5th September 2020
Saleque Sufi

International Energy Agency (IEA) has recently released a report titled Sustainable Recovery Plan (SRP) 2021-23, suggesting adoptions by the governments across the world to recover from all round impacts of the global COVID-19 pandemic. The SRP is not a ‘must do’ mandatory guideline, but it seeks to show the governments what can be done to better manage the recovery initiatives. The IEA considers that whether or not countries follow the measures laid out in the plan would remain the sovereign choice. Its suggested plan is a combination of policy actions and targeted investments. It offers an encouraging scenario how the world can achieve quickest possible recovery confronting the monumental challenges triggered by the pandemic. This write up is an in depth review of the recovery plan.

 

The world community is now at a war with the worst ever health pandemic since 1930. The pandemic has triggered colossal economic damage and as consequential impacts dealt severe blows on employment and investment. The pandemic has impacted every aspects of the economy, including energy. It is well understood that the governments cannot wait with fingers crossed and continue with the widespread shutdown or lockdown. They had to unlock activities to decelerate the spiral domino effects on the economy. Hence, planning recovery is of prime importance at this moment. This recovery plan needs to contain pandemic staying alongside with it for a while and make economy resilient enough to confront similar pandemics in the future.

 

The IEA started taking stock of the situation since the outbreak of the pandemic and urged upon the governments for making the recovery plans as sustainable and resilient as possible. The reasons behind such call were addressing the core issues of global recession and growing unemployment. The IEA also stressed upon developing cleaner and more secure energy system.

 

The IEA suggested the policymakers designing economic recovery plans and taking economical consequential decisions in a very short span of time. The decisions are for planning and implementing economic and energy infrastructure sustainable over decades with an end in view that these meet the long term energy and climate goals. The IEA claimed that its suggested recovery plan would provide opportunity for boosting economic growth, creating millions of new jobs and at the same time structurally decline green house gas emissions.

 

IEA has announced its plan for a Clean Energy Summit on 9 July 2020 for providing to government policy makers, industry, and investment community with the strongest possible data, analysis and options. All relevant stakeholders can choose the best option for recovery.

 

IEA has identified and assessed various impacts of the pandemic as under:

 

Macroeconomic Impact

Even in end June 2020, none knows for sure how long this pandemic is going to last or whether there would a second wave of attack. None also know for sure what would the pandemic and related containment measures would impact global trade fundamentals, businesses, consumer behavior and investors confidence. IEA observed that by mid-April 2020, full or partial lock downs were imposed in countries representing 60% of the global economy. By Mid–May almost one third of the global population were under lockdown.

 

IEA report referred to OECD (Organization for Economic Co-operation and Development) report that stated about 6% contraction of the world economy in 2020 provided that a second wave of COVID can be avoided over the second half of 2020. IMF also made similar projection. GDP of all countries would also shrink significantly. The ILO report 2020 stated about 300 million fulltime job cuts and about 450 million industries reportedly encountering disruptions.

 

The pandemic created volatility in global energy market. Price of crude oil and natural gas dropped to the lowest ever level in early March 2020. Oil and gas revenue constitutes the backbone of the most producing and exporting countries. IEA projected that income from oil and gas export may by 80% of countries like Iraq, Nigeria, Oman and Angola in 2020. These nations would be in considerable crisis in managing the social and health infrastructure. The challenges are much greater in depth and diversity than the previous oil shock in 2014. Such reductions, according to IEA, reinforce the importance of economic diversification.

The challenges of low income countries are a bit different. Their ability to manage and mitigate immediate health risks are often compromised by lack of access to sanitation and public health infrastructure. Their high household occupancy rates and significant number of low income, often informal jobs not possible carrying out remotely, making these hard to practice social distancing. According to IEA, in 27 sub-Saharan African countries, close to 60% of health center facilities are without access to reliable electricity and over 860 million people worldwide lack access to electricity, severely limiting their ability to store medicines and food, charge phones, access digital information, maintain access to education remotely or light their homes effectively.

 

Many developing economies also have less capacity thanadvanced economies to boost spending on health measures, provide emergency assistance to workers, households and businesses, and regenerate their economies. The developing economies often face high levels of debt service: many countries in sub-Saharan Africa spend more on interest repayments than healthcare. The World Bank predicted that remittance flows, a significant source of revenue for many economies, could also fall by around a fifth in 2020 due to job losses in wealthier countries. International cooperation, assistance and aid will be critical to ensure that developing economies do not suffer disproportionately from the fallout of the crisis.

 

Impact on Energy Sector

Reviewing four months’ data up to end April 2020, the IEA predicted for a 6% contraction of demand of primary energy in 2020 in major region. This, according to IEA, is seven times larger than that occurred during the 2008-09 financial crisis.

 

IEA predicted that demand of oil to drop around 8% in 2020. Demand in April 2020 dropped by 25% due to transports demand dropping sharply. Since then due to gradual reopening of business in limited way, the demand bounced back a bit. But we must not expect getting back to business as usual soon.

