The effects of the COVID-19 crisis on the energy sector are substantial and diverse: a decline in energy demand, shifts in energy use, and the risk of energy poverty as a result of reduced income. Without adequate policy responses, the crisis is bound to lead to more energy insecurity for vulnerable households and businesses. The COVID-19 pandemic hits a world in transition. As governments are moving from crisis response to economic recovery, climate and development goals should be front and centre.
The COVID-19 pandemic dominates public life across the globe, and it is not slowing down yet. The impact on the economy is devastating: as a result of lockdowns and restrictions on economic activities, global GDP growth for 2020 is expected to be negative (-) 4.5% (OECD). According to the ILO, labour income decline over 2020 is expected to be around 8-10% and the crisis has already wiped out as much as all new jobs created since the global financial crisis in 2008. Global energy investments are expected to drop by 400 bln USD (20%) in 2020 compared to pre-COVID projections.
In particular, many fossil investments have been postponed or cancelled. Whilst renewable energy investments continue to grow in absolute terms, they do so at a much slower rate than necessary to accelerate the clean energy transition. Wind and solar PV are the only energy investments that are still picking up, moving the share of clean energy investments in the total from 33% in previous years to 40% in 2020. The effects of the crisis on the energy sector are diverse and the full impact is not yet clear.
The following four direct (general) effects can be observed, but there are variations across countries, sectors, businesses, and households according to their specific vulnerabilities. First, the crisis has caused a decline in energy demand. During various national lockdowns, global electricity demand fell by 20% and, according to the IEA, electricity demand for the full year of 2020 may have fallen by as much as 5% globally and 10% in some regions.
Second, there are shifts in energy use: restrictions on travel and social distancing requirements have led to a significant reduction in transport services and fuel demand. On the other hand, with many countries encouraging ‘home-working’ where feasible, residential power use has grown significantly.
Third, there is the challenge of energy insecurity as a result of reduced income: while households are losing labour income and businesses are forced to scale back their activities, they may not be able to scale down their energy costs accordingly. Lastly, businesses in the power sector are confronted with supply chain disruptions as well as uncertainty over access to capital, affecting the development of new capacity as well as maintenance of existing infrastructure.
All this happens against the backdrop of a global climate emergency. As was clear before the pandemic started in early 2020, mitigation ambition and action in the current five-year window (i.e., 2020-2024) will crucially determine whether the Paris Agreement goal of limiting global warming remains within reach. The 2015 Paris Agreement on climate change calls for keeping warming well below 2 degrees C, and according to the latest scientific assessment by the IPCC, this means global CO2 emissions should be halved by 2030 and reduced to net-zero in, or shortly after, 2050.
To achieve this, most sectors will need to decarbonise fully in the coming three decades. Electrification is the most suitable decarbonisation option in a number of end-use sectors, for example for transport, or for heating or cooling in buildings and industry. With many activities switching to electric, demand for power capacity will grow, and long-term development of power supply will need to take decarbonisation choices in other sectors into account.
In fact, electricity supply needs to lead the way and transform even faster (i.e., in less than three decades) to enable other sectors to decarbonise. While the case for green recovery is overwhelmingly positive, lobbying power of fossil incumbents protecting and reinforcing their vested interests is strong. Analysis by Vivid Economics for The Guardian newspaper finds that (as of November 2020) in at least 18 of the world’s biggest economies, environmentally harmful spending dominates pandemic rescue packages. Only four countries – France, Spain, UK, and Germany – and the EU have interventions that will produce a net environmental benefit (The Guardian, 2020).
In order to drive ambition over time, the Paris Agreement contains an ‘ambition mechanism’ which invites countries to submit “long-term low greenhouse gas emission development strategies” (LTSs) and requires them to submit an updated NDC every five years. Every iteration should be a progression from previous submissions (i.e., no backsliding), reflecting the highest possible ambition given their national circumstances.
At the 26th Conference of the Parties to the UNFCCC (i.e., COP26), in November 2021, the first iteration of the ambition mechanism will be discussed. The combined pledges brought to the table there will be an indicator of whether the Paris Agreement temperature goals are still tenable or whether the renewed commitments are again inadequate. Countries whose pledges do not yet reflect their highest possible ambition, still have time this year to work on that – in parallel with detailing economic recovery efforts – which makes 2021 an important year for climate and energy.