At this time of crisis, the immediate issue is to solve the health and economic emergencies, and we salute the heroes of the medical and logistics services who are getting us through. However, when the crisis passes, a new world needs to be built, and COVID-19 has the potential to be the midwife of the energy transition from fossil fuels to renewables. The crisis is likely to bring forward peak demand for fossil fuels as a whole (first coal, then oil then gas), and weakens the lobbying power of incumbents. It creates space for policymakers to put in place a sustainable energy system and so enables the clean energy revolution to continue. In the midst of the chaos and despair that we face, this is a beacon of hope for the future.
The fossil fuel sector has had a pretty good run. After 200 years of continuous expansion, and with many governments and think tanks under their control, they were looking forward to many more decades of paying fat dividends to a lucky few. And yet the signs of the malaise were already there even before 2020 thanks to the growth of renewables and the rising regulatory pressure. Total demand growth for fossil fuels had slowed to just 1% a year, and in nearly 40% of the world fossil demand was already falling. In 2018 we calculated that fossil fuel demand would peak in 2023 if the rapid growth rate of renewable energy technologies continued. Stock prices had been underperforming for a decade, with the oil and gas sector dropping from 15% of the US stock market to under 5%. Investors were worried about financial risks, and governments were increasingly concerned about the millions of deaths from fossil fuel pollution, import dependency and the looming climate disaster. The sector was already deeply vulnerable.
And then came the crisis. Fossil fuel demand has collapsed and may never surpass the peaks of 2019. By the time the global economy recovers, all the growth may be met by renewable energy sources. The maths of what happens when a sector near its structural peak hits a cyclical downturn are pretty simple: the peak of demand is advanced by a few years. This is precisely what happened to the European electricity sector as it stumbled unsuspecting into the 2008 crisis. Demand for fossil fuels for electricity collapsed, and never again reached 2007 levels because by the time electricity demand recovered, renewables were large enough to supply all the growth; share prices fell by up to 90% as $150bn of assets were written off; the sector underwent radical restructuring, and was forced to embrace renewables and reinvent itself for the new world. And once the peak is passed, the fossil fuel sector as a whole will face an eternal scrappy battle for survival, struggling with overcapacity and stranded assets, with low returns and high risks. One area of fossil fuels after another will face its peak; we have likely already seen peaks in coal, in conventional cars, and across the OECD.
COVID-19 and the energy transition: crisis as midwife to the new – Carbon Tracker Initiative
At this time of crisis, the immediate issue is to solve the health and economic emergencies, and we salute the heroes of the medical and logistics services who are getting us through. However, when the crisis passes, a new world needs to be built, and COVID-19 has the potential to be the midwife of the… [Read More]