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Energy Demand Will Never Be The Same After COVID-19, IEA Report Finds


COVID-19 is transforming the global energy system in ways unthinkable just four months ago. This crisis is, without exaggeration, the biggest shock to the global energy system in at least seven decades, and the implications of that shock will be with us for years to come. Companies, investors, and analysts need to drill down to understand the transformative events.

The International Energy Agency (IEA), one of the premier organizations for forecasting and analyzing the latest trends in global energy, just released a new report that provides an almost real-time view of the COVID-19 pandemic’s shocking impact across all major fuels. The IEA report is based on more than 100 days of real data so far this year, and includes estimates for how energy consumption and carbon dioxide (CO2) emissions trends are likely to evolve over the rest of 2020.

The bottom line? Clearly, the pandemic and ensuing economic lockdown have  slashed demand for all fuels, in particular those oil derivatives used for transportation. Planes aren’t flying, buses and cars aren’t driving.

Energy demand is also down across the board, as large industrial power users, non-essential businesses, schools, and government buildings remain closed.  Per the IEA report, in the past 100 days we have experienced a 6% decline in global energy demand, five times what was lost in the 2008 crisis. In absolute terms, this is equivalent to losing the entire energy market of India.

The report forecasts that advanced economies will be hit the hardest, with demand set to fall by 9% in the United States and by 11% in the European Union. The impact of the crisis on energy demand is heavily dependent on the duration of the lockdown and stringency of measures to curb the spread of the virus. For instance, the IEA found that each month of worldwide lockdown at the levels seen in early April reduces annual global energy demand by about 1.5%. Electricity demand has also severely been cut, in some cases up to 20% — the largest drop since the 1930’s Great Depression.

Implications

Large energy companies are being hit by lower demand for energy sources, including oil, gas, coal and electricity – and by subsequently lower prices for these outputs. This is causing cascading effects across the entire energy industry and its value chains. WTI’s drop to the one-time, horrifying  price point — $36 last month does not bring much confidence in the US shale patch – once an engine of American economic growth.

And the oil glut is not limited to the big three of production: U.S., Saudi Arabia and Russia. War-torn Libya, sanctioned Iran, mismanaged Venezuela, well-endowed Iraq all are waiting for their turn to supply the anemic markets. 

Natural gas prices have declined to all-time lows throughout Asia and Western Europe, exacerbated by mild winters and a preexisting supply glut. Subsequently, power prices across the developed world are falling fast, in some places by as much as half. Renewables capacity is still expanding globally, with solar PV and wind becoming competitive with gas in many locations.

According to the report, market prices for electricity have dipped below zero in the United States and a number of countries in Europe – including Germany, Denmark, and France.

Electricity security is another key facet of the COVID crisis. The availability of uninterrupted electricity is a necessity for the continued functioning of supply chains, teleworking, and for powering the healthcare sector, including the fight against COVID.

The flexibility of our grids are being tested, as demand spikes and cliffs put unprecedented stress on the system. Renewable energy sources, which fortunately do not require a supply chain for their fuel inputs, unfortunately add stress to these systems due their variable nature. The higher the penetration of renewable energy systems in modern electricity networks, the more flexibility, storage capacity, and smart grid capacity is needed to manage sudden spikes in demand. Otherwise, users will be at a heightened risk of blackouts.

On the plus side, carbon emissions have fallen at an unprecedented rate due to the economic lockdown, possibly paving something of a clear path for a green energy transition.  But such a transition requires commitment and a plan. The fossil fuel consumption decline and the parallel decrease in C02 emissions are only a temporary phenomenon. 2010, the year we recovered from the Great Recession, also saw highest year-to-year increase in CO2 on record. 2021-2022 may be not much different.

Policy Makers, Pay Attention!

Policy makers will play a crucial role in how the world’s energy markets look after COVID-19. The design of stimulus packages will shape how our nations link the economic recovery with a pathway towards cleaner and cheaper energy sources.  At the same time, regulators and utilities must also be wary of over-dependence on renewable energy sources in grids where flexibility is limited.

We cannot beat the Coronavirus without the lights on.  Bold vision, leadership, and technical expertise will be needed to turn this crisis into an opportunity for a cleaner, more abundant and resilient energy sector.  This is a one in a generation opportunity we should not miss.

With Assistance from David Pasmanik

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