Covid 19, Corporate Bankruptcy, and Renewed Environmental Regulation: accelerating the adoption of renewable energy in the United States?

By: Benjamin Carver

It is no secret that the ongoing coronavirus pandemic has had a profound effect on the world economy. From intense challenges to the global supply chain, to widespread changes in the behavior of consumers in a locked-down economy, businesses have had to adapt to circumstances unparalleled in recent history. While some industries such as E-commerce and cybersecurity have seen undeniable growth throughout of the pandemic, many others have seen dramatic downturns. Perhaps nowhere is this more evident than in the legacy energy sector where there has been a rash of high-profile bankruptcy cases.  This, combined with a renewed surge in both state and federal climate regulation mean that the energy sector is likely to see an even further accelerated shift toward renewables in the near future.

The worst hit sectors are generally those which rely the most heavily on transportation and physical trade. As global restrictions on the movement of people became the norm in early 2020, the cost of oil plummeted, sending already vulnerable oil and gas companies over the edge into insolvency. Many of these oil and gas companies were already in poor financial straits due to oil’s significant price drop following the widespread proliferation of U.S. shale oil production. Furthermore, these restrictions significantly reduced global demand for electricity, dramatically affecting the price of coal and other fuel commodities.

Government action in response to this economic turmoil was primarily focused on small businesses and individuals rather than highly valued corporations. The CARES act for example, expanded the debt limit allowable for small businesses under the Small Business Reorganization Act of 2019. As a result of this and other legislative action, bankruptcies among individuals and small businessed almost counterintuitively trended downward over the course of 2020. However, such relief was unavailable to large businesses. As a result, 2020 saw a huge increase in large corporate bankruptcies, with 153 companies with assets worth over $100 million filing for bankruptcy, more than double the annual average of 76. Furthermore, of the 20 largest corporate chapter 11 filings in 2020, over half of the companies listed were in the mining, oil, and gas sector. While all of these were widely regarding as having financial difficulties before the pandemic, they also universally cited COVID-19 related cost issues as being a primary contributing factor in their decision to file. Notably, those energy companies that have existing renewable energy assets often prioritize retaining and building that sector of their business in order to regain profitability. Such plans simultaneously include divesting fossil fuel focused legacy assets instead.

While a global slowdown in electricity consumption and travel may sound like it would present an issue to the energy sector in general, it is notable that renewable energy remained strong regardless of the fossil fuel trends. Chesapeake Energy corporation, McDermott International incorporated, and Whiting Petroleum corporation were among the largest companies to file under chapter 11 in 2020, and all were nearly entirely focused on oil drilling, fracking, and other forms of hydrocarbon exploration. In contrast, renewable energy equipment manufacturing and project management firms’ stock prices have rebounded since the early days of the pandemic to what are now record highs. Furthermore, despite the global dip in electricity usage, investment in wind and solar remained high throughout the pandemic and subsequent lockdowns, especially among energy companies continuing to move away from fossil fuels. This is perhaps in part due to the lower cost variation inherent in these energy sources. Regardless of the reason, the fact remains that both legacy energy companies and national governments continue to invest in renewables as a cost effective, stable alternative to continued fossil fuel development.

Beyond the practical challenges faced by the fossil fuel industry due to COVID, both state and federal government climate regulations and renewable incentives have seen a sharp resurgence under the Biden administration. While the fossil fuel industry saw a slight resurgence amid a flurry of deregulation under the Trump administration, overall trends in the energy sector remain solidly in favor of further investment in renewables. This trend has been even further bolstered by the priorities of the Biden administration, congress, and myriad state and local initiatives.

Some of the most widely publicized actions of the Biden administration include the United States’ reentrance to the Paris Climate accords and revocation of the Keystone XL pipeline’s permit. Many of these regulations are aimed primarily at slashing existing greenhouse gas emissions while simultaneously decreasing the financial viability of new ventures in the legacy fossil fuels. This approach has had the predicted effect in the energy industry and ever-increasing regulation is driving historical hydrocarbon industry giants such as Murray energy out of the market seemingly for good.

Perhaps lesser known but equally influential policies are recent steps taken to develop under-utilized wind and solar resources. Chief among these are ambitious plans to develop a robust off-shore wind energy production infrastructure. The United States currently produces only 30 Megawatts of electric energy via off-shore wind turbines despite its thousands of miles of coastline. This stands in stark contrast to other developed economies including Europe, which produced in aggregate nearly 25 gigawatts of energy via off-shore wind farms in 2018. The Biden administration has directly announced funding for such off-shore wind projects, both to fill the widening jobs gap left by the shrinking off-shore drilling industry and to meet the commitments of the Paris climate accords. These include review and anticipated approval for at least 16 construction and operation plans for off-shore wind farms located on the mid-Atlantic coast, the great lakes, the northwest pacific and off the coast of Hawaii.

In sum, while the global push for renewable energy has been underway for some time, the energy sector may undergo a further high-speed shift toward renewable energy as a result of recent events. The economic turmoil and widespread energy-sector bankruptcies caused by the coronavirus pandemic combined with renewed energy regulation point toward a period of rapid advancment within the renewables sector in the years to come.