SERIES: COVID-19’s Long-Term Policy Implications - The Post-Pandemic Energy Landscape

The COVID-19 pandemic has rightly become the sole focus of the public health policy world, but it is also having far reaching effects into policy landscapes way beyond healthcare. This blog post is the fifth in a series that will explore how COVID-19 is changing American life, and as a result, impacting various policy areas. This series will explore changing American attitudes, examine new policy ideas, and project on legislative and regulatory activity we may see as a result of the virus in the months ahead. 

In a matter of weeks, the COVID-19 pandemic has shaken the world’s economy to its core and impacted nearly every major industry. Energy is no exception, with renewable and conventional producers alike suffering massive job losses and a decline in consumption. However, the two groups were not identically positioned prior the onset of the global tumult; this piece will aim to parse out how they might look in a post-COVID landscape.

Renewable Fuels

Prior to the beginning of the COVID-19 outbreak, renewable energy production had been experiencing robust growth for the past decade. This development can be attributed to market forces – e.g., increased cost-competitiveness, expansion of private investment, public preferences about “going green,” state and regional portfolio standards, etc. – and to public funding for both nascent and market-ready technologies. The gradual shift in public sentiment toward more seriously considering climate risk has boosted the attention paid to renewable energy.

Even with the strength that the sector has shown, the pandemic poses a number of challenges that may hinder efforts to quickly transition away from reliance on fossil fuels. Chief among these are supply chain challenges, liquidity issues, and permitting delays.

Wind

On three separate days in the past weeks, electricity generated from wind has surpassed that generated from coal. Such occurrences carry enormous economic and symbolic weight; as the number of these days increase, the perception of wind as a reliable source of power will solidify, ultimately leading to greater access to capital and increased market share.

In the short-term, analysts have indicated their belief that wind (and solar) companies are better positioned to quickly rebound than their counterparts in oil and gas. This confidence is echoed by the ratings firm Fitch, which argued that renewable generation sites are less susceptible to COVID-related disruptions than traditional thermal power plants, as their operations are less complex, require fewer workers, and are often in less populated areas. Further, as electricity demand returns to and exceeds pre-pandemic levels, developers can build wind farms to handle load increases more quickly than they can gas, coal, or nuclear plants. In times of economic strife, investors may be more confident in disbursing capital to projects that can quickly generate a return, rather than those with a more protracted investment horizon.

Despite these relative strengths, wind energy companies have encountered a number of roadblocks that could harm growth in the mid-term. With federal agencies working from home, permitting has slowed. Already, the Bureau of Ocean Energy Management has announced that a planned 120 MW offshore wind farm near Delaware will be delayed by a year as the agency continues its environmental impact assessment. Additionally, the turmoil of global trade has resulted in supply chain disruptions for a number of firms. While this has had a negative effect on projects already under construction, those that are still in the planning or permitting stages could see a delayed timeline as the most significant impact that they experience.

A policy tool that has proven beneficial to the wind industry is the production tax credit (PTC), which provides a tax credit of 1–2¢ per kilowatt-hour for the first 10 years of utility-scale wind electricity generation. Barring action by lawmakers, the current PTC expires at the end of the year. Wind energy trade groups have noted that the years in which the PTC was allowed to lapse saw significant decreases in wind installations. Should Congress fail to extend the PTC, it is possible that the U.S. could again see a drop.

Over the long-term, CEOs and forecasters alike believe that the shift away from coal, oil, and gas is part of a growing, inevitable trend. As the largest renewable generator of electricity, wind power seems poised to provide an increasingly large share of the nation’s power.

Hydropower

Hydropower is the most mature of the renewable energy industries. After a period of build-up, hydropower generation has remained relatively constant over the past decade, hovering between 250 thousand megawatt hours and 320 thousand megawatt hours, and comprising 6-7% of total domestic electricity. Although hydropower provides reliable, carbon-free electricity, some environmentalists have advocated against additional damming, citing the damage done to upstream riparian zones. As other zero-carbon technologies continue to improve in efficiency, the share of hydro as a component of the renewable mix is likely to decline even as its generation capacity stays constant.

