With the IMF now predicting a greater than 3 per cent hit to global GDP, the rocky road to recovery is likely to speed the transition to renewables as countries spend big on infrastructure and ditch dirty coal.
“While protracted recessionary conditions could slow the investment in renewables and storage, and new projects might have a tough time right now, the crisis is very likely to accelerate the retirement of coal-fired power plants,” Ursula Tonkin, head of listed strategies at Whitehelm Capital, told Investor Daily. “In developed markets, reduced energy demand is impacting coal more than other generation sources given the higher marginal cost.
“For instance, on 28 April 2020 Great Britain set a new record for the longest period of coal-free electricity generation, going over 18 days without coal generation.”
That’s the longest stretch since the Industrial Revolution – but as more countries flag green stimulus packages, it’s unlikely that record will go unbroken. And with the economics of renewables starting to overtake political pushback, the transition “has its own momentum” – particularly in Australia, which is having a crisis of faith in the fossil fuel sector in the wake of the bushfire emergency.
“While politically fossil fuel may well continue to be supported, further declines in the capital cost of renewables and particularly battery storage [mean] economics will ultimately trump politics,” Ms Tonkin said. “Whilst at the national level there has been political inertia in recent years on renewables, at the state and local government and corporate business level there has been tremendous support.
“Furthermore, with reduction in both institutional investor and bank debt financing for fossil fuel-based projects, the commercial costs and risks of these projects are only increasing over time, whilst renewables are heading in the opposite direction.”
To reach the goals of the Paris Climate Agreement – net zero emissions by 2050 – there will have to be massive investment in infrastructure, and investors can benefit from strong growth in the sector. But they should also keep their eyes peeled for sector-specific risks.
“Investors need to be selective in the projects they consider, particularly greenfield projects,” Ms Tonkin said. “Investors should be watching for capacity constraints to ease, as well as keeping a close eye on the cost curve for storage. Capacity constraints [mean] investors need to be very focused on the geographical location of their projects and have strong visibility on potential additional capacity in the vicinity coming online.”
