COVID-19 and the Renewable Energy Sector
Vivek Sen, May 6, 2020
The COVID-19 pandemic has adversely affected all sectors of the global economy. The International Monetary Fund (IMF) has revised its global GDP growth estimate from 3.3% from just three months ago to a contraction of 3%, something not witnessed since the Great Depression of the 1930s.
The energy sector has not been immune to COVID-19. The outbreak has contributed to a dampened demand for oil, where global oil demand is expected to fall by a record 9.3 mb/d year-on-year in 2020. The full range of consequences for the energy sector are yet to be revealed and are difficult to predict. However, it is already clear that the demand for energy resources has dropped, prices have plummeted and non-payment of utilities bills by end-consumers will have a detrimental effect on the overall value chain.
A similar trend of falling demand and price reduction has been observed in the electricity sector globally. We saw demand for electricity falling by 25% in Italy, 20% in France, 12% in the United Kingdom. It was a similar case in India too, where the electricity demand fell by almost 26% in the months of Feb – April 2020, mostly on account of reduced industrial and commercial load. The pinch of reduced demand is already being felt by the highly stressed electricity distribution sector and is bound to impact the renewable energy value chain in short and medium term.
Some of the immediate challenges that the renewable energy sector must grapple with are delays in the construction of new projects, delays in financial closure, disruption of supply chains for projects under construction, payment defaults by renewable energy off takers, reduced offtake from the offtaker due to reduced electricity demand for projects that are operational, and working capital shortages for small-sized projects.
While the situation is challenging, it provides ample opportunities for supporting the electricity sector in general and the renewable energy sector specifically. Measures taken by policymakers, regulators, and market participants can determine the well-being of the renewable energy value chain. Certain measures in some countries have already been taken to support the renewable energy sector. For example, extending deadlines for renewable energy producers for the commencement of sales within the auction system, as seen in Poland.
The duration of the COVID-19 crises is unknown in India, and we anticipate a shift in government priorities towards addressing socio-economic challenges post the crisis. This would certainly include addressing concerns of the energy sector in India and in particular the electricity sector. Clean energy will be at the heart of all incentive plans that are created and adopted to counter the negative impacts of the COVID-19.
The time is right for India to look at renewable energy as the energy source of the future beyond COVID-19. The opportunity exists for an increased focus on transitioning to clean energy in all the important economic sectors of the Indian economy—renewable energy is adopted as the primary electricity source for the health and education sector; renewable energy is modelled as the energy source to deal with all kinds of natural disasters; and higher renewable energy is used to contain CO2 emissions from the electricity sector in India. Renewable energy, being already cost competitive, permits all this happen.
There are however a few necessary conditions to be achieved in order to seriously rejig our policy perspectives to cement renewable energy as the electricity source for future. A good starting point could be to revisit existing electricity subsidy mechanisms. Redirecting fossil fuel subsidies to the renewable energy sector coupled with practices such as the direct benefit transfer of the electricity subsidy will make electricity tariffs cost reflective across all consumer categories. This will only increase the affordability of renewables in long run. A separate renewable energy law or a policy would foster the further adoption of renewables. It is heartening to note that the recent proposed amendments in the Electricity Act discuss these and many other ways to mainstream renewable energy in India.
Vivek Sen is Associate Director – Clean Power Program, Shakti Sustainable Energy Foundation.