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The impact of COVID-19 on the energy transition

Jul 06, 2020
6 min read
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By: Sverre Alvik, Energy Transition Program Director, DNV GL

The coronavirus pandemic will have a dramatic impact on energy supply and demand in the short term and will have lasting impacts once the pandemic dissipates. However, that will in itself do little to advance the world’s progress towards the Paris climate ambitions.

Energy use is strongly linked to economic activity, which has, and will continue to be, significantly impacted by the novel coronavirus pandemic: Our energy forecast is predicated on IMF’s longer outbreak scenario, where World GDP will shrink 6 per cent in 2020. The lingering effects of the pandemic will take the wind out of the sails of the world economy for many years – reducing World GDP in 2050 by 9 per cent, relative to pre-pandemic forecasts. Even with slower growth, however, by mid-century the world economy will still be twice its size today. In contrast, energy demand will not grow. In 2050, it will be about the same as it is today, in spite of a larger population and world economy. This is largely due to significant improvements in energy intensity, but also due to the effects of COVID-19.

An 8% drop in energy use

Before the pandemic, we predicted total global energy demand in 2050 at 456 exajoules (EJ), (Global energy demand using the latest historical figures was at 424 EJ in 2018.) Our modelling now shows that the pandemic will reduce energy demand through to 2050 by 8 per cent, resulting in energy demand in 2050 at almost exactly the level it was in 2018.

Improvements in energy intensity will remain the most important factor in reducing energy demand in the coming decades, and the contraction due to COVID-19 comes on top of this. That is as a result of the brakes applied to economic activity generally by the pandemic, as well as some specific sectoral impacts. Lasting changes linked to COVID-19 are mainly behavioural in nature and include the impact of the pandemic on the transport sector, especially aviation, but also on less office work and changed commuting habits, which will result in transport energy use never again reaching 2019 levels. Demand for manufactured goods globally will need almost four years to recover to 2019 levels, and the energy-intensive iron and steel industry, impacted inter alia by lower demand for new office space, may never reach its pre-pandemic heights.

Hydrocarbon challenges

On the face of it, this appears to be good news for decarbonisation – transport remains heavily oil dependent and iron and steel is one of the key so-called ‘hard to abate’ sectors, relying as it does to a large degree on hydrocarbons to supply high-heat processes. Declining demand in these sectors is one of the main reasons for the price weakness in hydrocarbons, with widespread write-downs in oil and gas assets. It appears likely that oil has already reached a supply plateau that we forecast to occur in 2022, prior to factoring in the effects of the pandemic.

It is certainly not game over for hydrocarbons, and especially not so for natural gas, which we forecast to take over from oil as the largest energy source in this decade. However, the reduced return on capital and the increased volatility in fossil fuel prices is making many investors look at these assets in the post-COVID world with a greater degree of caution; they may also now regard renewables assets more favourably, even though the pandemic is placing a temporary check on the expansion of renewable sources of energy. Renewables have first place in the merit order of the power mix due to their very low operating costs, and short design and construction times. These assets are therefore more robust, and we predict a slightly faster recovery of the non-fossil capital expenditure in the next couple of years than will be the case for fossil energy.

Limited long-term effects on the climate

With the earlier than anticipated plateauing of oil and the continued rapid decline of coal use, our forecast shows that CO2 emissions most likely have already peaked (in 2019).

Again, this appears to be good news from a climate goals perspective – but the longer-term decline in emissions is not significantly accelerated by the pandemic. Even with peak emissions behind us, and flat energy demand through to 2050, the energy transition we forecast is still nowhere near fast enough to deliver the Paris ambition of keeping global warming well below 2°C above pre-industrial levels. To reach 1.5-degree target, we would need to repeat the decline we’re experiencing in 2020 every year from now on.

To put this in perspective, the COVID-19 impact on energy demand only buys humanity another year of ‘allowable’ emissions before the 1.5°C target is exhausted (in 2029) and a couple of years before the 2°C warming carbon budget is exhausted (in the year 2050).

It should also be acknowledged that emissions have been declining in the first half of this year for the wrong reasons. The coronavirus pandemic is exacting a heavy and tragic toll on lives and livelihoods, increasing poverty and hunger and reducing growth prospects for those that need it most. There is a potential for a much more just and sound energy transition that does not cause the harm and disruption associated with the COVID crisis.

In our forthcoming Energy Transition Outlook (2020), which we will release in early September, we explore many of the technology solutions that can help to close the gap between our forecast global warming outcome and the Paris ambitions. Our view remains firmly that humanity already possesses the technology and knowhow to deliver on Paris. We also have the capacity to modify our behaviours and habits, and in this year’s Outlook we take a renewed look at energy-related behavioural change, and explore where and how COVID-19 may permanently change our habits.

Policy choices

However, the key to reaching the Paris goals remains policy: the political choices and policy delivered around the world that encourages the correct behavioural changes and enables the right technical solutions to scale.

Policy also represents the main uncertainty as to whether the pandemic will speed up or slow down the energy transition. It is unclear whether the enormous COVID-19 economic stimulus packages being lined up by governments will be spent wisely on renewable energy sources, or expeditiously on fossil sources in the hope of bringing larger numbers of people back to employment more rapidly. There are signs now of both directions being pursued, with strong regional variations. Our assumption is, therefore, that globally, the sum of the stimulus packages will not significantly impact the energy mix – but that remains an assumption. Time will tell.

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