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Effects of COVID-19 on Energy Investment

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Effects of COVID-19 on Energy Investment

Investment in the clean sector has been slowing for a few s now, after peaking in 2017. This is a situation that is only set to worsen as the impact of COVID-19 continues to squeeze liquidity conditions. Energy research Rystad Energy warns this could lead to a halt in the growth rate of renewable installations. We can also expect to see project execution delays, the postponement of auctions (which accounted for a staggering c.80GW of capacity procurement in ) and difficulties in operating and maintaining existing projects, especially when it comes to complex assets like offshore wind. While the good news is that banks are much better capitalised than they were in during the Global Financial Crisis, and a downturn in the oil market is likely to drive more liquidity to the clean sectors, the fact remains: liquidity has become more scarce since COVID-19 hit. We are increasingly seeing investors moving away from riskier opportunities. This could have a knock-on effect for the petroleum assets domestication to grow the economy by local investors and financing of projects in frontier markets as well as newer technologies where risk-sharing practices are not as well established. Smaller developers with projects not yet off the ground could also be hit hard, as their financing becomes scarce.

As market shutdowns continue around the world, daily consumption has fallen and power demand in New York has fallen in recent weeks. It remains unclear exactly how this type of shock will impact sub-sectors like renewable , which are somewhat protected by long-term power purchase agreements (PPAs). What we should be aware of, however, is that PPA prices are in many cases higher than market prices and, as the demand declines, there could be higher risk of curtailment coming through. Over the longer term we can also expect some repricing in the asset markets as investors grapple with higher off-take risk as wave of sovereign downgrades now hit the headlines from Mexico to UK to Oman.

Greenfield projects are already experiencing disruption as a direct impact of COVID-19 – large wind manufacturers GE, Vestas and Siemens Gaemsa have all reported plant closures. In solar, a shortage of installation components including inverters and modules is pushing prices up by as much as 15 per cent in markets like the US.

In our view, this may spell adversity for greenfield project bids that have already been awarded – some of these will be salvaged by higher quality bidders, but a number of these situations are likely to result in stranded projects which may never see the light of day.

The pandemic has led to a shortage of investments and projects, given the risks around executing new projects at this time, we would also expect to see procurement contract prices increase in the near- to mid-term. We may also see resource companies, particularly in the oil and gas sector, materially reducing investment into cleantech value chains at least in the near term. These companies have historically opted to be in the riskier part of the business (direct PPAs, technology etc) given their preference for higher returns, however, the COVID-19 situation means the conversation is shifting from business diversification into protecting core cash flows and liquidity. This is a situation that would have been unthinkable, even just three months ago.

Electric vehicle demand could be hit in the near-term, storage and electric vehicle (EV) are also expected to be significantly impacted by COVID-19 as on-going production disruptions and a restriction of labour movement in Asia causing production and supply disruption. manufacturers CATL, BYD, and LG Chem have all warned of an impact on their business. We also expect a significant and long-term impact on the speed of EV adoption as the sector faces a perfect storm of lower oil prices, which will delay the break-even point for EVs, and the upcoming recession, which will reduce the overall demand for cars as well as prevent consumers from paying the material premium demanded for EVs.

The clean opportunity

While the negative impact of COVID-19 on the clean sector is clear, some opportunities are emerging. Industry insiders have long complained of short-term build and flip investors bringing returns down to unsustainable levels. The current crisis offers an opportunity for long-term capital providers to enter into or expand their presence in the clean sector. But the biggest challenge and the opportunity for all of us is the unprecedented amount of stimulus spending that has been announced globally. A total of USD7 trillion (and counting) has been announced across tax breaks, government spending, money printed by central banks, and more. Stimulus could be a once in a generation chance for the industry to accelerate the low-carbon transition. The fossil fuel sector enjoys over USD400 billion of subsidies each – and the International Energy Association estimates that 70 per cent of the world’s investments is driven by governments.

This stimulus funding then offers a once in a generation opportunity for all industry participants including developers, investors and financiers to shape this spending to accelerate the transition and low-carbon agenda.

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