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Renewables face competitive test

The pandemic will test the real commitment of governments to support the sector

· renewable energy,post-covid19

ON July 8, 2020 the FORESIGHT published an opinion piece by our Senior Finance Adviser, Juan Alario. In the article, he discusses the impact of COVID-19 on renewable energy profitability and their competitiveness against fossil fuels, as well as the efforts needed to ensure a smooth shift towards renewables and a greener future.

If you are curious to read more about this topic, Juan has expanded on this ideas presented in the FORESIGHT article, below.

By Juan Alario, a former EIB Associate Director. He is a member of the GCPF Investment Committee and Senior Financial Advisor of GNE Finance

The renewables sector (RE) is also hit by the pandemic, but less than the rest of the energy sector. There are three different types of RE: RE for electricity production (41% of RE production in 2017(European Commission 2019)), RE for heating and cooling (48% of the total) and RE for transport (11% of the total). The business models and promoters of these three sectors are different. Renewables for electricity production are similar to any electricity generation investments. RE for heating and cooling have a business model and promoters similar to those in the energy efficiency sector. Finally, RE for transport concerns biofuels and electrical vehicles. This paper focuses on RE for electricity.

The supply of equipment and the capacity to work on the RE sites has been significantly disrupted during lockdown periods. The IEA1 estimates that the additional renewable electricity capacity in 2020 in Europe will be 38% lower than in 2019, due to disruptions in global and European supply chains.

The financial context will remain favorable to renewables

The capacity to mobilize funding to develop RE projects has not been affected by the pandemic. RE projects with a good risk-reward balance are very attractive to potential investors. Demand for sustainable investments exceeds supply.

Interest rate levels have a substantial impact on the cost of RE, because such projects are capital intensive. Here too, it does not seem that the pandemic may significantly affect the cost for financing renewables. According to recent analysis2, it is unlikely that the pandemic will affect the ultra-low interest rates environment prevailing in the EU, but difference between countries may widen.

Lower amount of renewables will be needed to achieve the EU objectives

The pandemic has not had an impact on the climate change policy of the European Union, which is the main driver of the expansion of renewable energy. At the contrary, it has reinforced the political commitment to fight climate change: “MEPs call for green and ambitious EU coronavirus recovery plan"3.

According to the EU policy, the RE objectives are defined as the ratio between RE consumption and gross final energy consumption (20% by 2020 and 32% by 2030). Lockdowns have substantially reduced the energy consumption. For instance EU electricity consumption has declined by 10-20% in most European countries during the lockdowns (Carbon brief-2020). In fact, the 2020 objective seems irrelevant now. There is extreme uncertainty about long-term developments, but most likely energy demand will remain lower than previously forecasted over several years. EU countries could increase renewable energy production above the level needed to fulfill their RE objectives, at least during the economic recovery period. This will both support the sector and contribute to a “green” economic recovery.

The capacity of governments to support the sector will be weakened

Most renewables for electricity are supported through the electricity tariffs and to a lesser extent through grants. Governments will have a limited capacity to support the sector directly, as it is certain that the level of public debt will be significantly higher after the pandemic. The key issue is whether the cost of supporting RE could led to a significant increase of electricity tariffs or grants. This will depend on their competitiveness

The impact on the renewables profitability should be generally limited

Concerning small RE for electricity4 (mainly small rooftop PV plants), the impact of lower electricity prices should be quite low for the most common remuneration system for this type of plants, which is feed-in tariffs, as they are fixed by nature. Cogeneration/net metering schemes are growing in importance. The impact of variations in electricity prices is less substantial than in projects selling in the electricity market.

All views expressed are strictly personal.

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