ICIS VIEW: Clean energy transition will take coronavirus hit

Author: Roy Manuell

2020/03/18

LONDON (ICIS)--Disruption caused by the coronavirus is likely to slow down the implementation of clean energy legislation throughout Europe.

This has the potential to threaten the efficacy of the carbon market, stall the expansion of renewable capacity and slow coal phase out plans.

LEGISLATION

The coronavirus has already caused significant delays on clean energy legislation. In Germany, Europe’s largest electricity generator and consumer, the government has deferred key decisions on renewable energy expansion after cutting short a summit last week due to the virus.

Many thought Germany was expanding renewable capacity at too slow a rate to meet the 2030 targets even before the coronavirus.

Onshore wind growth in 2019 fell to the lowest rate for at least two decades.

Auctions for new onshore wind auctions have been underbid by more than 50%.

If clean energy policy decisions designed to boost growth now face delays due to the virus, investors may prefer to wait for greater legislative clarity. By then, the uphill climb will be even steeper.

The German coal phase-out legislation vote due in week 13 has now postponed for at least one month with a decision date not yet defined.

This may delay the first wave of capacity closures , keeping some coal plants online for longer.

More broadly, the landmark Green Deal planned to roll out across Europe in 2020 could also face disruption.

Some member states have called for its suspension while they assign resources to deal the virus.

Clean energy is fast slipping down the list of priorities for governments dealing with an unprecedented pandemic.

INVESTMENT

International Energy Agency chief Fatih Birol said on 17 March that countries should put clean energy “at the heart” of stimulus plans to counter the coronavirus.

Some, such as asset management company Aream, consider the situation an opportunity to invest in wind and solar due to their classification as critical infrastructure.

Nonetheless, the European renewables industry has already seen a knock-on-effect from supply chain disruption.

Some solar projects have asked lawmakers to allow for a delay in order to avoid losing funding. The WindEurope CEO said this week that delays on new project completion are likely and called on governments to be flexible.

EMISSIONS

An important caveat to add is that emissions are expected to drop substantially while major European economies implement strict measures to slow the virus spread.

However a dip in emissions in 2020 and perhaps 2021 will not be much help if coal plants are still running in 2030 and fewer renewable capacity is online than originally expected.

What has happened on the carbon market already illustrates the need for state-intervention to ensure the transition to clean energy sources.

The benchmark front December EU emissions allowance (EUA) has lost a third of its value since Italy announced a nationwide quarantine on 9 March, trading below €16/tCO2e on 18 March.

The last time the carbon market experienced a sustained period of economic slowdown it took a decade and a large dose of European Commission intervention to recover to fuel switching levels.

OUTLOOK

It is understandable that European governments have not provided much financial or legislative clarity that the clean energy transition will remain a key area of policy.

The focus in the first months of the outbreak has been keeping the lights on rather than cleaning up the electricity source.

Given the current outlook, the likeliest eventuality seems that the rate of renewable expansion will remain constant or decline over the coming years as investors wait for clarity and governments prioritise public health and the economy.

The onus will be on policymakers to provide incentives to investors amid the uncertainty and ensure that the energy transition does not stagnate.