How Covid-19 lockdowns have impacted the global energy sector

  • The International Energy Agency (IEA) has released a report, Global Energy Review 2020, detailing the impact of Covid-19 on global energy demands and CO2

Report Summary:

Covid-19 impact on global energy demands:

  • Decline in overall Energy demand:
    • The IEA is forecasting a 6% decline in energy demand for the year.
      • In absolute terms this is the largest on record.
      • Percentage wise, it’s the steepest decline in 70 years.
      • The demand hit is expected to be seven times greater than the decline in the aftermath of the financial crisis in 2008.

    • Under a faster return-to-business scenario, the IEA said demand loss could be limited to 3.8%, while a possible second wave of the virus could cause a greater than 6% decline.
    • Countries in full lockdown: There is average decline of 25 per cent in energy demand per week
    • Countries with a partial lockdown: The fall in energy demand is about 18 per cent per week.

  • Oil:
    • Oil has also been heavily impacted.
    • Roughly 60% of global demand for crude stems from driving and flying, so with people at home and planes grounded demand has fallen off a cliff.
    • The global demand for oil could drop by nine per cent on average this year, which will return oil consumption to 2012 levels.

  • Coal:
    • Global coal demand was hit the hardest, falling by almost 8% compared with the first quarter of 2019.
    • Reasons:
      • China – a coal-based economy – was the country the hardest hit by Covid‑19 in the first quarter;
      • Cheap gas and continued growth in renewables elsewhere challenged coal;
      • Mild weather also capped coal use.

    • Coal demand could decline by eight per cent this year.
    • The report expects increase in coal demand in some markets if recoveries are faster, such as in Southeast Asia, driven by Indonesia and Vietnam

  • Electricity:
    • Electricity demand has also contracted with factories shuttered and businesses closed as people work from home.
    • For the full year, the IEA expects electricity demand to fall 5%, which would be the largest decline since the Great Depression.

  • Natural Gas:
    • Because of reduced demand in power and industry applications, the gas demand could also fall much further than in the first quarter of 2020.
    • This decline is less than the anticipated fall in oil demand, reflecting the fact that natural gas is less exposed to the collapse in demand for transportation fuels.
    • But it nonetheless represents a huge shock to a gas industry that is used to robust growth in consumption

  • Nuclear Power:
    • Nuclear power demand would also fall in response to lower electricity demand.

  • Renewable energy:
    • The only energy source expected to grow this year is renewables.
    • The demand for renewables is expected to increase because of low operating costs and preferential access for many power systems.
    • The total global use of renewable energy is expected to rise by 1 per cent by 2020.
    • Renewable sources of energy have been the “most resilient” to Covid-19 lockdown measures

Impact of slump in demand on energy markets:

  • Oil prices have slumped
  • Brent crude trading near a 21-year low
  • US oil futures being pushed into negative territory – a historic feat.
  • The resultant glut in oil has overwhelmed the world’s limited storage facilities, with ships laden with surplus oil production idling at high seas.
  • Also, the historic collapse in energy prices has also hit the global commodity markets, threatening to tip the sluggish global economy into a deep recession.

Note: The projections are based on the assumption that shelter-in-place and social distancing measures will slowly ease in the coming months, with a gradual economic recovery following.

Covid-19 impact on CO2 emissions:

  • The worldwide halt in business has resulted in the largest drop in global CO2 emissions on record.
  • The decline in CO2 emissions witnessed in 2020 is largest since the end of World War II.
    • This year saw an 8 per cent decline in coal emissions, 4.5 per cent from oil and 2.3 per cent from natural gas.
    • Overall, the emissions decline in 2020 could be 8 per cent lower than in 2019.
    • It would be the lowest level of emissions since 2010 and the largest level of emission reduction(six times larger than what was witnessed during the 2009 financial crisis) and twice as large as the combined total of all reductions witnessed since World War II.

  • The decline in CO2 emissions was more than the fall in global energy demand
  • Reason for reduced demand: The most carbon-intensive fuels saw the biggest fall in demand.
  • In the first quarter of this year, carbon emissions were five per cent lower than during the same time in 2019.
  • Emissions declined the most in regions which were impacted the highest by the diseas
    • For instance, there was an 8 per cent decline in emissions in China and Europe, and a 9 per cent decline in the US.

  • It is expected that emissions will soar once economies restart, unless governments take a conscious decision to change the sources of energy.

Covid-19 impact on India’s energy demands

  • India’s 40-day long lockdown has resulted in a 30% fall in the country’s energy demand i.e. with each additional week of lockdown, annual energy demand is reduced by 0.6%.
  • However, the impact on first quarter of 2020, energy demand in India was modest, with demand increasing by 0.3 relative to first quarter of 2019.
  • As the lockdown continues, the impact on energy demand are set to be notably larger second quarter of 2020.

Note: China and India are the largest and third-largest electricity users in the world respectively, and coal use is dominant in both these countries shaping the global demand for this fuel.