Analysis: Recession forecast brings grim outlook for power demand, prices: observers

Houston — S&P Global Platts Analytics projects US GDP to contract 4% over the course of 2020, but begin to rebound in the second half and grow by 4.6% in 2021, drawing varied reactions from industry observers about the impacts to US power market demand and prices.

Platts Analytics' Global Economic Outlook, released Friday, made the following observations about the US:

• US first-quarter GDP was down at a -4.8% annualized rate, potentially accelerating to -25% in Q2, but is assumed to revert to positive 8% in Q3, positive 12% in Q4. Overall contraction would be -4% for 2020.
• Steel production has fallen 37% from early March, now running 36% below year-ago levels.
• Meat production is at 70-75% of capacity.
• Mobility metrics (derived from cellphone movements) vary by location, with New York running only about 65% of levels seen in January, but Los Angeles at 75%, Houston at 95%, Atlanta at 100%.
• US Transportation Security Administration passenger throughput is down 90% from year-ago levels.

Morris Greenberg, Platts Analytics managing director of North American power, said that "based on the last cyclical downturn, this forecast would suggest a weaker power demand outlook than we have been expecting."

POWER DEMAND LINK TO GDP

"Real GDP would be down 7% y/y during Q2, 5.7% in Q3 and 3.5% in Q4," Greenberg said in an email Friday. "In the last recession, power demand under-performed GDP. At the cyclical trough in 2009 Q2, real GDP was down 4% year on year and loads were down over 5% (not adjusted for weather). Even assuming a 1:1 relationship this time, loads would be down about 5% in CY 2020."

A.J. Goulding, president of London Economics International and non-resident fellow of Columbia University's Center for Global Energy Policy, described the Platts Analytics' GDP projections as "optimistic."

"I think that there is greater fear in the more populous parts of the US, and that will slow restarting the economy," Goulding said Friday.

Some have expressed the hope that this recession's GDP curve would have a "V" shape, implying a sharp downturn and rebound, while others have suggested that it may have a "U" shape, with a longer period between the contraction and substantial restoration to pre-recession GDP levels.

"Columbia economics and experts such as Glenn Hubbard have suggested the swoosh shape on the side of a major sneaker brand as being more consistent with how the economy will perform: steep downturn followed by a gradual recovery," Goulding said." I agree with this."

Hubbard is a finance and economics professor at Columbia who served as the dean of the Columbia University Graduate School of Business from 2004 to 2019.

Eric Smith, associate director of the Tulane Energy Institute, said he also considers the "swoosh" shape of recovery more likely "simply because it is always much easier to shut down activity than to restart it in the face of uncertain demand."

Matthew Cordaro, a former Midcontinent Independent System Operator CEO who now resides in New York, said, "The U.S. economy is in for a wild, volatile ride and there is no precedent, or model, to reliably predict what those downs and ups are going to look like."

Regarding power demand, Cordaro expects it to vary "from being down significantly in the Northeast to perhaps even increasing in regions such as Texas."

"As a whole, however, it will probably be lower overall in the US and likely not recover to 2019 levels until well into 2021," Cordaro said.

REGIONAL POWER USAGE EFFECTS

Tulane's Smith expects "mixed results" on power usage.

"I expect fairly quick recovery as industrial output picks up in the Gulf Coast and upper Midwest states," Smith said in an email. "[The Gulf Coast], in particular, should benefit in terms of a quick recovery in energy export markets ... So, relatively robust performance by early 2021."

Regarding residential and commercial demand, Smith expects areas with more dependence on retail consumer demand to "lag ... in part because of a slow pace of reopening, with consequent lagging demand for imports, a systemic lack of exports ... and continuing political difficulties with power grid and natural gas approvals."

New England might be an exception, as import of Canadian hydropower through May "will allow for a regional 'end run' around the New York governor's political blockade of domestic power and natural gas transit efforts in that region," Smith said.

Regarding power demand over the remainder of 2020 and 2021, Columbia's Goulding said he expects "gradual recovery in the fourth quarter across the US, but with a degree of permanent demand distruction in the commercial sector."

Cutbacks in oil and gas exploration and production could cause "potential tightening of natural gas prices" that would "provide some lift to wholesale electricity prices in Q1 2021, provided the US has a normal winter," Goulding said.