Part I – Global Energy spending to fall $400bn due to coronavirus crisis
According to a recent report published by the IEA (international Energy Agency), global energy investment is set to fall 20% to USD 400bn in 2020, which represents the biggest annual decrease ever to be reported in the industry. Global energy investment is expected to be $1.5tn in 2020 vs. $1.9tn in 2019.
The market expected to see a 2% growth in global energy investment during the 1Q20, however due to Covid-related restrictions – which saw economic activities halted and travel bans enforced globally – energy investment is expected to fall by 20% in 1Q20 yoy.
While oil and gas investments are expected to drop by almost a third this quarter compared to 2019, with the US shale sector taking the biggest hit; investments in coal are projected to fall by 15%. Renewable energy investments are expected to decrease by 10% and funds channelled into energy efficiency are forecast to decline 12%.
Furthermore, additional new energy capacity coming online from renewables is expected to be lower this quarter versus 2019 on the back of delays in project completions and planned investments in utility-scale wind and solar projects.
Some countries and individual companies, with the hope of reversing the financial damage of Covid-19, will revert to cheaper energy sources like coal (an increase already seen in China this quarter). Although renewable energy has performed relatively well and there seems to be an increasing momentum for alternative fuels, we expect lower growth during the near-term quarters.
In our view, Covid-19 is a double-edged sword for the renewable energy sector. The sector is set to benefit from “clean air momentum” – a growing demand from investors for pension funds and large institutional money managers to cut ties with companies involved with industries such as thermal coal – but at the same time, in the shorter term investment is set to be redirected away from the energy sector in general due to price volatility and lower demand – the renewable sector has not escaped this during 2Q20, but we assess that it will once the dust settles.
The driver set to accelerate growth (the reallocation of capital) from carbon to renewable energy sources will perhaps be the very same factor slowing down renewables in the short term.
Our mid and long-term view is that the renewable energy sector will be the ultimate energy benefactor following Covid-19. Changing political and regulatory attitudes towards energy efficiency and cleaner air will support growth in the renewable market. Increased oil market volatility during this period will also contribute to the shift in focus from fossil fuels to alternative energy. We are inclined to conclude that renewable energy will experience a significant jump forward that will amount to a 5-10 year acceleration, and that this will happen over the next 12-24 months.