Solar

After wind and hydropower, solar represents the third largest source of renewable energy in the United States. 2019 saw solar account for 40% of all new electric generating capacity, installing 13.3 GW, more than any other energy source. On a more extended timeline, solar has averaged an annual growth rate of nearly 50% over the past decade, with total domestic capacity now at 78 GW. Even with this protracted growth, the COVID-19 pandemic and the associated government responses have introduced uncertainty into the industry’s short- and mid-term future.

Much like their counterparts in wind, many utility scale solar projects are feeling the effects of a dislocated supply chain as they struggle to maintain project deadlines. On the residential side, the pandemic has significantly inhibited the ability of installers – by far the largest source of employment in the industry – to go to job sites. In an early-April survey, the trade group Solar Energy Industries Association said that around 40% of companies had begun to furlough or lay off workers in response to the virus. Forecasters have adjusted their 2020 and 2021 installation outlooks to reflect this shifting landscape.

A ray of good news can be found in community solar. The sector allows customers to purchase shares of a common solar farm, rather than have the panels installed by someone at their residence or place of business. With social distancing the expected norm for at least several more months, job growth from several companies in the community solar space – even as the industry as a whole sheds workers – points towards a positive future.

Government action will also play a large role in how solar emerges from this crisis. One of the key catalysts of the industry’s success has been the Investment Tax Credit (ITC), a federal subsidy that allows customers to deduct a portion of the cost of installing a solar energy system from federal taxes. The credit is set to expire at the end of the year. Those within the industry say that the ITC has been extremely helpful in advancing the market, and are pushing for an extension by Congress. Others, in response to liquidity issues caused by project delays, are asking for direct payments to retain workers until operations return to more stable levels.

Although the past decade has demonstrated the potential for solar to be an important component of the domestic energy mix, its short-term future has suffered setbacks as a result of the pandemic. Given its increased cost competitiveness with conventional forms of energy generation, we should expect to see further growth in the coming years.

Efficiency

The energy efficiency sector has been impacted more severely by the pandemic than perhaps any other energy-related sector. With a workforce of around 2.4 million largely centered around onsite work, essentially all residential and many commercial retrofits have ceased as stay-at-home orders and social distancing continue. Both public and private initiatives – e.g., the Weatherization Assistance Program and utility-led efficiency programs, respectively – have been halted or dramatically curtailed.

Prior to the spread of COVID-19, energy efficiency businesses had been the fastest growing energy sector, accounting for approximately half of the industry’s total job creation in recent years. With contractors largely unable to visit homes and businesses, companies have been forced to cut pay or furlough employees to stay afloat. Companies working on larger projects that can shift some of their work off-site for project design and development are not yet being affected as strongly as those who work on a smaller scale, but even they have indicated that there will be issues if the public health situation remains as it is.

Despite these significant challenges, those within the industry believe that public incentives could help with job retention and eventual growth. As some states begin to reopen portions of their economy, it is possible that we’ll see a gradual stemming of job loss as contractors are allowed to return to job sites. Over the long-term, the relative cost efficacy and political support for efficiency retrofits points towards a bright future.

Biofuels

Biofuel production in the U.S. began in earnest with the Energy Independence and Security Act of 2007, which established the Renewable Fuel Standard, a program requiring that 36 billion gallons of biofuels be produced domestically by 2022. Since the bill’s passage, production of biofuels has increased from 6.5 billion gallons to just over 16 billion gallons in 2018.

However, the success of biofuels is tied closely to that of oil, which is currently experiencing historically low prices and substantial declines in production as a result of the COVID-19 pandemic. With transportation grinding to a halt and oil stockpiles accumulating in storage tanks, ethanol plants have shut down and farmers have shifted planting in some of their fields to alternative, less-costly crops. As economies begin to gradually reopen and people start to drive again, expect biofuel use to closely track the growth of oil.

