Utilities' relatively decent performance in the first month of the coronavirus-triggered economic shutdown will not last forever and may not last long, an April 14 report from the Brattle Group Inc. warns.
As of the end of March and "relative to the depth of impact on the health system and employment there has only been a dampened or, more likely, lagged visible effect of COVID-19 on utility industry market conditions, partly owing to the essentiality of utility service," the Cambridge, Mass.-based consulting firm said. "However, this lagged effect cannot be counted on to last indefinitely or even far into the near term."
Utility stock prices have fallen nearly as much as the overall stock market since early March, noted Brattle, decreasing 10.9% versus the S&P 500's 11.0% decline between March 2 and April 8. "In general, values for all sectors of the economy have moved more in parallel than normally," which could suggest that "some investors question utilities' ability to recover lost revenues."
The economic downturn more broadly will impact utilities' cost of capital, liquidity, hedging and possibly capital expenditure programs, as well as the timing and choices in integrated resource plans.
Development and construction of power generation assets are also expected to take a hit. The U.S. Energy Information Administration projects that the coronavirus' impact on electricity will lead to the delay or cancellation of 4.9 GW of previously planned power generation capacity through September in its "U.S. Electricity Industry Overview" published April 7.
The average month-to-month hourly load for six major independent system operators dropped 8.7% in March, according to the report, though 4.9% of that figure, accounting for nearly 60% of the drop, can be chalked up to "seasonal factors observed in prior years," said Brattle. The remaining 3.8%, however, could be attributable to the coronavirus-related economic shift. "It may be that the full force of COVID-19 is not yet being felt," Brattle added.
"The importance of swings in weather, particularly a very warm or cold winter, should not be overlooked," EBW Analytics Group said in an April 14 executive summary of an upcoming report measuring the impact of the pandemic on natural gas and electricity markets. "Changes in weather could offset or significantly exacerbate the impact of the pandemic on energy prices," said EBW, noting that extreme weather has become common in recent years.
Overall, the biggest coronavirus-related load reductions are likely to come from commercial and industrial customers, said Brattle. The C&I segments' tendency to have more fixed charges could lessen revenue impacts from reduced demand though "they are not as often decoupled, unlike residential customers." Residential customers, meanwhile, represent 39% of load but 50% of revenues and could be more impactful on "lost fixed cost recovery due to volumetric charges," Brattle said.
"Clearly the pandemic will have at least a short-term effect on industrial load as large factories and industrial centers close, but the residential load has dramatically increased as millions of people work from home," said Ram Sunkara, a partner at Eversheds Sutherland LLP who leads the firm's natural gas liquids, petrochemical and distributed generation and renewable corporate procurement teams.
"By sometime in May, a clearer picture is likely to emerge regarding relaxation of social distancing requirements, the contraction of the economy and the drop-off in supply and demand of natural gas," said EBW. "As this occurs, natural gas and electricity prices could stabilize for several weeks."
"Steep declines are likely in domestic demand for natural gas and electricity and demand for [U.S. liquefied natural gas] exports," said EBW, with curtailments of LNG exports expected in the third quarter of 2020. "Most estimates of the decrease in US demand for natural gas and electricity resulting from the pandemic are much too low."
Low demand will increase the quantity of stored natural gas in April and May, pushing the near-term cost of electricity down, according to EBW, though those could stabilize in the near future.
"Strategic impacts on utilities will depend on how long the COVID-19 negative economic impact persists," said Brattle, with most economists expecting a deep drop in the second and third quarters of 2020, followed by positive growth towards the end of the year.
However, a rebounding economy at year-end does not mean that consumption will immediately shoot up far enough to avoid damage to pre-lockdown projections for 2021.
"Demand for electricity is expected to remain below previously expected levels not only in the remaining months of 2020," said EBW, but for "all or most of next year" as well.