The International Energy Agency (IEA) created a global stir in May when it warned that the Covid-19 pandemic will lead to “the largest drop in global energy investment in history”, with spending to plunge this year in every area from fossil fuels to renewables and energy efficiency.
But behind the headlines – many of them far more positive for renewables than other energy sectors – the picture is more nuanced.
Demand for energy has indeed dropped hugely as businesses scale back operations, international travel has virtually stopped, and millions of people work from home. Gas and oil have been particularly hard hit. According to the IEA’s report World Energy Investment (WEI) 2020, oil consumption could return to 2012 levels.
Plus, with the oil price extremely low, many major energy companies are cutting back on capital expenditure (CAPEX) in both oil and gas. But in the eyes of many governments, corporations and civil society actors this is a golden opportunity – the ideal moment to accelerate the transition to renewables.
Undoubtedly, the outbreak has given pause for thought and we expect the trajectory towards a low carbon society to continue. It also seems highly likely that some of the changes – such as lower energy demand – may be permanent due to changing industrial dynamics and increased home working.
Nonetheless, looking at the effects on financing of renewables projects reveals a mixed picture.
Firstly, the situation in the US appears to be less optimistic than many of the press announcements might suggest. Engie announced a $1.6bn tax-equity package from Bank of America and HSBC for 2GW of renewables on 9 April. However, while some big legacy deals are still closing, little new has been happening since March. The tap appears to be running dry on equity-funding for new projects. Smaller developers in particular are likely to struggle to secure tax equity this year.
On the other hand, Europe is seeing deals progressing in both solar and wind. Many investors are flocking to renewables since such projects are considered relatively safe and reliable. The fundamentals that support them – such as subsidies – have not changed, and the perception that the crisis might accelerate the energy transition is attracting investors.
The perception that the crisis might accelerate the energy transition is attracting investors.
Confident buyers, wary lenders
Moreover, although the economic fall-out from Covid-19 may lead to fewer buyers, those that remain have deep pockets. And they see themselves as being in a buyer’s market, especially with the current uncertainty around the energy market and the macro economy affecting valuations. These investors look at the low power price and see the potential to get a bargain.
In contrast, debt financing is becoming more difficult. There is plenty of capital available, but the crisis had led lenders to be more cautious and the cost of borrowing has increased – by up to 70 to 85 basis points in some cases in Europe and APAC. Overall, the future for debt financing looks more challenging and less liquid. Much of the activity that is continuing is around aspects such as re-financing debt that was previously factored into the timeline of operational projects.
A new normal?
Clearly, ‘normal’ will not be as it was before. The IEA WEI 2020 suggests ongoing investment in renewables projects may fall by around 10% for the year, with distributed solar investments hardest hit by lower consumer spending and lockdowns. And regardless of the levels of investment, it is not likely to be a uniform picture. For instance, Europe and the US may well move at different speeds. In the long-term, whether Covid-19 marks a tipping point for renewables remains to be seen.
Michael Dodd is director of UK & Ireland at DNV GL – Energy