Will the COVID-19 pandemic upend the energy transition?

By Michael Rogers

Energy transition in action – envisioning Hywind Tampen at Snorre (illustration: Equinor)
Energy transition in action – envisioning Hywind Tampen at Snorre (illustration: Equinor)

“It’s moving a global energy system dominated by unabated fossil fuels with greenhouse emissions, to a global energy system dominated by low-carbon energy sources with much lower emissions,” replies Corin Taylor, when asked for a thumbnail description of “energy transition”.

As principal consultant with DNV GL’s Future of Gas team in the UK, Taylor is engaged in developing solutions related to the energy transition, and in particular the decarbonisation of energy sources.

Now, with the world faced with the COVID-19 pandemic and resulting economic distress, Energy Northern Perspective spoke with Corin Taylor about how the challenges posed by recent events will impact the energy transition and its decarbonisation goals.

Corin Taylor, principal consultant with DNV GL’s Future of Gas team in the UK
Corin Taylor, principal consultant with DNV GL’s Future of Gas team in the UK

Transportation dilemma
“I think, so far, the pandemic has clearly reduced global oil demand quite a bit, and flying is down to very low levels. With most countries that have implemented lockdown, you will have also seen a massive reduction in driving as well. This has led to, clearly, lowered CO2 emissions but also to better air quality as well,” Taylor says.

“We’ve seen that in a lot of cities where skies have been clearer, and the air has been cleaner than it has been for a long time – because you can knock off those air transport emissions,” he continues. “It is positive because I think people will say that it’s been quite nice to have the cities with fewer cars and to have more space for cycling and walking – and nicer to have cleaner air.”

“But I think there is a sort of counterpoint to that, which of course is that it’s going to be more risky to take public transport until there’s a proper vaccine treatment for the virus, and therefore, if people are travelling they might be more inclined to drive, because it’s safer from the point of view of not catching the virus,” he adds.

Asked about how the reduced oil demand might affect the market for alternatives, Taylor says, “I think you also need to look at people’s incomes. If you’re thinking about electric vehicles, for example, they will be less able to afford the cost of an electric vehicle. And if it’s cheaper to run their petrol car, they might just keep that going a bit longer. So, you can easily see the pandemic leading to a slowdown in the rate of electric vehicle uptake, for example.”

Carbon pricing revenues
“Clearly, governments around the world are going to have massive black holes in their finances with the stimulus measures and paying people’s wages, supporting businesses, and so on. A carbon tax is clearly a way to help restore government finances, because it’s broad-based, depending on the rates which you levy, you can potentially bring in quite a lot of revenue,” Taylor says when asked about the possibility of carbon pricing to help shore up government coffers.

“I think the challenge though is where we have seen carbon prices implemented, they are either at a low level or governments have been forced to redistribute the revenue in the form of other tax cuts. That might become a problem, where it doesn’t necessarily raise a lot for governments because they have to give it back in other ways,” he adds.

Earmarking the funds for the support of decarbonised energy sources could be one answer, he explains. “If you tax the bad and use the money to subsidise the good, you can accelerate a kind of switch-over, so there’s a logic to doing it. I think, that’s potentially an effective way of accelerating the energy transition.” Although it might not do enough to generate revenue, Taylor says, “But, if governments have a need to restore public finance, they would need to raise taxes somewhere else.”

Less-developed countries
Thinking globally, Taylor explains that “it is vital that developing countries are considered” as part of the energy transition. “Non-OECD countries account for the majority of global emissions, and so if it’s just Europe and North America that decarbonise it’s not really going to solve the problem.”

“In some areas, the sunny parts of the world, solar is already competitive with other forms of energy generation. So, some areas are close to not needing subsidising. Also, if you think about those who don’t have developed electricity grids, then more distributed solar can obviously help – which means you don’t have the cost of the big power lines,” he adds.

“In other areas though it is a challenge because you have the intermittency – you’re not going to get any solar generation at night for example, so how are you going to provide that backup? Battery costs are falling, but there is still quite a big cost to storage.”

“The other thing that’s worth mentioning is that in some developing countries people are still cooking on traditional stoves, which leads to massive air pollution and carbon emissions. An LPG stove is much better because it reduces carbon,” Taylor continues. “It’s not just a health issue, but it’s also the time that women and girls spend collecting firewood, which they wouldn’t have to do if they had a modern cook stove. So, it would allow for increased opportunities and education, which I think is also really important.”

Industrial transition
Taylor emphasises that hydrogen’s role in the energy transition will continue to rise. “At the moment, green hydrogen is a lot more expensive than blue hydrogen, and also blue hydrogen gives you the opportunity to produce hydrogen at real scale as well,” he explains. “So, if you’re thinking about decarbonising industries, particularly in industrial clusters where you might have several factories in the same area, you could switch them all to hydrogen from a central production source, then blue hydrogen is what you would go for to start with.”

“This is of course is dependent on carbon capture and storage – CCS,” he adds. “The cost of green hydrogen will fall, as we’ve already seen for batteries, solar and wind. It’s the mid-2030s that we see green hydrogen reaching cost parity with blue hydrogen – and probably go cheaper after that. It will depend on different parts of the world and how abundant the renewable source. It’s not uniform, but that’s the general trend we see.”

What about the recovery?
Taylor says that his Future of Gas team at DNV GL are in the midst of analysing how the post-pandemic recovery might shape up. “Our view on both how the global economy will grow and also what will happen to global energy use post-pandemic will be coming out in our forthcoming 2020 Energy Transition Outlook,” he says.

The risk, Taylor asserts, is industries relocating to areas of the world with lower carbon pricing. “In the UK, as an example, we import 80 million tonnes of CO2 every year from China alone, because products are made there, but they are consumed here,” he explains. “I think a kind of next-best policy solution would be carbon border adjustments, which are outlined in the EU’s Green Deal. But the jury is out on whether carbon border adjustments will really work, and governments are moving cautiously.”

Investment as transition driver
Taylor points out that while eco-investment can provide leverage to move the energy transition forward during the recovery, there’s a risk that problems might be pushed to other parts of the world. While investors may also be waiting to see how governments may react with subsidies or taxes, the influence of eco-investment is growing, he says, “And that might also impact on some of the independent oil companies because they’ve always assumed that returns on oil and gas projects are much higher than on renewables projects and that has been historically the case.”

The upshot is, he continues, “If this isn’t the case in the future, there might be incentives for them to become more like utility companies and develop a lot more, for example, offshore wind or other areas. They might get lower return for their money but might be more stable. We might see some changes in terms of what they do with their own investments as well. I don’t think it’s easy to say exactly what will happen. I think that these are some of the factors that could be shifting over the coming years.”

The Heading for Hydrogen report, based on DNV GL’s survey of more than 1,000 senior oil and gas professionals, is available to download here: https://www.dnvgl.com/oilgas/hydrogen/heading-for-hydrogen.html.