The future of energy after Covid-19: Will the crisis and government relief accelerate growth of sustainable energy?
The Covid-19 crisis has impacted every sector of the economy – and the energy industry was not spared. Despite the challenging circumstances, a combination of market changes and government aid policies could create a real opportunity for increased investments in sustainable energy, propelling us towards a greener future.
The state of energy markets amid crisis
Global energy investment is facing its largest decline in history, with levels expected to drop by 20% and energy consumption dropping by 10% to 35%. A decrease in demand for fossil fuels, such as oil and coal, accounts for a large portion of the decline in demand. Similarly, oil and gas are expected to see the greatest loss in investment in 2020.
However, amongst the turmoil, renewables are showing themselves to be the outlier, with output and capacity expected to increase in 2020. Investment in renewables is also expected to be more resilient, although not untouched by the crisis, with an expected fall in investment of around 10%. This is in part owing to the fact that renewable demand has been less affected than other areas of the energy sector. But it is also owing to other factors intrinsic to investment in renewables: some technologies, such as solar PV and wind, are among the cheapest options for new generation, have relatively short investment cycles and can have higher equity returns.
While the costs of developing renewable energy infrastructure have in many cases decreased to become more comparable to (and in some cases lower than) the costs of developing power plants based on fossil fuels, renewable energy can still be more costly to produce. Additionally, liquidity and financing constraints are likely to be a feature for 2020 and for some time beyond. This means that the Covid-19 crisis alone may not be enough to propel a green energy revolution – in other words, the direction energy takes will in large part be determined by the investment choices made, and this will be influenced by the government relief on offer.
Will the European Commission’s general preference for sustainable energy initiatives for State aid continue during the Covid-19 crisis?
As discussed in our earlier post, the EC has guidelines in place to encourage States to allocate public funding to sustainable energy initiatives. This is likely to increase in the near future, with new EU State aid guidance expected to support climate neutrality and phase out of fossil fuels. Not surprisingly, state aid is at the core of the European Green Deal. This general preference for sustainable development has, to date, translated into emergency Covid-19 relief granted using two avenues.
First, the EC has encouraged national governments to attach green conditions to bailouts using State funds, as the EC itself could not impose “green strings” on Covid-19 aid under emergency State aid provisions. In addition, specific environmental factors have been mentioned by the EC when reviewing the compatibility of state aids granted by Member States with national funds:
- Renault. The EC approved a EUR 5 billion loan guarantee by France to the Renault group to provide liquidity to mitigate the economic impact of Covid-19. In its approval, the EC noted that Renault’s research, development and production of electric vehicles was “essential for meeting the EU’s climate goals”.
- Air France. The EC approved EUR 7 billion in loan guarantees and loans by France to Air France to provide urgent liquidity in the context of Covid-19. When approving the loans, the EC noted that “France has also announced plans for certain green policy choices as regards Air France. Good. Member States are free to design measures in line with their policy objectives and EU rules”.
To date, in the context of the Covid-19 crisis, there are no instances of State aid being sought by Member States or individually approved by the EC in favour of owners of non-renewable energy assets, or to promote development of such assets.
Second, on 27 May 2020 the EC announced requirements on companies meeting “green” targets in order to access funds in the EC’s EUR 750 billion recovery program - with Vice President and competition chief Margrethe Vestager noting that “if you use EU funds, you should follow our political goals”. This means that heavy industries, such as power plants, seeking solvency support will need to submit plans on how they intend to “go green” in order to get EU funds.
Given the newness of the EU’s recovery plan and as implementation is not expected to start until January 2021, we are yet to see how the imposition of green strings will play out when granting relief through EU funds.
A greener future?
While we are still in the early stages of Covid-19 relief deployment, the focus of the EC on meeting its ambitious green objectives coupled with its track record in approving Covid-19 State aid relief to-date, indicates that the EC is very likely to prefer and support sustainable energy initiatives going forward. This will particularly be the case where companies seek funds under the EUR 750 billion recovery program, but (depending on individual State uptake of the EC’s focus on green initiatives) may also apply where companies seek Covid-19 relief directly from Member States.