The ‘new normal’: the real challenge

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The ‘new normal’: the real challenge

It seems, that the coronavirus crisis comes to an end or at least concludes the first round. But now, it’s when in terms of contraction of demand, we will really see the effects. The next few years are full of uncertainties and risks, but also of opportunities within the electricity sector and now we are asking ourselves… What will the ‘new normal’ bring?

Energy demand effects

According to European Union forecasts, the pandemic is expected to cause an unprecedented contraction in economic activity. Production should begin to recover strongly once restrictions are lifted, but it will be uneven across sectors, and the loss of some production will not be fully recovered within the forecast horizon. According to the European Commission’s forecasts, GDP is expected to contract by 9.4% this year, but to recover by 7% in 2021, starting in 2022 almost 3% below 2019.

Source: European Economic Forecast. Spring 2020. European Commision

According to the European Commission’s “European Economic Forecast” report, disturbances in the world economy and weak demand may prevent the normalization of industrial activity before the end of the year. With the onset of un-lockdown, the health crisis will inevitably turn into a financial crisis, which could lead to the worst economic growth figures in history for the second quarter of the year, but most forecasts point to a strong upturn during the second half of 2020 and 2021, although almost all agree that a recovery to 2019 levels will not be possible for at least two and a half years.

As we have said on several occasions, there is a relationship between economic growth rate and energy demand rate of change in recent years. Therefore, on a regression basis, we have estimated that the reduction in energy demand in 2020 will be 6.03%, and that it will begin to recover in the second quarter of 2021. But recovering 2019 levels will be difficult at least, not only because the variation in GDP is an early procyclical indicator of demand, which would take longer than GDP to recover, but also because of the energy intensity that began to fall in 2012, given the increased weight of services in GDP after the 2008 crisis.

Source: own elaboration, data until Q12020 from INE & REE.

The following graph shows what the demand would look like this year and next:

Source: own elaboration, data until Q12020 from REE.

But an upsurge in the pandemic, or a longer than currently predicted increase in its duration, could cause a much larger drop in GDP than assumed in the baseline scenario of this forecast, and the European Union reports already warn of this. It also warns that the crisis could lead to distortions in the single market if economic differences between Member States are exacerbated.

The European Union forecast expects a recovery, assuming that:

  • containment measures will be gradually lifted.
  • After these measures, the pandemic will remain under control.
  • the unprecedented monetary and fiscal measures implemented by Member States and the EU are effective in cushioning the immediate economic impact of the crisis, as well as limiting the permanent damage to the economic fabric.

Therefore, under these hypotheses, the scenario drawn up by the European Union not to prolong the fall in GDP any longer than necessary is based on a rather profound disclaimer, where any alteration of the variables may lead to a second recession or an even greater fall in GDP.

Will the PNIEC (National Integrated Energy and Climate Plan) pick up on the effects of the economic crisis?

It is a fact that all threats can be transformed into opportunities. It seems that in the first instance the expected contraction in demand has not made a dent in the request for access permits for renewables, which implies that the momentum of private investment continues, which as Sonia Diaz commented in the blog “The virus that deflated (or not) the bubble” can be an opportunity for the energy transition.

The following table shows that according to REE data as of April 30, there are 115 GW of generation between wind and solar photovoltaic with access permits waiting for connection by REE, far from decreasing, the requests are increasing.

Source: REE

 

Government in the last revision of the plan included a new remuneration framework through auctions (for more information read “The new Climate Change and Energy Transition Law” by Marta Merodio) and support programs, which will try to avoid mistakes made previously with the insertion of other technologies.

It will be a challenge to gather stimuli and efforts from public and private investment for the energy transition. The delicate moment we are in will act as an accelerator for those economies strategically making this transition. R&D&I in new technologies, storage, demand aggregator projects and the plans and regulatory framework of each country and the European Union will be essential to carry out the conversion in a satisfactory manner.

But we must be careful, the EU’s growth prospects predict a contraction in investment by 2020.

Source: European Economic Forecast. Spring 2020. European Commision.

How will the electricity balance be affected?

If we take away from the 2020 demand forecast, the pumping consumption, the peninsular link and the interconnections between countries, using for all the 2019 balances and consumption, we would have one generation left for this year. If we consider the economic contraction, our forecast implies a reduction in demand for 2020 of 48,000 GWh with respect to PNIEC’s target scenario and 35,000 GWh with respect to the trend scenario, which raises a number of questions.

Source: own elaboration, data until 2019 REE

If demand does not recover for at least two and a half years, it will be necessary to adapt plans to growth expectations. The difficulty now lies in how to extract capacity within the generation mix, since if we continue to bet on renewables, a technological change will be necessary. The problem now lies in calibrating technologies considering the contraction in demand and the danger of over-sizing the system.

The role of the government will be fundamental in the coming months, and quick, precise, concrete, and drastic reactions will be necessary so that we do not fall behind in the energy transition.

Marta Serrano | Energy Consultant

By | 2020-06-02T13:23:50+00:00 June 2nd, 2020|Categories: Electricity Markets, Energy Markets, Featured, M·Blog, Spain|Tags: , , |Comments Off on The ‘new normal’: the real challenge