The spread of Covid-19 around the world has brought about dramatic changes to economies and to everyday life. The full scale and duration of the impact from the virus remains unclear and will depend on both its future spread as well as the global policy response. What is clear is that economic growth will see a sharp downturn, at least in the short term.
With respect to the energy transition, we believe there are three main risks to companies: an impact on consumer demand, supply chain difficulties, and the effects of uncertainty and travel restrictions. We would highlight though that the sharp stock market sell-off in February and March opened up opportunities in stocks that were previously trading on lofty valuations.
Above all, we remain convinced of the long-term opportunity in the energy transition. If the world is to limit temperature rises to less than 2 degrees, as per the 2015 Paris Agreement, then the energy transition is essential. This is a long-term investment opportunity that will transform the entire energy system over the next 30 years and beyond.
What are the three main Covid-19 risks to energy transition stocks?
1. Economic slowdown to hit consumer demand.
First and foremost, the economic slowdown will likely impact consumer demand in key end markets such as electrical goods, electric vehicles and residential energy applications. This would undoubtedly have a short-term negative impact on companies in the electrical equipment and battery markets.
2. Supply chain and logistical risks
The second major risk concerns the supply chain and the logistical risks to companies across the different energy transition sub-sectors.
Global transportation networks have been restricted, and coupled with logistical challenges created by the lockdowns mean many facilities are unable to receive raw materials and components.
We believe the most material impact of any supply chain disruption could be to the renewable energy developers, with disruption in equipment deliveries potentially delaying project construction schedules across the world. It could also have the effect of increasing component pricing, which is an important assumption when considering project returns.
This risk has already started to play out. The full extent of any impact, however, will depend on the manufacturing time lost to the virus and whether this continues into the coming months. Many project developers, especially those in the US, will have already received equipment for 2020 projects.
3. Impact of uncertainty and travel restrictions
The final risk comes from heightened global uncertainty and restrictions on travel. These two forces may have the effect of seeing new renewable energy projects delayed or postponed. For instance, 2020 was meant to be a record year for both wind and solar installations globally. However, with restrictions on travel and challenges in securing investment for projects to be built, projects are likely to be delayed. Again, the full extent of any impact will depend on the policy response worldwide.
Energy transition remains a long-term theme
We acknowledge that the risks around the coronavirus in the short term are high, particularly with respect to 2020 earnings disruption. However, we believe the long-term value and potential of companies exposed to the energy transition has not materially changed.
While the coronavirus is dominating the world’s agenda, the imperative to reduce greenhouse gas emissions and slow the pace of climate change has not disappeared. Indeed, the single positive side-effect of coronavirus has been signs of improved air quality, as reduced economic activity has led to lower pollution in many areas. If we want to see lasting improvements in air quality, while returning to normal levels of economic activity, then investment in the energy transition is crucial.
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