As a result of the coronavirus, many organizations and many markets are experiencing challenges, ranging from a sharp drop in demand to blockages in (international) logistics. The energy market is not escaping either. Supply Value expects that unpredictable oil prices will accelerate the energy transition, collaboration with supply chain partners and suppliers will be structured differently, and the localization of energy demand offers opportunities for startups.
Unpredictable oil prices accelerate energy transition
That the demand for and price of oil fell hard during the corona crisis is by now old news. At one point, even money had to be added to get rid of a barrel of oil. According to the Executive Director of the International Energy Agency, it will take more than a year or even longer for oil demand to recover to what it was before the coronavirus caused the energy markets to collapse (AFN/Bloomberg, 2020).
If we look at the past, it appears that we always go to the limit with the use of energy resources. When this use leads to negative consequences, a change almost always occurs. On the one hand, this can mean using existing energy sources differently or looking for an alternative. A good example of this is how the 1973 oil crisis forced Denmark to revise its energy policy. This made them less dependent on oil in favor of renewable energy.
But why is a falling oil price accelerating the energy transition? According to Mark Lewis, Global Head of Sustainability Research at BNP Paribas Asset Management, it makes more sense right now to invest in renewable energy, especially wind and solar. Precisely because the risks of investing in oil are growing. Indeed, it remains to be seen whether investments in oil will be recouped in the long term. On top of that, society as a whole is putting more pressure on governments to accelerate the phase-out of fossil fuels. Mark Lewis also cites the need now to accelerate the development of energy storage, where targeted government incentives can accelerate the process.
In conclusion, the effect of the corona crisis on the energy market will certainly have consequences. How quickly the energy transition breaks through completely remains to be seen. However, we can say that the current oil price drop makes it even more difficult for oil companies to justify investments in new oil projects. On top of that, the returns from investments in electricity from renewable energy are fixed for a longer period of time and are less sensitive to fluctuations, making them reliable investments.
Collaboration with supply chain partners and suppliers is designed differently
Crisis times are the time for organizations to focus on strengthening the organization. An example is when organizations purchase their raw materials or products elsewhere or from multiple suppliers. In practice, organizations have only one or two suppliers for the production or delivery of these goods. However, due to the corona crisis, several suppliers are unable to deliver, leading to shortages of raw materials and stagnant production further down the chain.
The energy market is no different in this: especially in the field of personal protective equipment, which employees in the field are required to wear, there has been a major shortage recently. This highlights the dependence on that small number of suppliers. To avoid a similar situation in the future, many energy companies will review their procurement channels for these dependencies.
They will also assess and expand their supplier palette to reduce dependencies on one or a few suppliers.
Coronavirus exposes weaknesses in cooperation between organizations and indicates which part of the energy chain is most vulnerable to external factors. By analyzing these vulnerabilities, cooperation can be intensified and can be designed more efficiently. This more efficient and stable cooperation has several positive effects for the future. For example, sensitivity to future crises decreases because previously weaker points in cooperation are strengthened. In addition, the various levels of efficiency in the chain make it possible to produce more, thus guaranteeing energy supply in the longer term. This in turn has the effect of reducing sensitivity to future crises and increasing production.
Localization of demand – are traditional companies being overtaken by startups?
Nowadays, energy is generated in more places: think of solar panels and wind turbines on the roofs of business premises, but also on the roofs of residential houses. In addition, the sun and wind cannot be controlled. These two factors make energy generation less centralized and less constant. On top of that, in addition to the big players in this market, there are all kinds of small and medium-sized parties supplying energy.
This affects forms of grid management. According to the Rathenau Institute, until recently, balancing the electricity grid was the job of the national grid operator. With local energy generation, however, regional grid operators are also given more responsibility. Data on electricity consumption and generation are crucial in this regard. This data enables supply-based demand management and allows parties to help accelerate the energy transition with new data-driven business models. Digital innovations are already in full swing, by both large and smaller players in the market. Large companies such as TenneT are stabilizing the electricity grid from the consumer’s perspective using distributed energy storage based on blockchain technology. But smaller companies are also innovating in abundance. For example, experiments are taking place with “virtual” (read: distributed) power plants (Rathenau Institute, 2020).
Currently we see that in the short term, the corona crisis is causing decisions related to sustainability to be postponed. The expectation is that after corona, on the contrary, more investments will be made in renewable energy, causing the localization of energy supply to develop even faster. If large parties do not move fast enough, it is likely that they will be overtaken by smaller players in the market.
As outlined, the energy market is also experiencing strong effects from the corona crisis. Where the immediate effects are threatening incumbents and associated jobs, we see several positive developments in the longer term, aided by the breaking of patterns through this crisis. You can download the insight below.
