• Will renewable energy compete with oil and gas in the energy world after the Covid-19 pandemic?
• What is the future of renewable energy?
• What are the forms of competition between renewable and conditional energy?
Since the rapid spread of coronavirus that emerged from China and the negative social and economic effects that it has inflicted around the world, the whole gamut of the energy sector and the industrial economy has been affected, making the climate change system fall from the radar screen.
But we must prepare for the post-coronavirus stage in view of whether climate change has a key influence on the debate about the future of energy.
Coronavirus is likely to alter the market dynamics of different types of energy, mostly in favour of clean and renewable energy sources such as wind, solar, hydropower, and nuclear energy.
The Covid-19 crisis, low demand, and the shape of economy have brought about fundamental changes in two different ways.
The first is that the oil and gas industry has been shaken to its core, and the second is that the cost of capital at record low levels and returns have fallen to their lowest levels, and there will be billions of dollars in stimulus spending for the (energy) sector, looking for a safe haven.
The oil and gas industry has been paralysed by a 53% drop in Brent crude futures since its rise in May to about $37.8 a barrel, and a 68% drop in the spot price of LNG in Asia and Europe from the pre-winter peak in October last year to a record low week. The past is $2.80 per million British thermal units (MMBTU).
For crude oil and liquefied natural gas, this means that a lot of investment in the energy sector that was planned prior to the emerging of coronavirus will be deferred or even cancelled until oil and gas prices recover at the end of the year.
Strategic studies indicate that up to $210bn of planned oil and gas investments are now exposed to factors of the so-called ‘project risks’ in the event of an ongoing pandemic in terms of return on investments.
A Wood Mackenzie Research indicated that $110bn in investment would be deferred, with another $100bn pending and the new committed investment could reach $22bn if the most fortunate projects progressed.
This massive drop in spending on oil and gas will ultimately help drive the recovery in crude and LNG prices as supply tightens in the long run, but it also opens up a rare opportunity for renewables to seize a greater market share.
But what are the advantages of renewable energy?
The largest costs for wind, solar, and battery storage projects are pre-paid capital, and once these projects are run, operating costs are minimised.
In developing countries such as India, Vietnam, and other countries in Asia and Africa, renewable energy is likely to be significantly cheaper and faster in building and connecting electricity grids than conventional fossil fuel power plants.
In general, the Covid-19 pandemic is likely to alter the energy landscape long after the initial crisis has ended. With weak oil and gas, the time is right to take over renewable energy sources if the price of oil and gas continues to drop for a considerable period of time.
The big question now is: What will happen when countries lift their restrictions and withdraw policies of closure and social separation?
In light of the lack of financial liquidity and the decline in energy demand due to the global economic crisis, it is likely that new wind and solar energy projects, like other projects, will face difficulties in obtaining financing from banks due to the return on projects in light of the conditions of low oil prices.
Home- and small- business owners avoid buying expensive items such as solar panels, making home solar installations the most affected in the renewable energy sector. But the situation will be different if governments decide to direct support programmes to these types of projects.
What is a safe haven for energy investors?
The gains made by renewable energy during the past decade remain a source of confidence in the recovery of this sector faster than others. Thanks to the development of technologies, low prices, and continuous research on storing electricity, wind and solar energy imposes itself around the world as a clean, low-cost source that increases in feasibility day after day.
The sharp drop in oil and LNG prices in recent months due to lower global demand — especially demand in China; although we may see an increase in Chinese demand as economic activities recover in the coming months — as well as downward pressure on Brent prices may shift the market further in favour of buyers, spot LNG prices hit new lows as converted goods and oversupply hit the market.
With stocks at seasonal highs even before infection with the Covid-19 coronavirus, in addition to the strict market structures and contractual arrangements in place under LNG sale and purchase agreement (SPA) in the long run, we are not seeing significant uptake in additional volumes from Europe, Japan, or South Korea despite prices that are low – a scenario likely to be affected by the effect of the Covid-19 coronavirus on these same jurisdictions.
However, the continued drop in LNG prices will provide additional ammunition to buyers looking to renegotiate prices under long-term contracts through price reviews, or outside of those mechanisms — as we have seen in the past, as buyers seek to pressure the relationship between seller and buyer.
As was the case with previous buyer-friendly markets, buyers are not only seeking lower prices, but are also looking for other, more favorable terms in LNG SPAs, especially regarding quantities and scheduling — in an attempt to position themselves with the option of further lowering — the cost of liquefied natural gas in its portfolio, for its own use or for arbitration, when demand recovers and this strategy may weaken in the development of the renewable energy industry in future.
And this will create a strong competitor as the gas is an environmentally friendly energy and also an excellent alternative to future crude oil as fuel for power plants and others with competitive prices.
Therefore, in the near future, companies should consider an equal partnership and treat the clients as business partners, which will be beneficial for both.
This new business practice is very likely to be adopted soon.