Like a bat out of hell part four: Renewables set for rebound
The fourth in a five-part series from the BRG energy and climate practice examines how investment in renewable energy has been temporarily slowed and why it will bounce back fast
As the global economy rebounds from the coronavirus pandemic, we are increasingly bullish on the future of investment in renewable energy and grid modernisation. This is contrary to widespread speculation about protracted delays to renewable investments and energy transition policies resulting from the ultra-low gas prices induced by Covid-19 and economic recession. Proponents of this theory hold that today’s low gas prices will last for years, pushing power prices well below renewable energy break-evens. However, this view ignores key long-term social and market forces.
Rock-bottom gas prices and falling power consumption have slashed electricity prices. Electricity demand in the US fell by up to 4.5pc in Q1 2020, according to the IEA. Global electricity demand fell by 2.5pc in Q1 and is expected to drop by 5pc for the full year. In areas that were among the first to implement full lockdown measures—such as France, Italy and the northwestern US—demand for power fell by 15pc in Q1. This is far more limited than the massive oil demand declines of approximately 30pc.
As a result, power prices for the main US electricity hubs have fallen to historic lows, with year-on-year averages declining by 47pc in March, 28pc in April and 26pc in May. In Europe, the decline in day-ahead power prices has been even more dramatic. For example, Germany’s year-on-year average prices fell by 27pc in March but by 54pc in both April and May, when lockdown measures were fully in effect (see Figure 1). However, with economies reopening and power demand recovering in Europe and the US, prices are expected to rebound rapidly.
In this environment, new investment in renewable generation capacity for 2020 looks to have declined by as much as a quarter to a third of previous forecasts. This decline may reflect some response to reduced demand and lower power prices, but near-term capital projects with financing in place rarely stop because of changes in short-term market conditions. It appears instead that the bulk of the forecast reduction this year is arising from disruption to renewable energy equipment supply chains and construction during lockdowns. These disruptions will likely lead to delays for up to 5GW of utility-scale solar projects in the US out of a total of approximately 15GW of planned new capacity.
Despite the above, our near-term outlook for renewable energy and natural gas combined-cycle gas turbine (CCGT) generation in late 2020 and 2021 is bullish for several reasons.
Natural gas and renewables are the generation sources best able to compete in a low gas- and power-price environment.
First, gas-fired generators are highly flexible and can balance variable energy from renewable wind and solar sources when gas prices are low, a task that neither coal-fired nor nuclear generators can accomplish. Second, renewable energy developments benefit from ultra-low financing costs, which can be locked in for the economic lifetime of the project. Third, renewable energy technology continues to improve, reducing costs. Fourth, policies for clean power and carbon reduction will be politically difficult to eliminate or delay and partially insulate renewables from price competition from plants running on fossil fuels. Finally, power demand has been less affected by the Covid-19 crisis than oil demand because of sustained residential electricity consumption amid greater remote working. Demand has also responded quickly to the easing of lockdown measures due to the impact of economic reopening on commercial and industrial power consumption.
While renewables and gas-fired generation are underpinned by low costs, coal-fired generation continues its long decline. The UN Environment Programme reveals that renewables have in recent years accounted for around 75pc of investments in the global power sector, whereas new investments in coal generation have declined—aside from Chinese investment in Africa. This has occurred because coal generation costs have remained relatively flat, increasing the relative cost of coal power compared with increasingly low-cost gas and renewable energy generation. In a recent study, the International Renewable Energy Agency (IRENA) found that, on average, new solar PV and onshore wind power cost less than keeping many existing coal plants in operation.
Against this backdrop, the near-term decline in power demand and prices makes it likely that utilities and regulatory authorities will accelerate the retirement of old, inflexible and expensive coal and nuclear plants because they cannot compete with power generation from gas and renewables and are unlikely to do so anytime soon. In fact, in 2019 renewable energy consumption exceeded coal consumption in the US for the first time since 1885, according to the Energy Information Administration (EIA). We expect this trend to continue over the coming months and years.
Gas and renewables
Natural gas and renewables are the generation sources best able to compete in a low gas- and power-price environment. A November 2019 report by asset managers Lazard revealed the levelised cost of energy (LCOE) for utility-scale generation resources. The report found that certain renewable energy generation technologies are cost-competitive with conventional generation technologies, including wind and utility-scale thin film solar PV (see Figure 2).
Lazard’s LCOE for coal is based on coal prices at around $1.45/mn Btu, which is representative of current market conditions for early June, with average coal prices for the main US basins now at $1.44/mn Btu. However, Lazard’s LCOE for CCGTs is based on a gas price of $3.45/mn Btu, which is far above current spot prices—which are hovering just above $1.50/mn Btu—and near-term futures prices—which remain below $2/mn Btu). Lowering the expected future gas price to a target of $2.50/mn Btu reduces the LCOE estimate for CCGTs to between $38/MWh and $61/MWh.
By mid-2020, the economic impact of the pandemic will reduce oil and gas investment, firm gas prices, interrupt renewable energy supply chains and reduce existing coal-fired generation. Thereafter, power demand will experience a faster and more complete recovery than oil. Along with upward pressure on gas and LNG prices as US shale production shifts from associated and NGL-rich sources to dry gas production, the power demand rebound will tend to firm power prices at the levels needed to support gas-fired and renewable electricity generation while continuing to render coal uneconomic. Over the pandemic rebound period in late 2020 and 2021, moderate reductions in gas supply and sustained low gas prices will keep competitive pressure on coal, accelerate coal retirements and open new opportunities for high-efficiency renewable and storage technologies in combination with gas-fired generation due to their symbiotic economic, operational and greenhouse gas (GHG) efficiencies.
This article is the fourth of a five-part series from the BRG energy & climate practice that analyses the near- and long-term effects of the Covid-19 pandemic on global energy markets, the energy transition, and the climate-change imperative. The next article in the series will assess the implications of the current energy market developments on the energy transition and climate change policy.
Part one, which analyses the impact of Covid-19 on the global economy and the demand for and supply of energy, is available here.
Part two, which looks at the impact of Covid-19 on the global oil market and the trajectory of its recovery, is available here.
Part three, which evaluates the knock-on effects of the oil market crash on the natural gas and LNG sectors, is available here.
Chris Goncalves is chair and a managing director of the energy and climate practice at Berkeley Research Group, LLC (BRG). He has 30 years of experience in the LNG, natural gas, thermal generation and renewable energy industries, with expertise in energy markets, economics and finance. He provides both expert witness and business advisory services.
Robert Stoddard is a managing director in BRG’s energy and climate practice. He has over 30 years of experience as an energy economist in the US and European electric power industry, both as an expert witness and business adviser. He is also CEO of an ocean wave energy technology company and a member of the Energy Working Group of the State of Maine Climate Council.
Alayna Tria is an associate director in BRG’s energy and climate practice. She specialises in financial, market and economic analysis for business advisory and dispute resolution in the areas of oil, natural gas, LNG and renewables.
Tristan Van Kote is a senior associate in BRG’s energy and climate practice. He provides analysis in the areas of power and natural gas markets, climate change policy and project finance.