The Course of Electricity Demand in an Economic Crisis and What We Can Learn from the Current COVID-19 CrisisLiam Thomas, 20 April 2020
What is indisputable about economic shocks throughout history is that they also impact the demand for power. Every form of economic activity requires electricity – directly and indirectly. Following the 2008-9 recession, electricity consumption in the US was set back considerably, US utility sales did not exceed 2008 levels until 20181. In today’s economic crisis resulting from measures to contain the global spread of COVID-19, experts expect that the electricity use will again reduce in line with economic output, but will drop much less in percentage terms because essential services and households will continue to use power. In some instances, like healthcare, it is likely that electricity consumption will increase.
The Impact So Far
In developed economies, although the data is from a limited period and is not comprehensive, some banking and power market analysts2 have concluded that most countries will see a reduction in electricity demand primarily from their Commercial and Industrial sectors, partially offset by an increase in household demand. The impact on earnings for utilities and power companies is anticipated to be less material because sales to the Commercial and Industrial sectors are typically lower margin than sales to households.
In Australia, electricity consumption in March was down, on average across all states, by 7% when compared to March 20193. The decrease is not wholly attributed to government-mandated shut-down measures, but is also thought to reflect the very mild weather over this period requiring less heating and cooling.
In Europe, daily power demand statistics comparing the end of February with the beginning of April 2020 show significant declines with the largest impacts in Italy and Spain, where daily demand has declined 31% and 22%, respectively, likely reflecting the high early COVID-19 infection rates and subsequent containment measures enacted in those countries.
In the US, analysts estimate single digit declines in overall power demand with the pattern of reduced Commercial and Industrial demand partially offset by an increase in residential usage holding true4. The offset is partial because household electricity demand makes up a minority (40%) of electricity consumption in the US5. These estimates align with the commentary of energy companies in an article in Forbes where various CEOs confirm “incremental residential load” and have rejected the notion that earnings guidance needs to be reviewed6.
The size and segmentation of US electricity markets provides dynamic data on the course of the virus and the implementation of measures to arrest its spread. Using grid by grid data, a report from Bloomberg New Energy Finance confirms that the impact on regional grids is consistent with the course of the pandemic and shut-down measures, with New York and New England the hardest hit, while the southern states across to the desert Southwest currently continue to see demand growth7. Clearly that will change as states such as Florida begin to implement partial shut-downs.
The Light at the End of the Tunnel
What is encouraging is the very rapid turnaround that is taking place in China, which is ostensibly beyond the high-point of the crisis and moving to reopen its economy. Power demand growth is recovering and Morgan Stanley notes that demand growth in China Southern Grid (Guandong) turned positive on 18 March, 2020. Similarly, demand for gas also exhibited positive growth in the fourth week of March, compared to the previous year8.
Additionally, although there is expected to be some short-term disruption to construction of new solar and wind projects, power market analysts have not yet revised long-term build forecasts. Even if projects are materially delayed because of supply chain issues or labour shortages, the expectation is that they will still go ahead rather than being cancelled altogether given the ever-improving cost competitiveness of solar and wind as a replacement for retiring fossil-fuel generation.
New Energy Solar
How does this changing demand environment impact businesses like New Energy Solar (ASX:NEW) or US Solar Fund (LON:USF). Both have portfolios comprising mostly completed and operating solar power plants. Happily, the high proportion of annual revenue contracted under long term power purchase agreements (PPAs), approximately 96% for NEW9 and 100% for USF in 2020, underpins the resilience of the business’ earnings during the contracted period. While not specifically referring to NEW or USF, Morgan Stanley makes the comment about similarly structured entities with operating renewable assets that:
Yieldcos, which own mature, large-scale renewable assets, will in our view see minimal to zero cash flow impacts, and the current cash flow yield of many of these stocks is very high, limiting downside for these stocks.