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Coronavirus: Falling power demand is impacting clean energy

With the pandemic spurring a dramatic drop in economic activity across Europe, electricity, renewables and carbon prices have also plummeted Read More

(Updated on July 24, 2024)
Solar panels and wind turbines concept art

Much of the European economy is on some level of lockdown, with citizens and businesses in Italy, Spain, France, Germany and the United Kingdom all forced to curtail their usual habits, stay inside and wait until the coronavirus pandemic is under some sort of control.

No one knows quite how long these measures could be in place, of course, but in the meantime, the sudden downturn in economic activity that has plunged much of Europe and the rest of the world into a near-immediate recession already has had a dramatic impact on electricity use, with potentially significant ramifications for long-term decarbonization efforts, the wider green economy and the renewables sector, in particular.

“In most economies that have taken strong confinement measures in response to the coronavirus — and for which we have available data — electricity demand has declined by around 15 percent, largely as a result of factories and businesses halting operations,” Fatih Birol, executive director of the International Energy Association (IEA), wrote in a blog post Sunday.

He explained that in some regions with high shares of wind and solar generation, such as California and Spain, if demand declines and weather conditions continue as expected, it potentially offers an opportunity for renewables to take up an even higher share of generation than usual. Elsewhere, however, weaker electricity demand means power generation capacity is abundant, which presents significant challenges for how to operate baseload power — in the form of both fossil fuels and nuclear — while managing fluctuating renewables generation on the grid.

“This is an important moment for our understanding of cleaner electricity systems, including some of the operational challenges that policymakers and regulators need to address to ensure electricity security,” Birol said.

Meanwhile, the brutal collapse in oil prices has made coal the most expensive fuel in the world, with coal use falling as a result in the United States and Europe in the face of cheaper competition from natural gas and renewables, according to Bloomberg.

But while a decline in business, industrial and consumer activity is likely to almost certainly result in a sharp sudden drop in greenhouse gas emissions, an economic collapse is hardly something to be celebrated by environmentalists and certainly not by green businesses seeking urgent investment and economic and political stability.

In fact, BloombergNEF recently downgraded its forecast for solar and battery markets in 2020, while the European wind industry is also braced for disruption. Trade body RenewableUK, moreover, said in a statement that the sector’s “overriding priority at the moment is public health.”

Indeed, the medium- and long-term impacts on Europe’s electricity sector are still too early to call, and the short-term impacts for the European power markets are complex, as an analysis released this week by Ember — the carbon market-focused think tank formerly called Sandbag — shows.

Every country in Europe has seen electricity demand fall in recent weeks, down by around 2 to 7 percent week-on-week on average, according to Ember. But the situation varies significantly between nations. Italy, Spain and France — which have seen stricter measures of quarantine enforced for at least a week or two — have seen twice the level of falling electricity demand than the U.K., where Prime Minister Boris Johnson only Tuesday ordered all non-essential shops and public places to close in order to try to halt the spread of COVID-19.

Italy, which has suffered the highest number of deaths from the virus worldwide, has seen a total reduction in demand of around 20 percent over the past two weeks, Ember’s analysis suggests, and with further restrictions imposed in the country this week, it could yet fall further. Both France and Spain, meanwhile, have seen weekly falls in demand of between 10-15 percent, and again could see larger declines in the coming weeks.

However, in the U.K. at present little impact on electricity demand has been seen, although, as Ember’s electricity analyst Dave Jones tells BusinessGreen, the think tank’s analysis only takes in data up until Saturday evening.

“The only places you’ve got these major impacts so far are in Italy, Spain and France as of last week, but obviously this week is different and you would expect those big falls in electricity demand to start to be of that magnitude across other countries, and that will obviously impact electricity prices as well to some extent,” he said.

It is, of course, very early on in the pandemic crisis for Europe, as the U.K.’s situation shows, but China offers a clue as to how deep and long-lasting the drop in electricity demand could well be, according to Jones. There, where the pandemic first started in Wuhan, electricity demand was down 8 percent year-on-year in January and February, but with the virus spreading since then this is likely to have translated into a national demand impact for China of around 16 percent in February.

