Prior to COVID 19, energy momentum was firmly with renewables. They were making a serious and threatening dent in global energy market share, with both policy-makers and investors backing cleaner consumption initiatives. All signs were pointing towards a transformative shift from old to new energy at a pace seemingly quicker than predicted by the Big Oil companies. In October 2019, the International Energy Agency (IEA) forecasted that 2020 would be a record year of electricity generation capacity for clean energies and anticipated capacity to surge by 50% between 2019 and 2024. The COVID-19 pandemic however has led the IEA to review these forecasts, admitting that they may no longer be the case.

In parallel with the pandemic, Saudi Arabia and Russia engaged in a price war just as global consumption depleted. The upshot has left the oil price in freefall; dropping to extraordinary levels not seen since 1998, with the US oil price fleetingly dipping into negative levels for the first time in history. Saudi Arabia has of course done this before, most recently in rebellion against US Shale in 2014/2015, but the message to other producers is always broadly the same; no one can produce as cheaply as they can, and they’re prepared to prove it.

Low fossil fuel prices are a threat to renewable energy as they make the transition appear less attractive. Saudi Arabia and Russia, with pressure from the US, have now agreed to end their feud, with OPEC++ agreeing to cut supply in May and June by nearly 10m bpd. Subsequently however, “negative” US oil pricing for May contracts affirmed Goldman Sachs’ view that these cuts would have little impact and were too little too late.

Whilst concerning, the reality of the negative price dip isn’t quite as uncompromising as it may appear and was in fact the result of a technicality in the oil futures market. Unlike Brent, which can be settled in cash, West Texas Intermediate (WTI), is a physical contract, so at the time of scheduled delivery, the contract holder must take delivery of the physical barrels. With demand non-existent, and storage anticipated to be maxed-out with prior months’ backlog, the usual physical buyers weren’t in the market for more oil. Traders therefore found themselves having to offload contracts and pay someone else to deal with the oil delivery. The result; WTI crude sank to -$38 a barrel the day preceding contract expiry, but has since rallied back to positive trading levels, albeit well below average break-even price.  

Renewables will feel pressure on their cost competitiveness from the oil price drop, and furthermore, COVID 19 has exposed the sector’s supply-chain dependence on China for critical research, technology and manufacturing, all of which have previously contributed to cost savings. Energy consultancy Rystad however, believe that given the relative speed that Chinese suppliers have got back up and running, for projects already under construction or in procurement stages, production will likely stabilise. It is however, the future growth and expansion markets where momentum could stall.

Rystad predict that movement restrictions could wipe out the growth of newly commissioned wind and solar projects for 2020, but the greater impact will be felt in 2021 and beyond as fewer financial investment decisions are taken.

Wood Mackenzie echo the future concern, predicting the delay and cancellation of new auctions and tenders, notably affecting Emerging markets, where unfavourable FX movements are also negatively impacting investment decisions.

Oil and Gas companies are by no means winning in comparison, but the unprecedented market activity is pushing their needs to the immediate forefront. CAPEX budgets have been slashed, upgrade and investment projects postponed, workforce minimised and exploration and production pulled-back. Some wells will likely shut altogether as production exceeds storage capability.

How then, are governments responding to this perfect storm? Trump’s $2 trillion “rescue package” seemed to address the urgency of the situation with a Department of Energy Directive to purchase up to $3bn in US-produced crude in an effort to offset demand deficit. The supporting sentiment is similar from other major consumer countries that backed the OPEC++ deal, who are also preparing to bulk up their oil reserves in a bid to tighten the market.

However, Trump’s rescue package failed to include any expansion of tax incentives for renewables or commitment to spending on green infrastructure. Expectations are that most countries will burn through “crisis” funding in desperate bids to protect their wider economies. Investment in renewables therefore, will likely be sacrificed. As a result, given most projects rely on government backing to get off the ground, previously gained market share will likely fall away in favour of the “critical” structural propping-up of the Oil and Gas industry.

Circumstances are changing daily and interplay between old and new energy in light of COVID 19 is anything but clear-cut. What is clearer though, is that the outlook for the sector will depend on timeframe considerations, be it in the short, medium or long term.

In the short-term, both the renewable and oil markets have suffered shock from supply-chain interruptions and consumption deficits. Mature renewable markets, however, may soon be business as usual, particularly if the speed of China’s workforce rebound is anything to go by.  Corporate PPA’s are already established in many of these markets, so even if government subsidies cease or reduce, an increase in these agreements can still provide long-term price certainty for producers.

Whilst current unsustainable oil prices will devastate higher cost producers and force them to withdraw, in some cases permanently, the oil futures market paints a much more hopeful picture for the medium term, notably H2 of 2020 and 2021. Once demand begins to recover, the removal of some suppliers could see a sharp oil price rise for those producers able to ride out the storm. In paradox, it is during this period where the renewables market will likely suffer the most as uncertainty dampens investments in the emerging markets previously being prepped for the most significant growth. Old energy therefore looks set to regain market share in the medium-term.

Long-term however, as we transition away from the panicked mindset of pandemic reaction and begin again to clearly and proactively focus on the future, the momentum in favour of renewables will surely be restored. It will be interesting to see if, fresh from medium-term gains, we see the Big Oil companies at the forefront of this “future-proofing” shift.

To the extent that growth in the global renewables sector does take a temporary back seat to oil, there will still be opportunities for those investors with long term horizons.  Similarly, the dislocation in the oil & gas market that is currently and will continue to play out, will also present opportunities to those strategic acquirers seeking synergies.  In both sectors, there are likely to be buying opportunities for those with an appetite for acquiring distressed assets.  Whatever the case may be, it is clear that any investor seeking to use insurance in their transaction, needs to partner with an underwriter who understands the marketplace.

Should you wish to discuss any energy related exposure, please contact Emily on 020 3794 4526 or email at