COVID-19 is a game-changer for renewable energy. Here's why

COVID-19 has brought the generation of energy from fossil fuels to breaking point. As the lockdown measures were introduced, global energy demand dropped precipitously at levels not seen in 70 years. The IEA has estimated that overall energy demand contracted by 6% and energy-related emissions will decrease by 8% for 2020. Oil demand is expected to drop 9% and coal 8% for this year, while crude oil is at record-low prices.

Previous energy crises provide insight into what happens when the oil price crashes and how the use of fossil fuels has subsequently rebounded. But this crisis is different, because it is demand-led. The scale of the fall in demand, the speed of change, and how widespread it has been have generated a radical shift that seems to be more than a temporary short-term drop in demand for fossil fuels, at least in the power sector.

With the fall in demand, renewable sources (mainly wind and solar) saw their share in electricity substantially increase at record levels in many countries. In less than 10 weeks, the USA increased its renewable energy consumption by nearly 40% and India by 45% (see graph). Italy, Germany, and Spain set new records for variable renewable energy integration to the grid.

Although the pandemic is circumstantial and unexpected, the current outcome for the power sector is not. The ongoing increase in renewable energy into the grid results from a mixture of past policies, regulations, incentives and innovations embedded in the power sectors of many forward-thinking countries.

These are three key factors behind the increase in renewable energy during this crisis:

1. Renewables have been supported by favourable policies. In many countries, renewables receive priority through market regulation. The priority for the first batch of energy to the network is given to the less expensive source, favouring cheaper and cleaner sources.

2. Continuous innovation. Renewable energy has become the cheapest source of energy. IRENA recently reported that the cost of solar had fallen by 82% over the last 10 years, while BNEF states that renewable energy is now the cheapest energy source in two-thirds of the world.

3. Preferred investment. Renewable energy has become investors' preferred choice for new power plants. For nearly two decades, renewable energy capacity has grown steadily, and now 72% of all new power capacity is a renewable plant.

During the COVID-19 pandemic, governments introduced full-lockdown measures that depressed electricity demand at historical levels (15%-30%) in many countries (see the graph below), and generated an oversupply of available power capacity. As the crisis hit, grid operators, sought the cheapest (and cleanest) supply source to balance the lower demand. Therefore, weaker electricity demand increased the share of renewables in the system while sending the more polluting and costly carbon fuels to the back of the queue. This effect happened even at a time of historically low fossil fuel prices, making carbon the biggest loser in the pandemic.

In a matter of months, fossil fuels for power generation have reached a disadvantageous breaking point, as the power mix shifted towards renewables in all major regions.

The interplay of technology development, regulations and market conditions during COVID-19 has triggered a faster paradigm shift for the power sector. But the longer-term effect of the crisis is yet to be seen, as softer lockdown measures have shown a recovery of demand.

These are some initial insights into the effects of lockdowns on energy demand:

1. The work-from-home economy has shifted peak demand. As millions of people stayed at home, the changes in routines modified the intensity of peak times. A flatter peak time curve means that there was less need for non-renewable backup and storage.

2. Several countries registered new records for clean energy generation. According to the EIA, renewable consumption in the USA has passed coal for the first time in 130 years, while the UK hit a record for solar generation in April. Other countries in Europe, such as Spain and Italy, also have set records.

3. The pace of the transition can be fast-tracked. The radical substitution of clean sources for fossil fuels thas happened in less than three months and without compromising the security of supply.

4. A higher share of renewables can bring challenges. Just as with peak electricity demand conditions, a drastic lower demand with a higher and unexpected percentage of variable renewable energy can stress the grid system's operation. The state of the network and grid infrastructure matters, as a more flexible, efficient and smarter grid allows for more interconnected plants and fewer bottlenecks.

Not all countries are ready for higher variable renewable energy integration, as the World Economic Forum's Energy Transition Index 2020 has reported. Developing countries are far down the ranking list.

As businesses, industry and households focus on restarting their operations, the lockdown provides a real sense of opportunity for the energy sector. It brings plenty of lessons about clean energy policy, changes in demand patterns and knowhow for a greener grid without compromising the security of supply. It also opens further opportunities for investment and innovation.

Yet, according to BNEF, the vast majority of the COVID-19 relief from governments so far will support carbon-intensive industries - around $509 billion - without asking for improvements. An example is the $123 billion bailout to airlines with no conditions on carbon reductions attached.

Businesses and investors can play a role in boosting clean investment, both by promoting low-carbon supply chains and by grasping the opportunities of clean energy markets. Imperial College reported this month that renewable power shares offer investors not only higher total returns relative to fossil fuels but also lower annualized volatility.

As governments begin to shape new regulations and support businesses for the post-COVID-19 world, their focus should be on:

1. Taking stock from the lockdown and promoting green conditions to sustain and effectively manage a higher share of renewables.

2. Redirecting investment and increasing innovation for improvements in batteries, storage, digital markets, blockchain and smarter grids.

COVID-19 has had a game-changing effect in accelerating the clean energy transition in the power sector.

Governments, businesses and households have 'kept the lights on' during the pandemic but with cheaper and greener energy. Stimulating investment, conditioning COVID-19 relief to green recovery, innovation and infrastructure opportunities in low-carbon and digital technologies are likely to keep the clean energy curve from flattening.