If we look at the last few months, the energy markets have been hit by two crises. The first one, the most obvious, due to a slump in demand as a result of the lock-down and the halt in transportation (think, for example, of civil aviation being essentially stopped). This crisis was compounded with the war on crude oil prices that unleashed between Saudi Arabia and Russia earlier in the year.

Collapse in prices

The combination of these events led to a collapse in prices at unprecedented levels and speed. Investors’ disaffection with the oil sector also went hand-in-hand with the collapse in prices. This brings to mind the letter Larry D. Fink, Blackrock’s CEO, wrote to investors right on the heels of a similar position statement from the EIB indicating a progressive phase-out of investment and financing in the fossil fuel sector.

This not only because the sector’s profitability has considerably decreased, but also because oil & gas have proven like never before that they are subject to strong politically-minded influence and disturbance. 60% of the world’s oil production originates from countries where exports of oil products constitute 50% of overall exports.

Energy transition

Not only that, but energy transition also casts a shadow on fossil fuels. We’re experiencing what could be defined as ‘oil Darwinism’: the weakest companies with the highest production costs risk disappearing—it is calculated that if the current distress landscape persists, 70% of businesses producing non-conventional gas in the USA could go out of business—whereas Oil Majors will survive but at the price of lower profitability.

Even by virtue of such an unfavourable current juncture, energy transition marked by decarbonisation, decentralisation, digitalisation, is finding a renewed boost and new sponsors.

The downturn is accelerating energy transition mainly for three reasons. First of all, there’s a political motivation. At present there is strong political support for decarbonisation. The need for a Green Deal has been the flagship of the European Commission President von der Leyen, also reiterated over the course of the last few weeks as one of the pillars on which the relaunch of our European economy will rest.

Capital flow

The second reason is economic in nature: on most of the globe’s surface energy production from renewable sources has by now turned out to be cheaper and, as we know, money, like water, goes the easy way. At this time, if we think of the success of initiatives such as green bonds, financing associated with sustainability indexes or, conversely, discontinued financing for fossil fuels, it appears evident that a great flow of capital will be reserved for renewables, which can now compete on a level playing field with fossil fuels (the so-called market parity).

A further push towards energy transition has sociological roots, considering the eurhythmy of renewables with prevailing paradigms at this point in time. We’ve moved on from a world of efficiency towards a world of resilience, and renewables are extremely resilient because, for instance, they do not depend from the political or oligopolistic decisions of whoever owns them. A second paradigm lies in the transition from globalisation to self-sufficiency and renewables enable us to have a – so to speak – ‘home-grown’ production.

The third paradigm is widespread risk aversion and desire for security that are intrinsic qualities of renewable energy production. One last reason pushing towards sustainability: the health-care emergency has widened social, cultural, and political differences by creating new rifts. In a world of great divisions, decarbonisation is one of the few categories that finds (almost) everyone in agreement.

Resources of the future

From an economic standpoint, photovoltaic solar energy can certainly be a resource for the future of Italy. The construction of “utility scale” plants in the most irradiated areas, maybe not short-term, but rather over the medium term, might give investors great satisfaction. Limits to development by now only lie at a regulatory level: unfortunately to date the construction of large PV plants aimed at reaching the goals of the European Green Deal is opposed by some local authorities and especially by the Cultural Heritage Departments.

Hopefully, at a juncture where the Italian economy specifically needs private investments, this difficulty can finally be overcome.

Even energy efficiency and the tax concessions associated with it may constitute an interesting opportunity for operators and investors. In terms of energy efficiency, today Italy is already one of the most advanced countries in the world. However, the road ahead is still long: suffice to think of the need to radically improve the energy performance of public buildings. In this case, too, well-established international practices could be applied (think for example of ‘energy performance contracts’) which allow for energy efficiency works to be entirely financed by private investors.

Lorenzo Parola
Lorenzo Parola
Partner, Milan
+39 02 0068 1370