures and the reintroduction of full and partial lockdowns in some European countries at the end of October cast additional uncertainty over the expansion of renewable energy in the last quarter of 2020 and 2021.

January to June renewable electricity capacity additions

Global renewable electricity capacity additions were over 11% lower in the first half of 2020 than in the first six months of 2019: developers connected an estimated 40 GW of solar PV, 17% less than last year, while wind expansion was down nearly 8%. Conversely, hydropower capacity additions increased in the first half of 2020, mostly owing to the commissioning of large-scale projects in the People’s Republic of China (“China”). The impact of lockdowns and movement restrictions varied by country and technology, and initial IEA data shows that in most countries not only did renewable energy developers not halt construction, but they accelerated their installation activities once restrictions were eased to make up for delays.

Renewable capacity additions by technology and by region, Q1 and Q2 of 2019 and 2020

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Compared with 2019, first quarter (Q1) capacity additions in 2020 were lower for all technologies except hydro, with solar PV and wind each contracting 25%. China was the primary driver of this trend, as provincial Covid‑19 movement restrictions and related labour shortages reduced construction activity throughout the country. As a result, new wind installations in China declined by 50% and solar PV by 25% in the first three months of 2020. As the pandemic began to recede and lockdown measures were eased, China’s growth regained momentum with utility-scale PV, wind and large hydropower plants being installed at a faster pace.

Renewable electricity capacity additions by region, H1 2019 and H1 2020

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In the United States, policy deadlines dictate wind and solar PV expansion, as renewable deployment remains largely sheltered from Covid‑19 restrictions. US renewable capacity additions almost doubled in the first half of 2020 compared with last year, mainly driven by wind developers’ rush to commission projects to meet federal tax incentive deadlines. At the same time, growth in renewable capacity in India slowed significantly – but this started happening prior to the nationwide lockdown imposed at the end of March and resulted largely from the persistent challenges of utilities’ poor financial health and projects delays.

In Europe, although new renewable energy capacity additions were lower in the first half of 2020 than in 2019, the installation pace accelerated in the second quarter with the easing of lockdowns and movement restrictions. Germany registered a slowdown in installations (particularly of ground-mounted PV) when the pandemic first arrived in the country, but the recovery in May and June was strong, outpacing 2019 installations during the same time period. Recoveries were also recorded in Italy as additions rebounded to pre-pandemic levels in May after a 90% decline from February to April, and in the Netherlands the pace of combined wind and solar installations slowed during March and April, but recovered again in June.

The ASEAN region installed nearly 60% less capacity from January to June this year than during the same period in 2019. This decline is mostly due to the booming growth last year in Viet Nam as developers rushed to complete PV projects before policy deadlines. Elsewhere in the region, lockdown measures curbed construction activity in Thailand and Indonesia.

Pre-crisis policies will have at least as much impact as Covid-19 on the future of renewable technologies

In the first half of 2020, 13 countries awarded almost 50 GW of new renewable capacity to become operational during 2021-24, the highest amount ever. China’s national solar PV auction awarded 25 GW in June 2020, marking the global trend. Despite a sharp slowdown in construction activity, India awarded 11.3 GW of solar and almost 1 GW of wind capacity in central and state auctions, reversing the downward trend that had begun in the second half of 2019.

In Europe, Germany, France, Italy and Portugal each completed wind and solar PV auctions from January to June, but overall capacity awarded in the region was significantly lower than last year. Greece, the Netherlands and Ireland also held auctions, with some delays due to Covid‑19.

In Latin America, a record 4 GW of capacity was awarded in 2019, mainly through tenders in Colombia, Brazil and Argentina. In 2020, however, the pandemic prompted countries such as Brazil, Argentina and Chile to postpone scheduled auctions, so the region awarded no new renewable capacity in the first half of 2020 as a result. 

Renewable electricity auction results by country/region, 2018-2020

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Renewable electricity auction results by technology, 2018-2020

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As the final investment decision (FID) is the last step before a renewable plant (or any other infrastructure project) can start construction, FID data can provide insights into how interested the financing community and investors are in realising renewable electricity projects. Solar PV and onshore wind projects usually start operating 6‑12 months after reaching financial close, while longer lead times have been observed for offshore, hydropower and bioenergy projects.