In short, and perhaps unsurprisingly, the drop in power demand is likely to continue for some time to come in Europe, and in the U.K. that decline has barely even begun.

“We know that is coming, but quite how big it is going to be, and how much of an impact that might have, is hard to tell,” said Jones, who cautions against the potential for a notable shift towards cleaner energy sources in the short term. “We are not in the realm where we’ve got so much fossil-fuel generation wiped out you’re going to shift towards zero pricing to renewables, or anything like that. The merit order is still coal and gas plants for most hours across Europe.”

Crucially, however, falling demand has had a significant impact on wholesale energy prices across Europe, which is where the knock-on effects on power plant revenues, renewables investment and project development start to look a little clearer.

Lower electricity demand means cheaper electricity prices, with competition greater amid abundant generation. As a result, all energy generators — including gas plants — are set to take a hit to revenues in 2020. However, falling demand has also dramatically hit carbon prices in the EU Emissions Trading System (ETS), which having hit an 11-year high of $30.46 per tonne last summer, have plummeted to around $16.32 per tonne in recent weeks. So, if it costs less to pollute, fossil-fuel generation will find itself on more of a level playing field with renewables.

“If you’ve got a lower electricity price and a lower carbon price, it’s going to be more of a risk for wind and solar,” Jones warned.

However, the crisis is exerting direct downward pressure on renewables prices too, it seems. In the U.K. alone, the oil price crash has had a dramatic impact — even if at this stage the impact of dropping electricity demand is less clear, according to Pexapark, which provides advisory services for companies seeking power purchase agreements (PPAs). Its analysis shows the price of renewable electricity has fallen by around 20 percent since early March, from just under $46.24/MWh to less than $37/MWh. Similar yet even stronger declines for renewable power prices have been seen in France, Italy and Spain as well.

The resulting impact on clean energy trading has been stark, with many PPA negotiations being stalled across Europe, which risks disrupting development of renewables projects and slowing down Europe’s green transition, according to Luca Pedretti, co-founder and chief operating officer of Pexapark.

“The current situation is dragging prices down across many markets, and at certain points, as is now the case for solar in the U.K., Italy, Spain and Germany, the price levels reach a stage where they don’t allow for new investment,” he told BusinessGreen. “And now, due to these same price drops, probably some investments will be postponed. New capacity will probably not come online until prices have recovered. Or, of course, until clean energy technology gets cheaper, but that is not something which happens quickly over just a matter of weeks, but rather something which plays out over months and years.”

It all amounts to a less than encouraging short and medium-term outlook for renewables. But the hope is that if strict lockdown measures quickly stem the spread of the virus, economies can get up and running again, resulting in immediate upward pressure on power demand and prices.

As such, Pedretti remains hopeful the current situation will only represent a short term blip for renewables. “I think structurally it will be temporary, but as for how long it lasts, we’re early in the crisis, so it’s very hard to say,” he explained. “On the utilities side, some are panicking and overreacting, while others are keeping calm and carrying on. But you can see opportunity everywhere.”

Indeed, with ambitious net-zero targets spreading around the world and clean technologies advancing, the long-term fundamentals remain extremely positive for green energy in Europe, and the EU Commission already has signaled it remains committed to its Green New Deal plans for 2020. Moreover, if growing calls from the IEA, the CCC and others are heeded and green stimulus measures are deployed to motor economies back into action once the worst of the pandemic has passed, there could be plenty of capital around to invest in clean energy. Equally, if the crisis is mismanaged, a full-blown global depression could set the clean energy transition back years.

There is little denying the short term road for renewables looks bumpy — as it does for the rest of the economy — but the brighter view on the long term horizon offers some cause for optimism. The big unknown is how long the crisis lasts and how quickly can renewables reassert their increasingly compelling competitive advantages.

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