The Covid-19 economic crisis could prove an inflection point for climate change. So says the International Energy Agency (IEA), which argues that the incoming catastrophe can be lessened, if action on cutting emissions is built into the recovery.
The industry group said the decisions leaders make now would “shape economic and energy infrastructure for decades to come” and determine whether the world has a chance of meeting long-term energy and climate goals.
For its part, the IEA has devised a ‘sustainable recovery plan’ to be implemented over the next three years which it says could create 27m new jobs and ensure 2019 was the “definitive peak” for global emissions.
The strategy is largely based around improving global infrastructure – adding renewable energy capacity, upgrading electricity grids and improving the energy efficiency of buildings. Requiring an annual investment of $1 trillion (£800bn), the IEA believes its proposals would see global GDP come in 3.5 per cent higher in 2023 than it would otherwise have been.
An infrastructure spending spree
The IEA proposes spending $110bn per year to strengthen the resilience of electricity networks, allowing a higher proportion of renewable energy sources – whose output can be more variable – to feed into power grids. Improvements include rolling out digital infrastructure, scaling up cross-border interconnections and supporting decentralised power systems such as ‘mini-grids’.
National Grid (NG.) already has three interconnectors to Continental Europe up and running and three more are under construction. These ensure security of supply as well as allowing the import of decarbonised energy. Such endeavours are capital intensive and the IEA suggests that governments could stimulate investment by raising borrowing limits, providing tax credits and streamlining planning processes.
Under the IEA’s plans, grid upgrades would enable us to shift our power generation mix, accelerating the deployment of solar and wind power.
Renewable energy sources were on the rise pre-Covid-19 – according to BP’s (BP.) latest statistical review of world energy, renewables increased to 10.4 per cent of global power generation in 2019, up from 9.3 per cent a year earlier. But pandemic disruption has seen new construction slow this year. The IEA believes a recovery should involve “structurally reorienting countries’ energy sectors” and is suggesting an extra 130 gigawatts of new solar and wind capacity be installed annually to 2023.
SSE (SSE) is looking to contribute to a ‘green recovery’ in the UK post-Covid-19 through its revised capital expenditure plans – from £6bn of investment between 2019 and 2023, the group now plans to spend £7.5bn over the next five years on the transition to net zero emissions. This includes pushing ahead with its £580m Viking windfarm project as well as the £3bn Seagreen offshore windfarm in which Total (TTA) is set to take a majority stake.
Aside from energy infrastructure, the IEA has also homed in on modernising transportation, enacting policies to boost the uptake of electric and fuel cell vehicles and lowering the cost of battery production. But it also sees investment in public transport as vital, pointing to the electrification of bus fleets as well as suggesting an annual $90bn investment in long-distance transport such as high-speed rail. Although it is questionable how far this will stretch considering the latest estimate for the cost of HS2 stands at more than £100bn.
The IEA's proposed annual spending plans:
Source: IEA
The losers
Oil and gas companies are already counting the cost of the major drop in oil demand, BP mostly recently with its $13-$17.5bn write-off on a 30 per cent lower 2021-2050 average price forecast. The outbreak has also cut the world’s recoverable oil by over 280bn barrels by bringing forward peak oil demand, according to Rystad Energy.
With added stimulus away from fossil fuels in transport and electricity generation, this will accelerate changes already happening. Post-Covid, Germany has already put aside $500m for charging infrastructure, $1.1bn for automakers to “transform” as well as billions on rail upgrades, for example.
The shock of Covid-19 came after a 2019 slowdown in oil consumption growth. According to BP’s Statistical Review of World Energy, oil consumption last year grew by 900,000 barrels per day (bopd), or 0.9 per cent on 2018, after 10 years of annual average growth of 1.3 per cent.
Under the IEA’s plan, an extra $150bn annually would go towards “more efficient cars and electric vehicles”. This would deliver a significant boost to carmakers and those feeding materials into them, including copper and lithium, cobalt and nickel. This would certainly benefit the major diversified miners, like Rio Tinto (RIO), BHP (BHP) and Anglo American (AAL), largely through their copper assets.
In April, oil demand overall dropped 25 per cent, driven by passenger cars coming off the road. IEA data puts emissions in 2018 from passenger-carrying vehicles in 2018 at 3.6 gigatonnes (gt), well ahead of road freight vehicles on 2.4gt so any drop in petrol or diesel cars on the road has an immediate impact on emissions. The sustainability plan also says governments should cut fuel subsidies while oil is cheap, which could further dent demand. The countries with the largest subsidies are often exposed to oil prices as producers as well, and are facing an $800bn drop in revenue from the price crash this year, so might be forced into making these cuts in any case.
On an industry level, the IEA expects a $400bn, or 20 per cent, cut in capital spending in 2020 compared to 2019. This means less exploration, less infrastructure being built. In the longer term, as BP has outlined with its write-downs, an accelerated drop in demand will cut the value of projects and mean higher hurdles for new projects.
Gas is better placed than oil, under the IEA plan - at the expense of coal. Thermal coal is already in decline, losing its share of the global energy mix to gas and renewables according to BP, although this only contributed to carbon emission growth slowing in 2019, rather than falling overall.
