Brattle economists have released today an assessment through June 2020 on the ongoing impacts and implications of COVID-19 on the energy industry. The study provides an update to earlier compilations and assessments through early April 2020 and early May 2020 on the impacts of the pandemic on demand, prices, and financial conditions in the industry.
The updated Brattle assessment reveals that while demand depression was most severe in April and May 2020, June 2020 saw a rebound back to just 3% below normal (past average) levels. The uptick is likely due to phased re-openings in most US states.
7 ISOs’ Electricity Load in February-June 2020 Relative to Load for Prior 4 Years (2016-2019)
In addition, with respect to electricity markets, the study shows that:
- Residential load is estimated to be up around 8%, so the overall load reduction is concentrated in C&I customers, for whom load reduction has declined about 10–15% due to COVID-19 (though some locations have significantly more or less load reduction).
- Month-on-month average ISO load shapes often have a bit of a reduction in afternoon hours and actual highest-day peaks (not monthly averages) were generally reported as having declined, per ISO analyses.
- Forward electricity prices for 2020 generally remain depressed, but for 2021 and beyond prices are mostly a bit above pre-COVID-19 levels.
- Gas- and coal-fired generation in June 2020 are up by over 60% compared to May 2020 corresponding to seasonal warming plus partial economic recovery; but compared to June 2019, gas-fired generation is up around 20% and coal is down approximately 10%.1
US natural gas demand, conversely, has remained fairly consistent with normal seasonal levels, showing no strong or obvious COVID-19 effects. Henry Hub futures are depressed in the front months, mostly due to lower LNG export volumes and high storage levels, but like US electric forwards, are somewhat elevated compared to pre-COVID-19 levels in 2021 and beyond.
The updated assessment also includes comparative data on Ontario in the Canadian market. While Canada has had lower rates of COVID-19 than the US, it has experienced greater financial losses in its stock market, which may indicate that the direct effects of COVID-19 are not as critical to Canada’s economy as the pandemic’s impacts on its oil, gas, and natural resource export markets. For instance, the oil futures markets are reflecting a long disruption to the demand and prices – not reaching pre-COVID-19 levels of $50/bbl until 2025–2028.
Another addition to the updated assessment is evidence of elevated utility financial risks arising from the pandemic. “Utility stocks have been more volatile than the market as a whole, and utility betas have increased considerably,” noted Brattle Principal Robert Mudge, a study coauthor. “This may reflect anxiety about COVID-19 load losses and cost recovery difficulties.”
According to the study, utility revenue reductions should initially be smaller in percentage terms than load losses, due to residential increases under volumetric rates offsetting the much larger C&I load losses that are partly softened in revenues by demand charges. However, in the next few months, losses from utility moratoriums on shutoffs for non-payment may grow to levels difficult to recover, and some businesses may not be viable at reduced commercial levels likely over the next few months, possibly leading to bankruptcies – so very significant cost recovery shortfalls could arise despite notional deferral and decoupling mechanisms.
“Impacts and Implications of COVID-19 for the Energy Industry: Assessment through June 2020,” is authored by Brattle Principals Frank Graves and Robert Mudge, Associate Josh Figueroa, and Research Analysts Tess Counts, Lily Mwalenga, and Shivangi Pant.
1 The analysis includes generation from PJM, MISO, SPP, CAISO, NYISO, ISO-NE, and IESO.