 

IEA expected natural gasdemand falling by around 4% in 2020. This would constitute one of the largest contractions since natural gas became a major industry. With the reduction of demand, the world market is now over supplied with LNG. This coupled with significant reduction of gas price would cause bouncing back of gas demand back to business as usual. Learning lessons of positive impacts on environment from reduced polluting fuel use many countries would prefer natural gas as transition fuel from coal to renewables for power generation.  

 

The IEA predicted that coaldemand would drop by 8% in 2020. This would be the largest contraction since World War II. Declines in electricity demand are the principal cause of lower coal use.

 

It also predicted that nuclear power is set to fall by 2.5% from 2019 levels due to lower demand and delays both in re-fueling existing projects and in operations at new plants.

 

The IEA observed that the electricity demand reduced by 20% during the complete lockdown period of several countries. But with economic activities resuming slowly, the reduction may fall by 5% globally in 2020 and 10% in some region. Generation from renewablesis expected to increase because of low operating costs, its preferential access in many power systems, and recent growth in capacity with new projects coming online in 2020. As a result, electricity generation from renewables is expected to rise by nearly 5% in 2020.

 

According to the IEA, the demand of bio fuels would decline due to reduced transport activity and a loss of price competitiveness with oil.

 

Impact on Environment Due to Less Use of Fossil Fuels

 

The IEA put emphasis on the significant reduction of air pollution of major cities due to reduced use of fossil fuel as energy demand dropped.  According to the IEA, the global CO2 emissions in 2020 are expected to fall by around 2.5 gigatonnes (Gt) to just under 31 Gt, around 8% lower than in 2019. This would be the lowest level since 2010. Almost entire decline is due to reductions in economic activity rather than structural changes in the way the world produces and consumes energy. IEA observed that unless there is immediate action to bring about such structural changes, emissions are very likely to rebound as economies recover.

 

Impact on Energy Sector Investment

The IEA report 2020 evidences that volatile commodity prices and suppressed energy demand aversely impacted investment in the energy sector in 2020 causing the largest decline on record with a reduction of one-fifth – almost $400 billion – in capital spending compared with 2019. The oil and gas sector has experienced the largest reduction in investment of any energy sector as a result of diminished revenues that reflect less demand and lower prices, and uncertainties about future prospects.

 

The share of investment in low-carbon technologies (such as renewables, efficiency, nuclear, carbon capture, utilization and storage [CCUS] has held at around one-third of total energy sector investment in recent years. It is likely to jump towards 40% in 2020, but only because investment in fossil fuels is set to drop sharply. In absolute terms, it remains far below the levels that would be required to accelerate clean energy transitions. The IEA’s Sustainable Development Scenariosees annual investment in electricity networks in the 2025-30 period that is around 50% above the level seen in 2019, and annual investment in power from renewables that is around 90% higher.

 

Rationale of Sustainable Recovery Plan for Power and Energy Sector

 

A very robust and highly efficient energy and power sector would be essential for seamless recovery of all aspects of economy during the post-COVID period.

 

Investment in energy can sustain and boost employment while helping to deliver affordable and reliable energy and to improve the resilience of energy systems. This in turn helps to support higher employment and activity levels in all parts of the economy. Investment in energy is needed if there is to be a structural reorientation of the global energy sector that enables countries to meet their long-term goals on climate change, energy access and sustainability.

 

Evaluation of Possible Recovery Measures

IEA report evaluated as many as 30 energy related possible recovery measures of key sectors. Now it is up to the governments to review and adopt the best alternative that suits their case.

 

Electricity: IEA report suggested several alternative measures to support the expansion and modernization of electricity grids; accelerate new wind and solar installations and repower existing ones; maintain the role of hydro and nuclear power, mainly by preserving existing facilities; and manage gas- and coal-fired generation. Each option has the potential to create 1-14 jobs per million dollars invested, and would have very different impacts on energy resilience and sustainability.

 

Buildings: Measures to improve the efficiency of buildings and appliances could be implemented quickly, in some cases have very short payback periods and would create 10-15 jobs per million dollars invested. In low-income countries, over 2.5 billion people still lack access to clean cooking. Low LPG prices make providing access attractive, with payback periods of just one year, plus substantial job creation potential.

 

Industry:One-in-four jobs are in industry, and the Covid-19 pandemic has disproportionately hit small and medium industrial enterprises. Investing in energy efficiency, notably motors and agricultural pumps, and recycling would create around 10 and 18 million jobs per million dollars invested respectively.

 

Fuels: Investment to reduce methane emissions could mitigate some job losses in the oil and gas sector while cost effectively reducing GHG emissions. The current period of low oil and gas prices provides fertile ground for renewed efforts to phase out fossil fuel subsidies. Supporting growth in sustainable biofuels could create around 15-30 jobs per million dollars invested.

 

Innovation: Technology innovation plays a crucial role in improving future energy systems, and innovation in hydrogen, batteries, small modular nuclear reactors and carbon capture, utilization and storage could bring enormous long-term sustainability and resilience benefits while creating 3-8 new jobs per million dollars invested.

