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The Pandemic and the power sector

Digital format, 18/11/2020, Aspenia

An overall energy transition is under way, and has been for several years despite significant structural obstacles and cyclical ups and downs. The ongoing pandemic and the related economic slowdown have come at a critical juncture in this respect. Today’s situation has highlighted a connection between GDP levels, population density and the impact of Covid-19 infections – likely through air quality – as manifested in various areas of Northern Italy and probably elsewhere. It is thus clear that energy issues must be viewed through the lenses of environmental concerns and quality of life as well as those of growth models, profitability and economic efficiency.

Historically, there has been an almost direct link between GDP growth and increases in CO2 emissions: only recently has there been a divergence, which marks a genuine turning point. The challenge is that even with the full implementation of recent commitments by most industrialized economies, including China, we are likely to see a worsening of environmental conditions globally over the next several years.

In this context, important lessons can be learned from the very peculiar conditions caused by the pandemic. The reduction in electricity demand that has been recorded as a consequence of the various lockdown measures is comparable only to the World War II period: it is, therefore, a massive phenomenon. Italy has experienced a greater decrease than the European average and yet a smaller decrease in terms of energy prices, which puts the country’s fiscal and normative framework in the spotlight.

At a broader level, it is clear that new infrastructure and smarter energy networks are a key precondition of a more efficient and flexible energy system. Therefore, an efficient use of available funds (especially EU funds) and a coherent regulatory framework are fundamental.

The global context, including the shifting security framework, has an impact on energy markets. We are almost certainly entering a period of Sino-American “bipolarity”, and the pandemic is helping China close the gap with the US in some areas more quickly. In fact, China is closer in terms of overall power to the US than the USSR ever was, especially in economic terms. There will likely be economic fragmentation around the two superpowers, with major implications for trade and technology. This setup is probably less prone to military conflict than a multipolar system, but it poses serious challenges for the management of the global economy as we know it. At the same time, other significant powers (including the EU) will have room for maneuver; they will also be faced with tactical choices – such as whether to be close to the US or to China or simply to remain neutral – depending on specific circumstances.

Against this backdrop, the power sector will see significant “decoupling” (between China and the US, and more generally with a reduced presence of Chinese companies). A strong state role is probable for most major economies, and China – given its fast growth and vast population and landmass – will without a doubt be structurally in need of massive energy imports. Meanwhile, most economies are already diversifying their energy mix, although the current slowdown is putting the entire system under great pressure. Saudi Arabia and Russia, naturally, are trying to play the role of swing producers to their advantage. The “shale revolution” remains an important piece of the puzzle, too, as some analysts believe that fracking will continue to be profitable thanks to its flexibility – with major benefits, especially for US competitiveness.

Several economies that are highly dependent on fossil fuel exports, such as the Gulf countries, have been badly hit by the Covid crisis. The pandemic is damaging sectors like tourism and logistics – where some countries have been investing significantly – while also reducing oil prices in the course of the complex energy transition toward renewable sources. This a very delicate combination, with both global and regional consequences, particularly for the Middle East. On the positive side, solar energy is extremely promising for these countries as well, so opportunities remain great for these players, if only they ensure an adequate level of investment. This, in turn, will require technological partners, with Europe as well as China being well placed to play such a role.

The decarbonization plans currently underway at the EU level require massive resources, with close coordination between the public and private sectors. Each member country must necessarily use the funds wisely and effectively. Unfortunately, according to most participants, this has not been the case so far in Italy, especially as regards authorizations and regulations. Still, the energy transition will be decisive to transform and modernize what remains a very competitive manufacturing sector, despite Italy’s well known structural weaknesses.

Looking at Italy, the country needs urgently to update and accelerate its plans for the energy transition, in an effort to establish a more sustainable and innovative economic model. There are also issues in terms of energy supplies, deemed excessively concentrated in Russia. Here, the choice of natural gas as a key component of the mix is proving beneficial, given the unique role of gas as a comparatively clean non-renewable source. Major investments on hydrogen are also forthcoming, as well as high-level coordination efforts with France and Germany in particular.