COVID-19 and the energy sector

The economic fallout from COVID-19 has severely affected the energy sector, and will continue to do so well into the future – potentially having significant implications for energy access in Sub-Saharan Africa and South Asia. Simon Trace, EEG’s programme director, explains more.


During the COVID-19 pandemic, the energy sector has faced multiple challenges, from huge reductions in demand and plummeting oil prices to supply chain disruptions and on-grid and off-grid projects being brought to a standstill. The full impact the virus will have on the energy market remains to be seen, but many of the issues being faced could have long-lasting implications for energy access efforts in Sub-Saharan Africa and South Asia, where hundreds of millions of people still live without reliable electricity.

It is thought the disruptions caused by COVID-19 are likely to affect electrification, slowing, and in some cases even reversing, advances. Current and future electrification plans, are, for example, likely to be compromised by the financial difficulties the energy sector is facing, as are the maintenance and upgrade programmes needed to provide a reliable service. A combination of falling demand, lower prices and a rise in non-payment of bills means that energy revenues going to governments and industry are set to fall by well over $1 trillion in 2020, according to the World Energy Investment 2020 report from the International Energy Agency (IEA).


Reduced energy demand and falling prices

Countries that have been hit hard by COVID-19 have seen a sizeable decrease in demand for power. A shift in people working from home has caused electricity demand patterns to take new shape, with weekday consumption patterns resembling those of weekends. And, as economic activity has declined, the energy requirements of major users, such as manufacturing plants and factories, has reduced.

Countries in full and partial lockdown were experiencing an average 25% and 18% decline (respectively) in energy demand per week in mid-April, according to IEA analysis of daily data. In India, the lockdown reduced power demand by 20-30%, particularly from high-paying industrial and commercial consumers. In South Africa, the lockdown led to a drop of 30% in energy demand, with energy-intensive mining and manufacturing industries, which account for about 60% of national consumption, not being fully operational.

Furthermore, a report from the International Energy Agency projects that global energy demand is set to fall 6% in 2020 – seven times the decline after the 2008 global financial crisis. It says the plunge in demand for nearly all major fuels is staggering, especially for oil, gas and coal. In fact, a recent report from financial thinktank Carbon Tracker has found that falling demand and rising investment risk is likely to slash the value of oil, gas and coal reserves by nearly two thirds, and that COVID-19 has hastened the peak for their demand.

The recent collapse in oil prices was partly related to COVID-19 and lower demands (global demand reduced by 29 million barrels a day from about 100 million a year ago). According to S&P Global Platts, the world still has one billion barrels in storage, and the data firm Fitch Group projects the global oil industry will lose $1.8 trillion in revenue this year.

Major global gas markets have also experienced price falls to record lows, with lockdowns and reduced industrial output stunting demand. Meanwhile, the coal industry, which has been in decline in many countries for several years, has seen demand falling further due to COVID-19. The IEA puts coal demand at 8% less during this year’s first quarter compared to the first quarter of 2019, with the significant drop attributed to lower demand in the electricity sector, in which two-thirds of coal is consumed.

The growth of electricity generation from renewables also appears to have slowed as a result of the pandemic – but so far renewables appear to be holding up much better than other major fuels. However, BloombergNEF has lowered its forecast for solar, battery and electric vehicles markets in 2020.


Non-payment of bills

Alongside this backdrop of reduced demand, utilities’ revenues are being further eroded through non-payment of bills. Lockdown restrictions and social distancing measures have limited people’s ability to earn a living, and have affected businesses’ profits, making it difficult for customers to pay for electricity.

Some governments have put short-term relief measures in place so that consumers continue to have access to electricity while they are unable to work and pay for their service. These measures have included discounted and/or delayed bill payments and bill payment ‘holidays’. In Côte d’Ivoire, authorities extended payment deadlines for all households, and will allow payments to be made in several instalments. Similar initiatives have been seen in Burkina Faso, Democratic Republic of Congo, Niger, Senegal, Myanmar and Nepal. However, unless compensated, such measures will directly impact utilities’ revenues and collections, further threatening their financial viability.