Data show that there were 10% fewer FIDs for total utility-scale renewable projects (excluding large hydropower) in the first half of 2020 than in the same period last year. While support qualification deadlines in 2020 in key markets are the main reason for the decline, risk aversion concerning the economic uncertainty created by Covid‑19 is also a factor. The initial shock of the pandemic in February/March led to the lowest quarterly FID since 2017.

FIDs for new utility-scale renewable electricity plants, 2015-2020

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The largest downturn in the first half of 2020 was for onshore wind, with a year-on-year reduction of 36% marking the global FID trend. Financing activity for onshore wind in China and the United States had surged in 2018 and 2019 to meet policy deadlines for project deliveries this year, followed by an expected slowdown in 2020.

In contrast, offshore wind had the most FIDs of all renewable technologies, as the Covid‑19 crisis did not delay major deals in Europe, the largest market. Developers in the Netherlands, the United Kingdom and France closed financing for almost 5 GW of new offshore wind capacity, while in China, several large-scale offshore projects reached financial close to meet the 2021 deadline for feed-in tariff (FiT) phaseout.

Although FIDs for utility-scale solar PV projects in the first half of this year were below USD 25 billion, they remained relatively stable at just 4% lower than in the same period last year. However, investment activity remains significantly below the historical averages of USD 35-45 billion over 2017 and 2018.

This decline is underpinned by developments in two key markets: first, the deadline to qualify for subsidies in China, the world’s largest annual PV market, contributed to a flurry of financing activity in 2H 2019. To qualify, projects have to be commissioned by the end of 2020, thus most of them closed financing in the second half of 2019. Although this trend was expected to persist into the first quarter of 2020, the pandemic curbed financing activity significantly.

Second, in India, project delays and cancellations resulting from regulatory issues, combined with emerging financing challenges caused by Covid‑19, kept the pace of financing activity slow in the first half of 2020.

Five reasons why financing activity for utility-scale renewables is expected to increase in the second half of 2020 (and beyond) are:

  1. Monetary policies announced in most key renewables growth markets in the first half of the year support low interest rates in the foreseeable future, offering favourable conditions for wind and PV projects, which require high upfront investments.
  2. Renewable energy projects provide a “safe heaven” for certain institutional investors confronting the emerging economic slowdown because they often come with long-term fixed-price contracts.
  3. Countries worldwide have awarded a record 100 GW of renewable electricity projects since June 2019, with the majority expected to close financing in 2020.
  4. So far, the Covid‑19 crisis has not prompted governments in major markets to abandon or cancel already-announced policies ensuring investors that policy support will continue despite the economic turbulence. In addition, long-term net-zero goals in the European Union and China, the two largest renewable energy markets, provide investors with long-range visibility.
  5. Stimulus packages have maintained the solvency of major utilities and, to some extent, small businesses investing in renewable projects (i.e. independent power producers [IPPs]) in both emerging markets and advanced economies. These relief measures have been crucial to improve their cash flow and allow them to finance planned projects in the second half of this year. 
Renewable industry equity performance

Robust financial performance is important for renewable manufacturers and project developers to be granted a lower cost of capital to fund capital-intensive expansions. One measure of performance is the stock market, which can indicate rates of return and financial health because listed companies are required to provide a transparent method of assessing their financial performance (IEA, 2020).2

Prior to the pandemic, the renewable energy industry (including wind turbine and solar manufacturers as well as independent renewable power producers) had been achieving higher gains than most major stock market indices since 2018 and performing better than the overall energy sector. For instance, the shares of wind turbine manufacturers, solar equipment producers, and renewable independence power producers increased 30% to 70%. This is far higher than the ‑20% to +20% changes in major stock market indices and utilities in Europe and North America.

The equity performance of the renewable energy industry has remained resilient since the beginning of the pandemic. In March 2020, stock markets all around the world experienced major sell-offs due to concerns over the Covid‑19 impact on the global economy. Wind turbine and solar manufacturers recorded significant declines, with many companies recording negative EBITDAs in the first half of the year as revenues temporarily fell.

However, the stock prices of major wind and solar companies have rebounded, reaching all-time highs owing to strong order backlogs indicating growing demand and healthy business over the medium to long term. Despite the Covid‑19 crisis, major solar module manufacturers in China announced plans to double their panel manufacturing capacity in the medium term.

Renewable power producers have been mostly sheltered from the impact of the pandemic. Declining electricity demand and lower prices due to the Covid‑19 crisis resulted in sharp revenue drops for major utilities all around the world, especially those deriving revenues from wholesale electricity markets. Due to revenue losses and slow demand recovery prospects, the market values of utilities remain below pre-Covid‑19 levels.