Conventional Fuels

Beginning with coal in the late 19th century, fossil fuels have played a significant role in shaping the modern economy. However, developments in alternative modes of generation have begun to challenge the supremacy of conventional sources, with renewables now comprising around 17% of domestic electricity generation. The COVID-19 pandemic has impacted the coal, oil, and natural gas industries in myriad ways.

Coal

Since the Bureau of Labor Statistics began recording industry-wide employment in 1985, U.S. coal has shed jobs steadily, with a peak of nearly 180,000 workers declining to just under 50,000 workers in March of this year. Even with a shrinking workforce, coal consumption continued to grow until 2007, after which its market dominance lessened as technological advances were made in natural gas extraction. These long-term shifts in energy production do not indicate a bullish future for the industry, and the COVID-19 pandemic is likely to further threaten the viability of coal.

Coal plants operate most economically when they able to run at full capacity. The virus-related shutdown of numerous segments of society has led to decreases in electricity usage. This short-term demand drop may lead to long-term harm to coal plants, whose cost-efficiency becomes less favorable when compared to other sources as plants run at diminished levels. Without a claim to inexpensive energy production, it is possible that coming years will continue retirements among the remaining plants. Indeed, analysis conducted by the Institute for Energy Economics and Financial Analysis predicted that coal could make up only 10% of U.S. electricity generation as early at 2024.

Even before the pandemic shuttered large swaths of the economy, coal was an industry whose best days were behind it. An aging fleet of plants – coupled with both weak energy demand and political pressure to decarbonize electricity production – suggest an insecure long-term future for coal.

Oil

Oil forms the bedrock upon which much of modern society is built. Transportation in particular relies almost exclusively on petroleum products. Despite its durability as a source of fuel and integration into daily life, oil has encountered difficult times in recent months as a result of dual demand and supply shocks.

The rapid closure of much of the economy has significantly decreased demand for oil. With fewer people driving to work and shipping lanes slowed as a result of health precautions, the International Energy Agency has anticipated a global decline during the second quarter of 23.1 million barrels per day below last year’s levels, and a year-over-year decline of 9.3 million barrels per day.

Meanwhile, in March, Saudi Arabia initiated a price war with Russia, causing the price of oil to drop more than 60%, with U.S. prices falling to less than $30 per barrel. The Trump Administration, fearing a collapse of domestic producers, brokered a deal between OPEC and Russia, in which oil production was cut by around 10 million barrels per day. Prices have remained depressed in the weeks since the agreement was reached, with oil futures falling into the negatives, as owners of the futures contracts were paying to offload them.

What does this mean in terms of the role of oil in the post-COVID energy landscape? At least in the short-term, we shouldn’t expect to see an immediate migration away from the fuel, as demand is expected to gradually pick up as economic activity builds and transportation patterns normalize. Further, the extraordinarily low price of oil, coupled with an economic downturn and the high sticker price of vehicles, may end up locking-in use and delaying a transition to lower-carbon alternatives. Over the long-term, as the transportation sector electrifies, battery storage technology matures, and political bodies incentivize cleaner fuels, oil consumption may fall.

Natural Gas

The development and widespread use of hydraulic fracturing (fracking) has led to a boom in natural gas production. Since 2010, natural gas generation has increased by more than 50% and now comprises almost 40% of utility-scale electricity generation in the U.S. However, much like other industries, natural gas has experienced the effects of the pandemic.

The production of oil and gas are closely related to one another. With oil at historically low prices and continued uncertainty for the foreseeable future, drilling operations have been curtailed across the country. Accordingly, forecasters are predicting that natural gas prices will rise next year as the slowdown in drilling leads to a decrease in the gas produced from oil wells. While this could raise energy prices for consumers, it would also help companies with any solvency issues that may have accrued during the economic shutdown.

Another area of promise for natural gas resides in the retirement of old and inefficient coal plants. Much of the gas industry’s growth in recent years has come at the expense of coal, and with the pandemic’s asymmetrical impact on the two fuel sources, gas is much better positioned to resume and expand generation than is coal.

