Report: COVID-19 ‘likely accounts for about half of this decline’
OKLAHOMA CITY – Demand on the nation’s electric grid declined last month as compared to the average of the previous four years. However, “normal seasonal factors” had as much, or more, to do with that as did the coronavirus, a global consulting firm reported recently.
The Brattle Group based in Boston performed the assessment of COVID-19 impacts on the nation’s electric and natural gas industries through early April.
The authors of the report wrote that relative to the depth of effect on other sectors such as healthcare and employment, through the end of March there was “a lagging visible effect on the utility industry’s market conditions,” due in part because the industry is essential to the economy.
From the beginning of February this year to the end of March, electric loads declined by 3% to 11% across most of the nation, research shows.
“We don’t yet have final audited numbers for March,” said Stan Whiteford, region communications manager for Public Service Co. of Oklahoma (PSO), a major electricity provider in southwest Oklahoma. “However, we estimate customer demand is down about 7% to 8% from what it would normally be at this time of year.”
The decline in electricity usage caused by the shut- down of many large commercial and industrial customers, such as Goodyear in Lawton, “is greater than any increase in residential usage,” Whiteford said. “Although many residential customers will see increased usage due to every- one staying home, that does not make up for the decreased usage by C&I customers.”
The Brattle report points out that across six major U.S. centralized wholesale markets operated by independent system operators (see chart), monthly average electric load dropped 8.7% in March as compared to the average of the previous four years.
However, COVID-19 “likely accounts for about half of this decline.” The rest of the impact, about 4.9%, or nearly 60%, is “due to normal seasonal factors.”
[Editor’s note: A tool from the U.S. Energy Information Administration – the Hourly Electric Grid Monitor – is a looking glass onto the nation’s electricity network in real time. https://www.eia.gov/ beta/electricity/gridmonitor/ dashboard/electric_overview/ US48/US48]
High-level effects on the energy sector, according to the Brattle assessment, include:
• OPEC conflicts plus demand reductions have led to a 50% to 80% drop in crude oil prices (depending on grade) through March. “The recent OPEC+ production cut agreement will help to rebalance the market, but storage limitations could become a significant problem over the next couple of months.”
• Natural gas prices have fallen by an average of 20% since early February, “likely due more to seasonal warming” than to effects of COVID-19.
“Some significant utility impacts from the pandemic’s effects can already be anticipated,” said Frank Graves, a Brattle co-founder, and report co-author.
“The utilities’ cost of capital likely has increased due to increased volatility and cost-recovery risks... We expect the impact of COVID-19 to become more discernable in the coming weeks as information emerges about how long the business closures are likely to last.”
The Brattle authors also commented on several high-level impacts on utility finance:
• Demand reductions from social distancing and ongoing consumer anxiety will likely create revenue shortfalls for most utilities. Furthermore, there are often caps on how completely or rapidly utilities can recover lost revenues through rates.
• The majority of states have mandatory or voluntary suspensions of utility shutoffs for non-payment of bills. Public Service Co. of Oklahoma and CenterPoint both have temporarily suspended customer failure-to-pay disconnections.
PSO, based in Tulsa, supplies electricity to more than 550,000 customers in Oklahoma, including residences and businesses in 37 southwestern Oklahoma cities and towns. CenterPoint Energy provides natural gas to approximately 100,000 residential and business customers in Oklahoma, including 20 cities and town in southwestern Oklahoma.
• Many states have ambitious targets for distributed energy resource (DER) adoption over the next few years. “COVID-19 could make those a lower priority, as well as less economical for a while.” Low fossil fuel costs make DER savings smaller or “less plausible,” the report notes.
(A distributed energy resource is a small-scale unit of power generation that operates locally and is connected to a larger power grid. DERs include solar panels, small natural gas-fueled generators, residential wind turbines, and controllable loads, such as HVAC systems and electric water heaters. An important distinction of a DER is that the energy it produces is often consumed close to the source.
• Potential electrification growth (such as, from electric and hybrid vehicles) may be delayed as a result of reduced fossil fuel prices and reduced consumer wealth.
By the end of March, wholesale gasoline had fallen from about $1.50/gallon to about $.50, but retail gasoline prices “have not changed as much,” the authors of the Brattle report wrote.
On average, U.S. owners of electric and hybrid vehicles incur $485 in fuel costs annually compared to $1,117 spent for fueling vehicles powered by an internal combustion engine, “a comparative price advantage that could be lessened with declining gasoline prices.”
Traffic volumes are down approximately 41% nationwide and 35%-62% in major U.S. cities, the Brattle authors report.
“A bigger cause of reduced electric-powered vehicle adoption may be consumers’ reduced wealth from exhausting their savings” during the coronavirus shutdown.
The Brattle Group answers complex economic, regulatory, and financial questions for corporations, law firms, and governments around the world. The firm provides consulting services and expert testimony in economics, finance, and regulation to corporations, law firms, and public agencies.