Could COVID-19 be a windfall for utilities? It's possible, according to Steve Cicala, a faculty research fellow at Tufts University.

As the United States shuttered parts of its economy in the second quarter and pushed for workers to do their jobs from home, the country saw shifts in electricity demand and usage. Generally speaking, commercial and industrial (C&I) consumption fell while higher-priced residential sales accelerated. Cicala said this has given a boost to utilities' bottom lines — while their customers are struggling.

According to consulting firm The Brattle Group, the utility industry saw "modest" revenue impacts this summer and posted second quarter earnings almost 9% higher than in 2019. Experts say there is a range of explanations for the stronger returns beyond load shifts due to COVID-19, including weather and cost-cutting measures.

While higher residential revenues are possible due to customers working from home, representatives from the utility sector say this is balanced by higher costs to supply the electricity during the pandemic and any increases in demand are largely in line with historical variations. There are also lower C&I sales to be considered, they say.

"Weather remains the most important driver of what moves utility sales in the short term," said John Bartlett, president of Reaves Asset Management (RAM). But "residential sales have definitely been more powerful than they usually are."

Working from home less efficient 

Cicala's research finds that overall electricity consumption returned to "normal" this summer — after falling early in the pandemic — but now more of it is being consumed at home. In an October paper, he concluded that shift has reduced efficiencies of scale that come with supplying power to groups of people in one place, such as an office, and has created a situation where consumers are paying higher electricity bills than they were before the pandemic.

Cicala points to "all of the things associated with being at home. ... It goes beyond heating and cooling."

That makes sense, according to Albert Lin, executive director of Pearl Street Station Finance Lab, "if you think about the general model of how people move through the workweek or day." It is more efficient for hundreds of office workers to share an efficient air conditioner, he said, than for individuals to cool their own homes.

Pearl Street is supported by Energy Foundation, and works with regulators, policymakers and utilities to reduce carbon emissions.

"When the pandemic hit and everyone began spending far more time at home, you saw a tremendous increase in residential use and at a much higher profit margin," said Lin.

Using hourly smart meter data from Texas and some data from the U.S. Energy Information Administration (EIA), Cicala found a 16% increase in residential demand during work hours "offsets the declines from commercial and industrial customers."

Cicala documented an overall 10% increase in residential consumption, and a 12% and 14% reduction in commercial and industrial usage, respectively, during the second quarter of 2020.

'Higher residential consumption is good news for utilities' 

"The increase in residential consumption is found to be positively associated with the share of the labor force that may work from home," Cicala's paper concluded. And that means higher costs: From April through July this year, residential consumers nationwide spent $6 billion more on their power bills than they did the year before.

From April to July 2020, the paper shows monthly electricity bills were more than $20 higher on average for utilities serving one fifth of U.S. households.

"The reduction in economic activity is clear in patterns of industrial and commercial electricity consumption, while there has been a striking shift towards using more residential usage," the paper notes.

Residential demand is about 35% to 40% of total U.S. electric consumption — it varies regionally, and among utility service territories.

"Higher residential consumption is good news for utilities, which have a higher markup on residential sales," said Cicala.

According to Pearl Street's Lin, Cicala is correct. "As a general rule ... residential (consumption) has gone up, and it is more profitable," he said. C&I consumption has fallen, he sad, and those sectors are less profitable to begin with for utilities.

From a financial perspective, "utilities are, overall, pretty happy with the pandemic," said Lin.

Utilities dispute study findings   

The Edison Electric Institute, which represents investor-owned utilities, disputes Cicala's conclusions — though they say higher revenues from residential electricity sales are a possibility.

"The premise of the paper has a bit of a problem," said Adam Benshoff, executive director of regulatory affairs for EEI. "It starts with this premise there is a markup on residential versus commercial and industrial prices, and that's just not really how regulated companies work."

Regulators look at the cost to serve individual rate classes, said Benshoff, and set rates to cover those costs. Rates for residential customers in some cases are higher because the cost to serve that class is higher, he said. "But it's not like a grocery store ... there's not a wholesale-to-retail markup that happens in that context."

​Cicala says he understands how rates are set. "Residential customers pay higher rates with volumetric charges to cover fixed distribution costs. That's fine, but fixed distribution costs are fixed, and they're paying for them based on quantities that are going up, and that means more money in utility coffers," he said.

