Coal, Covid-19 and the rise of renewables
As Britain reduces its historic energy reliance on coal, Newton portfolio manager Paul Flood considers what legacy the dwindling use of this staple fossil fuel – amid the ongoing Covid-19 coronavirus crisis – might leave for the energy industry and investors in renewables.
In June, the UK went two months without burning coal for energy – the longest period since the industrial revolution¹ in what some hailed as a major landmark in the move away from CO2-generating fossil fuels to more sustainable energy production².
The shift was partly due to reduced electricity demand in the nationwide lockdown forced by the Covid-19 coronavirus pandemic. Yet, while a period of unusually sustained sunny weather also played its part, such a long period of coal-free power generation also demonstrated the benefits of the investment the UK has made in renewable energy and other power sources over the last decade.
According to International Energy Agency (IEA) estimates, the height of the Covid-19 crisis reduced electricity demand by 20% or more in countries with full lockdown measures. In May it forecast global electricity demand was set to drop by 5% in 2020, the largest decline since the Great Depression in the 1930s.³ The IEA added that renewable energy appears to have been the power source most resilient to Covid‑19 lockdown measures.
Against this backdrop, the future for coal-burning power generation, in developed markets such as the UK, looks increasingly bleak. Commenting on the shift away from coal and the recent impact of the pandemic, Newton portfolio manager Paul Flood says: “The UK has been working to move away from coal for a while now and we expect to see more coal generation come off the market as more renewable energy comes on.
“Part of the reason we went so long without coal being part of the mix earlier this year is clearly because the impacts of Covid-19 sharply reduced demand. Yet at the height of the pandemic, there was sufficient electricity supply from other providers and generators, including renewable sources such as wind and solar.”
Looking ahead, Flood sees a gloomy future for the beleaguered coal industry. He points to both the purchase and environmental costs of burning coal and more prosaic problems with increasingly dated coal fired power stations.
“CO2 emissions are not the only problem with burning coal to generate energy,” he says. “Beyond the cost of buying and burning coal it can also be quite difficult to turn coal generating power stations off and on. As a fuel, coal has limited flexibility.”
The UK is not alone in seeking to end coal-fired power generation. Other European countries are also seeking to do this, with Germany, whose grid is more reliant on coal than many other European countries, intending to phase out coal use. It seeks to end coal-fired generation by 2038 at the latest and has already agreed on a shutdown schedule for individual lignite power stations while providing compensation payments for operators.⁴
Elsewhere, ongoing reform of the EU Emission Trading System (ETS), in moves designed to cut greenhouse gas emissions by at least 40% by 2030⁵ – also poses a potential threat to carbon intensive coal generation in Europe.
A brighter future?
From a renewables standpoint, the recent pandemic, coupled with the slow death of coal, could deliver an unexpected bounty for more sustainable energy producers and their investors.
While the immediate impact of Covid-19 lockdowns is expected to have a negative impact on the commissioning and construction of some renewable projects – amid broader economic inertia -the longer term forecast appears much brighter.
About five million jobs are already associated with the solar and wind industries and the falling cost of new wind and solar projects over the past decade has also made capital investment far more productive – all of which is further bad news for coal and other fossil fuel producers.
Source: Lazard/Economist 2019
At a wider economic level, the UK and many other major markets face potentially dire economic consequences from the coronavirus pandemic and are now looking to marshal recovery. In the UK, this looks set to be primed by government spending, some of which, Flood hopes, will be earmarked for renewable energy projects.
In June, the UK government sketched out plans for what it calls a £5bn ‘new deal’⁶ aimed at building houses and renewing infrastructure which will include £3bn of energy efficiency measures which Flood welcomes.
“After the impacts of the Covid-19 pandemic, the UK government looks set to get the economy going again through fiscal spending and we expect a large part of that infrastructure spend will go towards the green economy and could help support the development of renewables in the future,” he says.
While Flood acknowledges renewable energy remains a variable power source, dependent largely on the weather, he believes ongoing national energy efficiency drives, the use of ‘smart’ technologies in metering and other areas of the grid all bode well for renewable energy operators and investors in the sector.
“Over the last 15-20 years we have continually driven greater energy efficiency out of our homes through means such as insulating homes better, LED lighting, smart electricity meters and through improvements to the wider grid system,” he says.
“As we get more renewables we also expect to see the development of more sophisticated battery technologies which will enable us to have more flexible power storage that could allow us to store electricity and bring it back to the market as it is required.”
All of this, Flood contends, could be good news for investors in renewables. He points to the role steady government subsidies can play in underpinning the value of investments in this sector, the diversification these investments can offer investors and the reliability of the sector in delivering dividends to shareholders.
“Throughout this year and the whole pandemic, renewables have continued to provide very stable revenues to investors. While we have seen a lot of dividend cuts in wider equity markets, renewables have continued to pay stable dividends throughout this turbulent period,” he concludes.
¹The Independent. Britain goes coal-free for two months – longest period since industrial revolution. 09 June 2020.
²Shropshire Star. Ludlow MP praises UK’s longest period without coal since Industrial Revolution. 11 June 2020.
³IEA. Global energy demand to plunge this year as a result of the biggest shock since the Second World War. 30 April, 2020.
⁴Clean energy wire. Spelling out the coal exit – Germany’s phase-out plan. 30 June 2020.
⁵European Council, Council of the European Union. EU emissions Trading System reform: Council approves new rules for the period 2021 to 2030. 27 February 2018.
⁶BBC. Coronavirus: Johnson sets out ‘ambitious’ economic recovery plan. 30 June 2020.
⁷FT. UK government’s £3bn energy efficiency plan ‘not yet a green recovery’, 08 July, 2020.