In the off-grid market, the COVID-19 Energy Access Relief Fund aims to enable off-grid energy companies in Sub-Saharan Africa and Asia to both maintain their customers' existing energy services and retain the staff required to deliver future services.


Reduced investment

Organisations with reduced cash flows and weakened balance sheets will be cutting back on investment. In fact, the IEA has said the COVID-19 pandemic has set in motion the largest drop in global energy investment in history, with spending expected to plunge in every major sector this year – from fossil fuels to renewables and efficiency.

According to the IEA’s World Energy Investment 2020 report, at the start of 2020, global energy investment was on track for growth of around 2% (the largest annual rise in spending in six years), but it’s now expected to plummet by 20%, compared with last year. The IEA says that in the longer-term, a post-crisis legacy of higher debt will present lasting risks to investment, which could be particularly detrimental for some developing countries, where financing options and the range of investors can be more limited (new analysis in the World Energy Investment 2020 report highlights that state-owned enterprises account for well over half of energy investments in developing economies).

The IEA report suggests renewables investment has been more resilient during the crisis than fossil fuel investment, but spending on rooftop solar installations has been strongly affected, and final investment decisions in the first quarter of 2020 for new utility-scale wind and solar projects has fallen back to the levels of three years ago.

According to Wood Mackenzie estimates, 2020 global solar and energy storage installations are expected to drop nearly 20% compared to pre-COVID-19 projections, and wind turbine installations are expected to decline by 6%.


Disruption to current projects and existing systems

Meanwhile, the projects that have the financial resources to go ahead are being hampered by COVID-19 related supply chain disruptions, quarantines, lockdowns, social distancing measures and travel restrictions.

For example, many of the world’s largest solar panel, battery and wind turbine manufacturers are located in China, and the COVID-19 restrictions imposed in the country are likely to have disrupted supply chains and delayed delivery of key components. This could have hampered construction programmes and increased costs as those commissioning works look to suppliers outside of China.

Supply chain disruptions also threaten the maintenance (and therefore reliability) of existing electricity systems, which in many countries in Sub-Saharan Africa and South Asia are already fragile and unstable.

Furthermore, COVID-19 will be compromising the resilience of existing infrastructure in other ways, with rapid changes in demand patterns (such as reductions in commercial demands and increases in domestic ones) testing system flexibility, and lockdowns, quarantines and travel restrictions resulting in depleted workforces.

An example of how countries may be coping with such challenges comes from Ghana, where lockdown halted on-grid programmes in Accra. As COVID-19 cases levelled off and various aspects of the lockdown were gradually lifted, every infrastructure contractor involved in improving the energy grid was asked to develop Health & Safety guidelines tailored to the COVID-19 context before restarting implementation.

It has become clear that the energy market has come under immense strain as a result of COVID-19 – and EEG is funding several projects on the relationship between the pandemic and the sector, with the aim of learning lessons that can be applied to future energy system planning, operation and maintenance. We are funding research, an online workshop and the production of several Energy Insights, including one that explores the targeted measures being taken by international energy-related organisations to support key players in the energy sector during the COVID-19 pandemic.

There has been much debate about the impact COVID-19 will have on all aspects of life – and energy is one sector that is set to change fundamentally. During the pandemic, the sector has seen huge reductions in demand and plummeting prices, households and businesses have struggled to pay their electricity bills, maintenance teams have been depleted, and supply chains, new projects and investment plans have been disrupted. There is however much talk of recovery, and the opportunity to ‘build back better’ in a way that reduces poverty, boosts growth and lowers environmental impact. The recent Tracking SDG 7: The Energy Progress Report presents policymakers and development partners with global, regional and country-level data to inform decisions and identify priorities for a sustainable recovery from COVID-19 that scales up affordable, reliable, sustainable and modern energy.

By Simon Trace