Nuclear

Much like hydropower, nuclear energy has long been a source of low-carbon electricity generation to the grid. However, given the high capital cost of new plants and resistance from some environmentalists, there has been little new construction since 1990. As a result, generation has remained at steady levels in recent years.

The primary consequence of the COVID-19 pandemic on the nuclear industry has been its effect on station refueling, of which one-third of the nation’s plants have planned before June. This process can last up to a month and typically involves hundreds of technicians and other specialized industrial workers, and isn’t something that can be done remotely. Despite the public health risks presented, some plants have gone ahead and begun refueling, indicating that they’ve taken appropriate cautionary steps to protect their workers.

Over the long-term, the nuclear industry may see its generation capacity diminish as its plants age and renewable sources become more cost-competitive. The spread of the virus does not necessarily play a significant role in this forecast, but it could be demonstrative of the advantages that solar and wind – which do not require large gatherings of workers for continued operation – possess in emergency situations.

Energy Policy in the Presidential Campaigns

Throughout his first term, President Trump has been a strong proponent of American “energy dominance” and an advocate for fossil fuels. Dating back to the 2016 campaign, he has cast doubt on anthropogenic climate change and promised to return jobs to the coal industry. Even as market forces and the pandemic make coal less cost-competitive, the Administration has sought alternative ways to assist other fossil fuel sectors – such as oil and gas – by pushing for expanded loan access and purchases to fill the Strategic Petroleum Reserve.

Much of President Trump’s energy efforts have centered around rolling back regulations his Administration deemed stifling. The withdrawal of the United States from the Paris Climate Agreement, ending of the Clean Power Plan and Stream Protection Rule, and opening of the Alaska National Wildlife Refuge for energy exploration suggest a preference for a “full steam ahead” approach to production, with fossil fuels and low energy prices acting as essential components of a successful economic recovery. This theme has been echoed in campaign rallies, and should continue as the election draws closer.

The Biden campaign seems to be taking an approach that continues and expands upon his work as Vice President during the Obama Administration. He has publicly stated that he would rejoin the Paris Climate Agreement if elected, and all of his VP candidates – Kamala Harris, Amy Klobuchar, and Elizabeth Warren, among others – had proposed energy and climate plans of varying ambition during their respective campaigns. As Biden seeks to shore up support among progressives and younger voters, his campaign has teased a more comprehensive energy policy that focuses on a gradual phase-out of fossil fuels, with natural gas generation serving as a bridge to entirely carbon-free electricity.

However, the sharp economic downturn associated with the spread of the COVID-19 virus could throw a wrench into Biden’s clean energy push. It is a common political axiom that voters are more likely to support environmental-oriented policies when national incomes are rising, and an extended period of uncertainty could make any policy that raises energy prices a difficult sell. As the effects of the pandemic continue to develop, expect the Biden campaign to tailor its messaging to reflect shifting economic and political realities.

The Post COVID-19 Landscape

The global shutdown caused by COVID-19 has had broad economic implications for the entirety of the energy industry. Disruptions in global trade networks and reduced government permitting capacity have slowed projects in both the renewable energy and fossil fuel sectors. Wind and solar, after experiencing sustained growth over the past decade, are projected to see their installations decrease, but have the industry fundamentals to rebound rapidly post-pandemic. Electricity generation from hydro is likely to remain at stable levels.

Coal, an industry already hurting prior the onset of the virus, will continue to see its cost advantage eroded, and we may see increased plant closures as the economics no longer justify their operation. Although oil companies have been hit with the dual crunch of a supply glut and drastically reduced demand, their mid-term prospects seem likely to return to some semblance of normalcy as economic activity resumes and transportation picks up. Lastly, we can expect to see a bump in natural gas prices in the coming year as oil drilling slows, and its abundance and the capital already invested for its use suggest that gas will continue to be a part of the energy mix for some time to come.