As global economic activity has rapidly ground to a halt, energy markets have witnessed a rapid, unprecedented drop in demand. While economic impacts on electricity markets and investment so far have been limited compared to oil and gas markets, substantial short-term uncertainty could complicate long-term investment decisions. Nevertheless, the operational and demand effects are wide-ranging.

The most pronounced impact for electricity markets has been a decrease in demand. Due to social distancing and quarantine policies throughout all major economies, total electricity demand has generally fallen by around 5-10%. Adjusting for weather remains an analytical challenge, as do accounting for regional differences in electric supply and industrial, commercial and residential demand. Further, estimates vary significantly by region, with EPRI finding peak and average demand down by as much as 22% in Italy, 15% in Spain and 7% in California and New York.

While the general load shape remains, there are hours where demand declines are especially large, which can lead to a decrease in morning and evening ramps.

A natural experiment

The demand situation is creating an unexpected natural experiment in managing variable renewable energy sources. According to IEA Executive Director Fatih Birol, the demand drop "fast forwarded some power systems 10 years into the future" in regards to integrating high percentages of renewable energy. As evidence of this, curtailment, a key form of renewable flexibility, has increased.

Declining energy demand is leading to large decreases in greenhouse gas and local air pollution. Multiple analyses using satellite and local air quality monitoring identified significant reductions in China, Italy and the United States. While electricity is only a portion of the declines, cleaner air is a sign of both the severity of the downturn and the potential future of a clean energy system.

However, depending on policy design or regulatory discretion, this lower pollution is unlikely to stay for long.  Additionally, environmental regulators may relax operator restrictions. As an example, in China, there is concern about lessened pollution regulations to jumpstart economic activity. In the US, the EPA has indicated it may limit enforcement activity if coronavirus mitigation measures impact pollution control measures.

Electricity prices are falling due to low seasonal demand, reduced demand from quarantines, and from falling input energy prices. Oil, LNG, coal and domestic natural gas demand have all collapsed, with subsequent declines in prices for each commodity, LNG prices are notable for reaching record lows below $3/mmbtu. Large LNG importers, including Japan, South Korea and Europe, often rely on LNG as a marginal fuel.

In the United States, persistent oversupply from shale gas production, including associated gas from oil wells, had led to very low natural gas prices before coronavirus struck. Now with a domestic energy crunch and the potential for reduced LNG exports, front-month natural gas contracts are trading between $1.50-1.80/mmbtu. A model for Europe found coronavirus impacts could reduce power prices by 9%.

Construction and operation impacts

Beyond demand and prices, concerns about coronavirus are impacting construction and operations activities for the electric sector. Many projects are being placed on hold or are outright canceled, including energy efficiency. Although existing renewables are unlikely to be impacted, new projects may be delayed or cut as industrial and commercial customers exercise financial caution during the outbreak. Further, supply challenges for renewable energy, particularly from solar due to China’s prolonged lockdown, threaten current projects.

Similarly, operations and maintenance activities are being deferred. This is especially problematic for nuclear fleets, which often conduct refueling and planned operations outages in the spring. Almost all nuclear plants in the U.S. have a least one planned outage this spring or fall, as do many plants globally. Requiring over a thousand workers, often from out of town, there is limited ability to delay refueling. Companies are trying to minimize downtime and worker exposure by deferring O&M activities but refueling is needed to ensure the facilities can keep operating.

In response to the economic situation, there are many policy questions about how utilities and economic regulators should manage electricity rates and bills. Severe jumps in unemployment and delays in unemployment benefits raise major questions about customers’ ability to pay.

On the industrial and commercial side, large declines in demand are likely to cut into utility revenues while also raising the potential for force majeure declarations to break long term contracts. Many states and countries are halting utility shut-offs for non-payment, to avoid exacerbating energy poverty and worsening economic suffering. One proposal even calls for a utility bill moratorium, to be made up subsequently in future rates.

Significant financial fall out

The financial fall out for the electric power sector is already significant. Renewable companies are already shedding workers. Although utility stocks are typically seen as relatively safe havens during economic downturn, the unusual combination of large decreases in industrial demand, depressed electricity prices and uncertain quarantine length could impact utility stocks and finances.

Perhaps counterintuitively, the unexpected effects of a pandemic underscore the importance of electric sector resilience. Traditionally, electricity resilience is envisioned as ensuring sufficient, reliable supply to meet high demand. While electric systems have managed load declines to date, resilience must be understood as ensuring sufficient capacity during all time periods.

One of the more striking impacts of the current situation is that demand declines are accompanied by potential supply disruptions. A lack of industrial demand limits the ability of utilities and markets to call on demand response, effectively removing a key source of grid flexibility. A shift in demand to the residential sector may portend distribution system stress this summer. Operational constraints, especially staffing, could impact thermoelectric supply and even grid management.

The long-term impacts of the current economic disruption are uncertain. The length and severity of ongoing quarantine measures will determine the ultimate impacts. Even if stay-at-home orders are lifted, economic effects and continued social distancing practices may limit demand rebounds. It is possible that electricity demand will not return completely to normal until a vaccine ends the coronavirus threat.

Accelerated coal and nuclear retirements

In the United States, the most lasting effects of the current disruption for electricity could be accelerated coal and nuclear retirements. Coal for power generation was in a death spiral for most of the 2010s. The 2020s look no different as aging facilities, increased competition and climate-policy pressure drive the sector into a death spiral. Now, however, many coal plants could close even earlier due to the financial hit of low natural gas prices and limited electricity demand.

Similarly, while the nuclear fleet is generally more financially robust than the coal fleet, low power prices in wholesale markets may lead to financial struggles at marginal nuclear facilities, particularly those that lack state policy support. If operational limitations continue into 2021, deferred O&M or necessary capital estimates may lead these marginal facilities to retire, with attendant increases in emissions.

Despite good service provision to date, the electric sector must continue to prioritize system reliability and resilience in the face of unknown future impacts. Supply diversity, further demand flexibility and better electric industry coordination are all necessary to ensure reliability during future economic shocks and natural disasters. Economic outcomes and investment decisions during the next 18-24 months could reshape electricity markets for decades.