The Covid-19 pandemic’s abrupt arrival has disrupted the trajectory of many an industry and ushered in an unprecedented new socio-economic era. Seismic shifts in human behaviour have catalysed a major disturbance within the energy sector, on the sides of both supply and demand.
According to a recent report released by global management consultancy Kearney, global lockdowns have highlighted the need for universal clean electrification, as the natural environment has seemed to rejuvenate spectacularly in the wake of reduced human activity and offered a glimpse of what a cleaner world could look like.
“This glimpse will undoubtedly spur the already significant traction toward renewable energy supply that we had seen in the pre-Covid years,” suggests Prashaen Reddy, a partner at Kearney.
Reddy explains that pre-pandemic, the renewables complex, especially wind and solar, in Europe had finally achieved equalised cost with conventional non-renewable sources like fossil fuels. “Financing flowing into these projects was supported by low capex, low interest rates, and growing future power price curves, thereby incentivising Purchase Power Agreements”, he says.
However, the combined shock of the virus and the global jolt sustained by the oil and gas industries has been a significant speed bump in the transition to clean energy. The economic slump, which resulted in wide-spread liquidity pressures for many companies that had hitherto been focussed on their transition to renewable energy, forced them to respond by cutting back to ‘survival-mode’ and as such, were preoccupied only with their own immediate viability.
“Although commitments for the transition to green energy remains firm, the plummeting oil price has removed incentive and contributed to the delay in final investment decisions”, says Reddy. “The situation is further exacerbated by the generally tumultuous state of supply chains globally.”
On the other hand, renewable energy was declared by the International Energy Agency to be the most resilient supply of energy during the Covid-19 lockdowns. Therefore, in spite of the lockdown-induced downturn, there is more enthusiasm for sustainability-driven investments as energy production around the world is being decarbonised. “This is an era in which consumers are loyal to earth-conscious brands, and players across all echelons are now incorporating environmental considerations heavily within their road-maps to economic recovery,” said Reddy.
According to Kearney, governments may even decide to conditionally attach Covid-19 relief grants (or ‘stimulus packages’) to climate-change mitigation objectives, in favour of subsidising fossil fuel-based initiatives, as they have in the past.
“All of this may see the sector agitated into taking the necessary steps to gain the lion’s share of the flow of capital from the ‘investment wallet’ going forward”, says Reddy.
Along humanity’s road to a decarbonised society and the meeting for the sustainable development goals recommended in the UN’s Agenda 2030, the Covid-19 pandemic could prove more than a mere hiccup. But with a strong basis and sound strategic decision-making the renewables industry could emerge as one of the more confident sectors in future, although many players would be wise to consider the benefits offered by high-level financial guidance and expertise in avoiding liquidity problems.
Traditionally one major criticism with renewables has been its unreliability – the dips and surges in energy supply we experience due to fluctuations of the elemental forces of sunshine, wind and water. To mitigate this, Kearney recommends strategies to handle the impact of these natural peaks and troughs, like increased access to various markets; more sophisticated pricing models; acquisition of more efficient power-storage technologies; and streamlined mutually beneficial strategic partnerships between players.
But the shift towards renewables will not solely be driven by self-centred profitability decisions. In the era of conscious capitalism, there is far more transparency and information spreads very quickly.
“There is therefore a greater incentive than ever before to make altruistic decisions, and focus on investments which are sustainable, conscientious, and geared towards the greater good. Indeed, in this new paradigm and the economic environment that is emerging around it, such decisions may prove to be the most profitable ones,” concludes Reddy.
About Kearney: As a global consulting partnership in more than 40 countries, our people make us who we are. We’re individuals who take as much joy from those we work with as the work itself. Driven to be the difference between a big idea and making it happen, we help our clients break through. Visit www.africa.kearney.com/