The Wood Mackenzie Energy Transition Practice team in its a weekly update on coronavirus is looking at the impact on the global power and renewables industry.
Accelerating the scope and scale of coronavirus containment risks near-term project execution, while longer term fundamentals rest on a demand rebound.
Technology value chains have varying levels of exposure to supply side constraints and potential scale of demand erosion.
- Asian dominant supply chains for solar and energy storage are in the process of rebounding after contractions in February. Moving forward, near-term development activity and local logistics in leading European and North American markets are expected to outweigh lingering supply issues.
- The wind industry’s supply chains are much closer to market in Europe and North America and will be impacted as production and logistics are curtailed. US projects remain under the added pressure of qualifying for the production tax credit, however restrictions in many US wind regions remain limited compared to Europe at the current moment.
- Electric vehicles (EVs) remain particularly exposed due to a nascent supply chain and being largely a premium consumer purchase. The outsized decline in EV sales compared to ICE in China January and February highlight this impact. Long-term fundamentals remain strong but gigafactory facilities are likely to be delayed and fledging EV manufacturers could face bankruptcy. Declines in EV sector demand may be gains for the stationary storage segment but the situation remains fluid.
Regional power markets primary risks centre the depth and duration of demand destruction should economic standstill become a prolonged recession. Gas generators must navigate uneven impacts of simultaneous oil price collapse.
- Italy’s demand shows an 8% decline from the previous week, with similar declines expected as more countries impose restrictions and industrial demand to be particularly volatile. European gas generators will bear the brunt of demand loss where, despite low LNG prices, a carbon price decline bolstering coal and supply swings from variable renewables generation during the relatively productive spring period will be a significant determinant of gas demand.
- In North America, Texas and Alberta could see outsized impacts because of both their energy-only market structure and heavy exposure to O&G activity that will limit scarcity driven prices throughout the summer. Outside of these regions, reserve margins are significant (>25%) and demand growth was already expected to be relatively lacklustre. This means that new contracts, particularly those without any policy impetus, are at the highest risk. C&I offtake could be particularly vulnerable.
- Latin America’s fortunes are linked to those of global markets as a source of raw materials and the automotive supply chain. This will diminish demand in key markets of Brazil, Chile, Mexico and Argentina and likely lead to reduced or delayed auctions and challenge project financing.
- China remains a market to watch for its ability to rebound from an aggressive response. Across Asia, low LNG prices challenge both coal and renewables.
Carbon emissions in 2020 will drop as a result of national responses, while the longer-term fundamentals of the energy transition remain in place.