Natural Gas Trumps Clean Energy

The global economic slowdown brought on by the coronavirus pandemic is viewed in many circles as an opportunity for nations and corporations seeking to retool for a post-coronavirus world to move toward renewable energy sources as an alternative to a market currently dominated by oil and gas. The attractions of exploiting the global economic recession — and potential depression — and emerging from the current crisis with a more green-friendly posture are considerable. But beyond the social and political advantages of this approach, the fact remains that economic realities more often than not trump social imperatives in political decision-making. In an energy security world where economic realities will increasingly dictate outcomes, the edge enjoyed by the oil and gas industries in terms of cost-effectiveness and efficiency will hold back the more socially attractive competition from renewable energy.

Global energy producers have been hit hard by the precipitous drop in demand brought on by a worldwide economic downturn triggered by policies taken to contain the coronavirus pandemic. For the oil and gas sector, a price war between Russia and Saudi Arabia flooded a market already awash in a sea of cheap oil, further depressing prices. The economic consequences of this global oil glut are dire, nowhere more so than in the US, which is witnessing a record number of bankruptcies among oil and gas sector companies and millions of workers placed on unemployment.

The current collapse of oil and gas has been seen by many proponents of so-called clean energy — a broad term that encompasses a range of technologies, including energy efficiency, renewable energy (wind, solar, hydro, and nuclear), energy storage (batteries) and cleaner fossil fuels such as compressed natural gas — as an opportunity to position low-carbon sources of energy as a viable competitor to traditional fossil fuels. For the most part, the social conditioning required to gain public support for such a broad initiative has already been accomplished — from a purely public relations standpoint, renewable energy is seen as the ecologically sound alternative to power plants powered by coal and natural gas which, given their high carbon emissions, are politically challenged in this age of global warming awareness.

One of the biggest obstacles facing any surge in clean energy projects, however, has been their high upfront costs, especially when operating on the scale required from a utility perspective. At a time when coal and gas remained affordable and secure, it has also been difficult to build the political will to take on the major economic restructuring a meaningful transition to clean energy requires. However, in a post-coronavirus world, where the new economic norm is defined not by comparative economic performance, but rather the need for economic stimulus from large-scale injections of capital into the economy, many proponents of clean energy were hopeful that they would attract a meaningful share of economic stimulus offered by governments desperate to kick-start their economies.

Hit by the Virus

Clean energy, however attractive it is from a social and political perspective, is not immune from economic realities. It actually is getting hit hard by the coronavirus pandemic, too. In the US, where proponents of clean energy were hoping for a boost in the aftermath of what many interpret as the collapse of the US shale industry, the clean energy sector lost more than 600,000 jobs in March and April. Moreover, the prospect of even more crippling unemployment figures loom. Congress failed to provide any clean energy measures in the $2.2 trillion CARES Act signed into law in March, and congressional Democrats have failed to include specific relief for clean energy in the emergency package currently being considered by Congress. Without significant federal assistance, analysts predict that upwards of 850,000 US clean energy sector workers will be out of a job by the end of June.

It is not just US clean energy companies that are reeling. This month Nordex, a Danish manufacturer of wind turbines with a large-scale presence in Europe, withdrew its guidance for the 2020 financial year, unable to predict where the future will take it. This follows a similar action by another Danish-based wind turbine giant, Vestas, which withdrew guidance in April. While the economic stimulus package put forward by the Danish government secures salaries for employees, forestalling unemployment, it could not do much for the companies themselves. They face disruptions to supply chains, the stoppage of most ongoing installation projects and the collapse of new installation deals, which have virtually eliminated any demand for manufacturing.

While the EU as a whole has placed a premium on “going green” as part of any post-pandemic economic recovery, political goals are not always in line with economic realities. With competition for stimulus money so high, especially among the social service components of European society, any clean energy company not able to stand on its own two feet to exploit the social and political desire for a green economy will find itself lacking the capital to invest in the kind of large-scale projects necessary to make a meaningful transition away from fossil fuels. If the example set by Nordex and Vestas is any guide, few clean energy companies will be able to step up without a significant infusion of state capital, which, for the moment at least, does not appear to be forthcoming.

There are some exceptions. Portugal, which was heavily invested in renewable energy sources prior to the coronavirus pandemic, is restructuring national economic priorities to push for even more renewable energy investment. So far, it has been largely spared from the ravages of the coronavirus, and it is planning to build a solar-powered hydrogen plant that would be part of a hydroelectric project. The scope of the plant is ambitious, with plans for up to 1 gigawatt of power generation capability to be on line by 2023 — if sufficient investment can be acquired. But much of this investment will need to come from outside Portugal, and the availability of foreign capital will be constrained at a time when domestic needs dominate the economic priorities of its fellow EU members.

Even Germany, which has made the transition from fossil fuels to renewable energy sources a national priority, is finding it difficult to stay the course. A key aspect of the German plan is the so-called renewables levy, which funds the difference between wholesale power prices and government-guaranteed fixed energy prices. Wholesale energy prices have fallen dramatically, a phenomenon exacerbated in large part by declining oil and gas prices combined with all-time high feeds from solar and wind farms earlier this year. Already German politicians are calling for an end to the renewables levy to keep residential energy costs down and, in doing so, help restart the German economy. To make up such a shortfall, the German government would need to inject billions of euros to replace lost income generated by the renewable levy — money that could no longer be used to push for new renewable energy projects, whether in Germany or elsewhere in Europe.

The reality is that — with oil and gas prices at record lows and governments focused on economic survival — there is little scope for clean energy to compete in a market where energy demand has collapsed. At this time, governments seem unwilling to artificially sustain clean energy with massive government stimulus packages. Natural gas is cheap, and it will remain so going forward. Unlike clean energy, gas does not require massive upfront investment and long-term availability planning. For battered economies struggling to survive, let alone thrive, in a post-coronavirus world, the long-term security of natural gas as a power source offsets the social and political desire for clean energy. Until the global economy has recovered sufficiently to once again afford the massive outlays of capital needed to implement a meaningful transition to clean energy, natural gas remains the economic stalwart that most nations will fall back on for the foreseeable future.

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