S energy The global
S energy The global green recovery The pandemic is the first crisis of its kind with unusual implications for the energy industry. A sharp drop in carbon emissions has revealed the size of the climate change challenge. Covid-19 and the oil shock have jointly disrupted the global transition to green energy. Businesses that had been establishing their position in a low-carbon world are now fixated on short-term stability. As the industry begins to look forward, the game rules have changed, and old strategies need re-examination. Players that understand the impact of their strategies and are agile to adapt will be the winners in the transition race. DEMAND FOR ENERGY TOOK A DRAMATIC TURN The pandemic illuminated the challenge to achieve climate change goals. The global lockdowns reduced daily carbon emissions by 17% compared with the 2019 average, indicating a potential total annual emissions decline of 4-7% – the largest reduction in history (Figure 1). This drop accompanied an unprecedented global economic paralysis along with a massive and rapid shift in consumers’ behaviours. To achieve climate targets and keep global warming below 1.5°C, global emissions need to drop by about 7.6% annually until 2030. Achieving this target in an economically sustainable way is a Herculean task. The rapid spread of Covid-19 triggered an unparalleled change in the demand for energy as the world came to a halt. Three trends quickly disrupted the world’s energy markets: Klipheuwel Wind Farm ___ __ As the industry begins to look forward, the game rules have changed, and old strategies need re-examination. www.kearney.com Figure 1 Pandemic-related lockdowns caused carbon emissions to drop Global CO 2 emissions from fossil fuels (GtCO 2 ) Impact of Covid-19: NOTE: Additional CO 2 emissions from land-use change and forestry are not included. Assuming that CO 2 emissions from other sources and other greenhouse gases, such as methane, will follow the same reduction trends as CO 2 emissions from fossil fuels. Scenarios presented correspond to 66% probability. Source: Global Carbon Project; Nature Climate Change, 18 May 2020; UN Environment Program, Emissions Gap Report 2019; International Energy Agency; CO2 Emissions from Fuel Combustion 2019; Kearney analysis 8 | Service magazine
energy S Source: Kearney analysis Effect of the pandemic on energy transition MACRO TRENDS TRENDS Transformation of – Decarbonising energy generation the power mix – Decentralising energy – Aggregation of services Improvement of – Alternative fuels for aviation and shipping mobility solutions – Increased hydrocarbon fuel efficiency – Transition to electric vehicles Change in – Decarbonisation of cities urbanisation models (energy and transport infrastructure) Impact of – Sustainability-driven investments: capital directed responsible finance to low-carbon technology – Financial instruments to support decarbonisation efforts (including use of CO 2 certificates and carbon credits) Raw materials – Circular economy, product end-of-life, and product demand shift carbon footprint – Migration away from plastics – Growing demand for clean energy raw materials Covid-19 – New ways of work (digitisation and remote working) behavioural shift Disorder in the supply chain. The crisis immediately impacted supply chains and companies’ ability to deliver their offerings affected their ability to generate revenues. A liquidity squeeze. As companies shut down and more people stayed home, the sharp decline in energy consumption put enormous strain on corporate revenues, creating challenges with cash reserves, operational and debt management, and access to credit. This sudden swing in liquidity made short-term stability a top priority – requiring companies to redirect funds to critical activities and press pause on non-essential projects, impacting the energy transition. Rise of renewable competitiveness. Various factors exacerbated by the pandemic reduced the profitability of oil and gas while simultaneously creating benefits for renewable investments in more stable and regulated markets. Due to travel restrictions, the energy industry saw the biggest decline in oil demand in 25 years – down 10% in March and 30% in April. Crude oil prices collapsed, worsened by the Saudi Arabia/Russia price war. Oil prices turned negative for the first time when the West Texas Intermediate (WTI) hit – a barrel on 20 April. Governments and industries alike are incorporating environmental commitments into their long-term plans for an economic recovery. The International Energy Agency reports that renewable energy was the most resilient power source amid the lockdowns. Energy demand declined 18- 25% each week (depending on a country’s lockdown intensity) and by 2.5% globally for the first quarter of 2020. Renewable electricity demand rose 1.5% in the first quarter of the year compared to 2019. 5 The world’s dramatic coronavirus response will have a long-lasting impact on the energy transition path. Two questions need to be considered: • How will Covid-19 impact the energy transition? • How should companies respond? 6 MAJOR SHIFTS (MACRO-TRENDS) RESHAPING THE ENERGY INDUSTRY FINANCE • A preference for low-carbon investments PRODUCE • Transformation of the energy mix • A shift in raw materials CONSUME • Changes in urbanisation models • A shift of mobility solutions • Product demand shift IMPACT ON ENERGY TRANSITION The destination is the same, but the pace has changed. As Covid-19 spread globally, energy-sector stakeholders shifted gears to respond to the crisis (above left). To understand the exact impact of the pandemic, management consulting firm, Kearney, conducted expert market analysis across nine sectors: oil and gas, utilities, aviation, consumer goods, automotive, private equity, chemicals, infrastructure and mining. Service magazine | 9
