The Energy Transition And COVID-19: A Pivotal Moment for Climate Policies and Energy Companies

Key Takeaways:

• The COVID-19 pandemic has drawn increased attention to climate policy and economic resilience.

• More than 10 times the emission reductions resulting from COVID-19 will be needed to meet the 2 degree target through 2050. However, the pandemic's effects will cumulatively lower energy sector CO2 combustion emissions by 27.5 gigatons over 2020-2050—equivalent to almost one full-year of emissions.

• COVID-19 has reduced long-term world oil demand by 2.5 million barrels per day. Not all adjustments to the demand outlook were downward. That decline is, however, not enough to substantively bring forward the year of peak oil demand that S&P Gobal Platts Analytics projects for the late 2030s.

• Lower global energy demand threatens gas more than other fuel sources as gas is squeezed between the decline in primary energy demand, the increasing penetration of renewables, and the stickiness of coal demand--particularly in Asia. Still, we do not expect global gas demand to peak over the next 20 years, owing to growing industrial use, led by China, India, and the Middle East.

• We believe the global growth outlook for renewables generally remains intact, but not all lights are green.  Notwithstanding the increased cost competitiveness of renewables and supportive policies, we also see important headwinds: decreasing subsidies and tax credits, lower power prices and competing traditional fossil fuels, as well as rising merchant risks, and ongoing integration needs with storage.

Key Takeaways:

• COVID-19 has altered three fundamentals drivers of emissions: macroeconomics, behaviors, and policy, that combined will lower energy sector CO2 emissions by 27.5 gigatons over 2020-2050. 

• However, this is only a minor step in the direction needed to meet the 2 degree target, which would require more than 10 times that reduction over the period.

• While changes in travel behavior typically do not meaningfully affect natural gas or coal demand because those fuels are not commonly used in the transportation sector, there will likely be second-order effects.

Key Takeaways:

• The European, U.S., and Chinese economies all reacted to the COVID-19 economic crisis with large monetary stimulus, but not all recovery policies will accelerate the energy transition.

• The EU recovery fund, agreed in July, dedicated €225 billion to the energy transition, to be invested in the next three years.

• The U.S. federal government has not provided any new support for green initiatives in stimulus measures to date beyond current tax incentives. The November election outcome will be pivotal for future climate change policies.

• In China, warning signs abound that the energy transition has stalled as policy stimulus ripples through the economy even as a new commitment is made to achieve carbon neutrality by 2060.

Key Takeaways:

• COVID-19's impact on the global economy and consumer behaviors has reduced long-term world oil demand by 2.5 million barrels per day, according to S&P Global Platts Analytics.

• However, some adjustments to the demand outlook were positive as weaker oil prices make electric vehicles less competitive, reduce the drive for efficiency, and stimulate underlying oil consumption.

• The weaker oil demand therefore is not meaningful enough to substantively bring forward the timing of the peak in oil demand that S&P Global Platts Analytics projects for the late 2030s. For oil demand to peak by 2025, drastic changes would need to occur to business and consumer behavior, including near full adoption of working from home, reshoring of supply chains, and widespread electrification of road transportation.

• Together with added COVID-19 concerns regarding ESG risks, weaker forecasts for oil demand are forcing oil companies to reassess investments and policies.

• The oil majors, which have the size and financial power to do so, might decide to develop renewables that would offer them options for adapting to changing energy scenarios, build different power assets, or gradually consolidate.

Key Takeaways:

• Lower global energy demand due to the COVID-19 pandemic threatens the future of gas more than other fuels over the next 10-20 years. Gas will be to some extent squeezed out by lingering coal supply and growing renewables.

• Still, we do not expect gas demand to peak over the next 10-20 years globally, owing to industrial demand rather than power generation. China, India, and the Middle East will account for 61% of growth over the next decade.

• Gas demand growth has probably peaked in the U.S. power generation sector, as utilities' strategies shift to renewables and retail integration.

• Smaller U.S. independent gas producers face the greatest credit impact, as the pandemic exacerbates preexisting pressure on their profitability, credit metrics, liquidity, and refinancing ability.

• In Europe, the Green Deal is unlikely to support gas in the long term, even if gas remains an important part of the energy mix owing to the phase-out of coal and nuclear power. Uncertainty about the future role of gas is beginning to weigh on gas utilities' regulatory returns.

• Large gas producers in Europe are focusing increasingly on decarbonization and green energy, or diversifying into growing markets in Asia.

Key Takeaways:

• COVID-19 has drawn increased attention to climate policy in Europe and is playing a role in the U.S. elections.

• We believe the global growth outlook for renewables generally remains intact, even if stimulus plans will likely prioritize employment and direct support measures to the economy over green growth--especially in China and emerging markets.

• Key risks for the sector are reductions in direct subsidies and tax credits as observed in China, Europe, and the U.S.; permitting; and a cloudier outlook for long-term prices.

• On the other hand, continued strong investor appetite and declining costs are allowing renewables to compete increasingly at grid-parity prices, but with lower returns and rising market risks.

• As a result, larger renewables players, with strong balance sheets and vertical integration to mitigate merchant risks, may be better positioned and could move to consolidate the industry.