In contrast, stock market prices for large renewable energy IPPs have recovered the losses of March and had reached new records by October. The solid performance of renewable IPPs compared with utilities results from the stable revenue stream they receive from existing projects with long-term (10-25 years), fixed-price contracts, which has mostly sheltered them from lower electricity prices.

Indexed stock market prices for major indices, 2018-2020

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Indexed stock market prices for traded energy companies, 2018-2020

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Impact of Covid-19 crisis on renewable electricity penetration and prices

Movement restrictions, lockdowns and the economic slowdown caused by the Covid‑19 crisis significantly reduced electricity demand around the world. In April 2020 relative to April 2019, power consumption had fallen 5% in the United States, 12% in Germany, 18% in Spain and 23% in India. Shares of wind and solar PV in electricity generation increased as a result, owing to their low variable costs, priority dispatch rules and long-term contracts – mostly through support policies such as FiTs, FIPs, CfDs and corporate PPAs, as well as continuous capacity deployment.

The combination of the demand shock, increased VRE penetration and low fuel prices pushed wholesale electricity prices down in Europe and the United States. In Germany, Italy, California, Spain and the United Kingdom, average spot market prices declined 30-50% from February to April.

Prior to the Covid‑19 demand shock, historical data show that wholesale electricity prices have been supressed in times of high VRE penetration when a smaller conventional generation stack was required. In Germany, California, Texas and Spain, electricity prices have already dropped due to higher VRE shares in their electricity mixes in the last five years.

Average monthly share of VRE-based generation and baseload wholesale electricity prices in Spain

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Average monthly share of VRE-based generation and baseload wholesale electricity prices in Germany

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Average monthly share of VRE-based generation and baseload wholesale electricity prices in CAISO - United States

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Average monthly share of VRE-based generation and baseload wholesale electricity prices in United Kingdom

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Average monthly share of VRE-based generation and baseload wholesale electricity prices in Italy

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Average monthly share of VRE-based generation and baseload wholesale electricity prices in ERCOT - United States

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The unprecedented demand shock may be temporary, but it has offered a glimpse of what future electricity markets with high VRE shares could look like. The rapid expansion of wind and solar PV will continue in the medium and long term, spurred by government decarbonisation targets, continuous technology cost reductions and increasing deployment outside of government policy schemes (such as through corporate PPAs and bilateral contracts).

In the medium term, electricity prices in markets with rising VRE penetration could very well remain at the April and May levels. Low prices do not provide the price signals necessary for investment in either conventional or wind and solar PV capacity without long-term contracts. Consequently, electricity market reforms may be required in the short term to attract investment in flexible generation and grids to cost-effectively integrate higher VRE shares. 

Renewable energy in heat and transport is less resilient

Global electricity demand is expected to be more than 2% lower in 2020 than in 2019, while renewables-based generation increases by almost 7%. Despite the pandemic, renewable capacity additions are expected to reach another record – proving their resilience. Policy-driven fixed-price long-term contracts have protected renewables from both lower demand and wholesale electricity prices.

Global heat consumption in homes and for industrial processes is forecast to decline more than 3%, mostly due to curtailment of economic activity. Renewable heat consumption also decreases, but by only less than 1%, demonstrating a certain degree of resistance to the crisis. While reduced commercial, industrial and construction activity has translated into lower bioenergy and waste use in several energy-intensive industries such as paper and pulp and cement, the use of renewables in the residential sector has been less impacted by the demand shock. In addition, renewable electricity use for residential heating is forecast to increase this year, prompted by greater renewables-based generation.

Renewables-based output and total demand change in the electricity, heat and transport sectors, 2019-2020

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Biofuels use drops the most of all renewable energy sources as a result of the crisis, due to a combination of lower transport activity and downward pressure on oil prices. Global gasoline demand falls 9% and diesel consumption 7%, while jet fuel demand plummets almost 40%. Biofuel production is expected to decline a record 11.5% in 2020 compared with last year. In spite of blending mandates, demand for biofuels declines much more sharply than for either gasoline or biodiesel because falling crude oil prices since the start of the pandemic have made biofuels less competitive with fossil transport fuels.

References
  1. Lockdown data available on the global level extend through mid-September.

  2. Despite all their flaws, stock markets remain a key indicator of the financial attractiveness of renewable power companies.