Economists at The Brattle Group have today released an assessment of the global impacts and implications of COVID-19 on utility industry financials.
Economists at The Brattle Group have today released an assessment of the global impacts and implications of COVID-19 on utility industry financials. The study concludes that it is likely that US utilities’ cost of equity has generally increased, despite reductions in long-term government bond rates. The study also notes that the increase in the cost of equity may persist if economic recovery is slow and utilities play a large role in financing energy to distressed customers.
The Brattle study shows how significantly financial markets across the world declined and became more volatile due to the COVID-19 outbreak, though not in a simple pattern related just to the scope of the pandemic. In particular, despite having the largest COVID-19 incidence, the US stock market rebounded so much that it has the least overall impact on stock prices. This is likely to be due to the dominance of a handful of extremely large companies, which account for roughly 20% of the US market and have grown during the pandemic period due to the increased demand for internet services they provide.
The study notes further that stock indices became much more volatile and that nearly all stocks became more correlated with each other. In particular, US utility stocks became more strongly correlated with and more volatile than the overall market, according to the study’s authors. This resulted in a near-doubling of electric, gas, and water utility betas.
In addition, the authors find that the implied one-year-ahead market equity risk premium (MRP) in the US has increased by about 1% above 2019 levels, but the overall market return is comparable to pre-COVID-19 levels. The MRP in other countries increased as much as 2.6% and averaged up about 1%, although the extent of the change in MRPs varies across countries.
The study concludes that the US cost of equity is likely higher for utilities than prior to the COVID-19 outbreak, despite a much lower cost of long-term bonds. This effect is likely to persist if the economy recovers slowly and utilities play a large role in dampening economic difficulties in their service territory.
"Global Impacts and Implications of COVID-19 on Utility Finance" is authored by Brattle Principals Bente Villadsen, Robert Mudge, and Frank Graves; Associate Josh Figueroa; and Research Analysts Tess Counts, Lily Mwalenga, and Shivangi Pant.