EEI also took issue with Cicala extrapolating Texas data to the rest of the country. The researcher says his conclusions are sound because they look at periods before high cooling loads kicked in, and are confirmed by the EIA data he used.

How will COVID-19 impact utility earnings? 

So how will utilities fare, with COVID-19 and changes to energy demand?

"We don't know," said Benshoff. "No one really knows."

There are some indications, however. According to a Nov. 2 Brattle report, electric utilities in the pandemic "on average have experienced revenue reductions smaller than total load reductions ... and have even shown a Q2 increase in earnings due to cost cutting."

Utility earnings grew by 8.9% in the second quarter, at a time when most industry earnings declined 30% or more, according to Brattle Principal Robert Mudge.

"Because residences pay more for every unit of electricity, you can imagine an equation where residential consumption entirely offset [declines in] commercial and industrial load," Mudge said. "It's certainly not impossible, and as it turns out in Q2, even though load was down profitability was actually up."

Utilities say pandemic is driving up costs 

Higher residential demand will lead to higher monthly bills, but EEI said the numbers so far appear within historical bounds and the overall impacts remain modest. And, Benshoff said utilities are seeing their own costs rise "fairly substantially" as they deal with the pandemic, change operating procedures and acquire personal protective equipment for their workers.

At least 34 state regulatory commissions have tracking mechanisms in place to closely monitor COVID costs and impacts, according to EEI.

That attention from regulators may give utilities a boost, according to Lin.

"They will grant all sorts of riders, trackers and fees to allow most utilities to recover whatever they experience in bad debt," said Lin. "And they will probably not have to give up any additional profit from increased residential sales."

While the extra $6 billion on residential second quarter bills seems like a large figure, EEI says residential revenues in 2019 were $189 billion, "so the delta here is less than 3.2% of annual revenue."

And, EEI officials point to EIA data that forecasts a 3.2% rise in residential consumption for 2020, but a 6.2% and 5.6% decline in the commercial and industrial sectors, respectively.

"A 3.20% increase is well within the normal variability that often is driven by seasonal weather," EEI spokesperson Brian Reil said in an email.

Long-term pandemic impacts may look different for utilities 

Compared with other U.S. sectors, RAM's Bartlett says there are a few reasons "utilities are in really great shape."

"Utilities get paid over long periods of time on their investment base, and sales are kind of noise," said Bartlett. "The last bill to not pay would be a utility bill." 

But according to Mudge, while utilities are doing ok now the situation may change as the pandemic wears on. And don't expect the rise in second quarter profits to continue.

"There are a lot of reasons a single quarter's earnings might have been protected," said Mudge, including deferral of expenses. "The question is whether it's sustainable, if we live in a world in which electricity demand is depressed for a prolonged period of time."

The Coronavirus Aid, Relief, and Economic Security Act, also known as the CARES Act, was a $2.2 trillion stimulus package that did a good job in helping keep customers afloat, he said. But if personal bankruptcies and economic distress rise, "utilities will be obligated to keep serving [customers], and the revenue hole will become very acute."

The rise in residential demand should not be viewed by utilities as a profit opportunity, Mudge said. And he warned "there will be other, continued and worsening stresses on the commercial and industrial side."

Because C&I bills tend to have larger fixed charge components, Mudge said revenue declines from lower sales have been muted so far. "But that is also unsustainable," he said. If demand does not return, "C&I customers won't keep those facilities in place."

Many consumers will pay $250 more for electricity this year  

There are two "practical takeaways" from the research, said Cicala. 

First, he said the data is important for lawmakers to take into account as they consider supplemental unemployment benefits during COVID-19 and other support mechanisms. "Expenses are going up at the same time budgets are taking a hit," he said.

Second, "working from home is not as green as everyone would think," he said. While commuting is down, it requires more energy to heat and cool individual homes during the day than to adjust the climate on a single office. 

As of Memorial Day, Cicala said overall demand has largely "returned to normal." He said that means residential demand is picking up the slack for businesses and industry that remain shuttered.

The change means expenses are shifting onto employees "that would normally be covered by firms," said Cicala. "If what we have on average for the entire U.S. continues for the year, it's about $250 more for a big chunk of the country."

There are significant regional differences. Cicala estimates California residential consumers, for instance, could pay $600 more per year to work from home.

"Those expenses will start to add up," he said.