 

IEA Suggested Policy Approaches

IEA suggested for government’s direct and active involvement in policy design and overview of the implementation process. The government must support in the following areas:

 

Supporting affordability of clean cooking options through direct incentives for equipment acquisition and fuel consumption for the poorest households. Options include subsidies, tax or duty exemptions and pre-financing of upfront costs.

 

Establishing price mechanisms for ensuring energy affordability for low-income households so as to increase household confidence in clean cooking solutions and reduce fuel stacking.

 

Developing markets for stoves and fuels, encouraging industry participation and private equity investment. This includes enforcement of laws and regulations, financial incentives and protocols to certify efficiency, emissions, and safety (e.g. safe cylinder recirculation model).

 

Supporting the development of modern fuel infrastructure. This includes investment in the production or import of modern fuels, distribution of cooking equipment and transport infrastructure.

 

Supporting government and non-government organization develop renewable based renewable based electric cooking solutions, and innovative business models such as pay-as-you-cook using LPG, and to support increased use of non-fossil cooking fuels such as bio-LPG, bioethanol and other upgraded biomass fuels.

 

Improve Energy Efficiency and Electrification

According to IEA, investment in energy efficiency would create on average around 10 jobs per million dollars spent. Investment in more energy efficient industrial electric motors, heat pumps for low-temperature process heat and agricultural irrigation pumps typically have attractive payback periods: they could quickly generate savings that would allow industry to increase expenditure on core business operations. Options for governments to promote such investment include: tax deductions, guaranteed lending, rebates, cash-for- replacement schemes incentives for energy management systems and training and hiring energy managers.

 

Expand Waste and Material Recycling

IEA recognized that recycling has gained momentum in recent years, but is facing challenges from concerns about the re-use of plastics and from low prices for virgin material as a result of Covid-19. Waste collection and sorting could be ramped up quickly to provide support for jobs, with around 15-40 jobs created for every million dollars of spending.

 

Sustainable Recovery Plan for Energy Sector

The IEA suggested following sustainable recovery plan for the energy sector:

 

IEA designedglobal sustainable recovery plan for the energy sector with three goals: to maintain and create jobs, boost economic growth, and improve energy sustainability and resilience. This plan is specific, detailed and time- limited, was developed using the quantitative assessments of potential energy sector measures it takes account of the circumstances of individual countries, as well as existing energy project pipelines and current market conditions.

 

IEA estimated the overall spending need for the plan as around $1 trillion per year over the next three years. This represents about 0.7% of global GDP, and includes both public spending and private finance that would be mobilized by public policies. The public spending required would be equivalent to less than 10% of fiscal expenditure in recovery plans announced; after the 2008-09 financial crisis, green measures accounted for around 16% of total stimulus measures.

 

IEA model indicated that this plan would create nearly 9 million new energy- related jobs in construction and manufacturing over the next three years. This compares with a figure of 6 million jobs at risk from the Covid-19 crisis in energy supply, efficiency and vehicles. There would also be more than 0.5 million permanent jobs associated with operating and maintaining the assets constructed by the sustainable recovery plan.

 

Analysis done by IEA jointly with the International Monetary Fund indicates that this plan would also increase global GDP by 1.1% in each of the next three years, and would lead to global GDP being 3.5% higher in 2023 that it would have been without a spending stimulus.

 

IEA observed that a wide range of policies would be required to support the deployment of this plan with the aim of delivering shovel-ready clean energy projects that boost resilience; developing a strong pipeline of new projects; tailoring support for distressed industries; mobilizing large levels of private finance; and strengthening international co-operation.

 

Energy systems would become more sustainable as a result of the plan. Globally, annual energy-related CO2 emissions would be nearly 3.5 Gt lower than they would have been otherwise, and methane emissions would be cut by 0.8 Gt CO2-eq.

 

Air pollutant emissions would be around 5% lower. In addition, around 420 million people would gain access to clean cooking solutions in low-income countries, and nearly 270 million people would gain access to electricity.

 

IEA observed that energy systems would become more resilient as a result of the plan. Investment in better electricity grids and improved efficiency would improve electricity security by lessening the risks of outages, boosting flexibility, reducing losses and helping to integrate larger shares of variable renewables. Energy consumer bills would also be lower across all regions, freeing resources for spending in other sectors.

 

Conclusion

The IEA has proposed various options in its recovery plan, reviewing extensive data and information about COVID-19 impacts on various aspects of economics, energy and environment. The real concerns are confronting immediate health hazards – saving lives, restoring jobs for livelihood. But for all these, business must unlock, education must be business as usual. There is no guarantee yet how long human civilization would have lived alongside the corona pandemic. But all these sustainable supply of quality power and energy would be essential. The IEA suggested recovery plan, among others, on how sustainable energy security can be approached in the changed circumstances. There cannot be any plan equally applicable to all countries as circumstances differ. But one thing for sure transition to greener and cleaner energy has to happen quicker than before and natural gas would become the preferred interim fuel. GHG emissions and CO2 must be drastically reduced at any costs for preserving and protecting mother nature.

 

Saleque Sufi;

Contributing Editor, EP


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