Impact of COVID-19 pandemic on Energy Markets and Prices

During the last few months, the COVID-19 outbreak has disrupted our lives, halted travel, and severely curbed most global economic activity. Strict lockdowns and restrictions to curtail the transmission of the virus resulted in the suspension of industrial activities around the globe, leading to an unprecedented decline in the demand for energy. We are witnessing a historic shock, the biggest decline in energy demand in the last 70 years. The impact on the energy sector is many-fold- diminished demand, the decline in prices, and the inability of individual and industrial customers to fulfil payment obligation on power supply contracts.

Many governments have temporarily granted individuals as well as enterprises the right to suspend their payment obligations under power and gas supply contracts. Although most energy suppliers have announced that they would refrain from disconnection and supply interruption in the event of payment defaults, they still need to be prepared to handle the resulting loss in revenue in the short-term. The defaulting payments will have an impact on the entire ecosystem- operators, DSOs, TSOs.

The below graph from Brugel compares the electricity consumption between 2019 and 2020 during the lockdown period.

Electricity demand is a clear indicator of economic activity. During the lockdown, Europe has witnessed a record decline in electricity prices and drops in overall consumption as much as 20% in Mid-April when compared to the previous year. Italy, where the lockdown was the strictest, recorded as much as a 30% drop in power demand, Spain 20%, France 15%, and Germany 10%. Even though residential power demand soared during the lockdown, a sharp decline in commercial and industrial power demand resulted in an overall dip.

European power markets have been volatile since the first lockdown happened in Italy. The electricity futures prices for the second quarter of 2020 have registered a sharp decline. International Energy Agency’s Global Energy Review 2020 projects that global energy demand will fall 6% in 2020. The reduced demand has already pushed down the energy prices, the abundance of supply means that a quick rebound would be unlikely even after the crisis blows over completely.

Impact on Oil

A sharp decline in road transport and the global aviation industry nearly coming to a standstill has negatively impacted demand for oil, leading to a sharp decline in prices and a decrease in production. The futures contracts on West Texas intermediate crude or WTI for May even traded on negative due to the lack of demand, oversupply and unavailability of storage. As lockdowns ease and road transport and aviation industry resume, the demand will pick up, however, production would still be delayed as all the stored crude oil would need to be used up first.

Impact on Natural Gas

Source: Authors :BEN MCWILLIAMS AND GEORG ZACHMANN Original Post: Covid-19 crisis: electricity demand as a real-time indicator

Even before the COVID-19 outbreak, the demand for natural gas registered a decline because of milder than usual temperatures during the initial months of 2020. Global natural gas demand could decrease by 5% in 2020. During the lockdown, the industrial demand for gas has also tanked and has dropped by about 15-20% across Europe.

Impact on Coal

The demand for coal is intimately connected to the demand for electricity. The global coal demand declined by 8% in the first quarter of 2019 due to a combination of factors- milder temperatures, lower gas prices, renewables being insulated from effects of COVID-19 and a strict lockdown in China- a predominantly coal-reliant country that uses more than half of the world’s coal.

Impact on Renewables

Not only did renewables not register a decline in demand, but there was also even a slight recorded growth. Renewables are not able to adjust their output according to the demand and are therefore given priority in the electricity grid. Thus, they remain unaffected by the decline in electricity demand. The market dynamics that play out during the COVID-19 pandemic will accelerate the share of renewables in the power mix. Global CO2 emissions are expected to decline as much as 8% in 2020. However, if this is to be sustained, governments and organizations everywhere must keep up the investment in the clean energy transition, even with weakened economic activity. Ongoing constructions of renewable energy infrastructure projects have been delayed or suspended because of the virus. The severity of the outbreak in China was a major factor as China is the leading global supplier of clean energy technology equipment and parts. Corporate PPAs are likely to be affected if companies affected by the COVID-19 pandemic default on payments to the operators, creating a capital issue which might lead to them delaying or suspending investments on new projects. As the crisis blows over, we might see new Corporate PPAs that are more complex to mitigate damages in the event of similar pandemics or unexpected situations in the future.

According to the projections from International Energy Agency’s Global Energy Review 2020,

Global Coal demand could fall by 5% in 2020
Global Oil demand could fall by 5% in 2020
Global natural gas demand could decrease by 5% in 2020
Global Electricity demand could fall by 5% in 2020
Renewables could register growth in demand in 2020

The demand for energy should pick up once the lockdowns and restrictions are eased around the world and travel and economic activity resumes. However, when exactly it would reach the pre-crisis levels, is still a question that energy market experts are pondering over.

For the 9th consecutive year, we are bringing together electricity market experts to benchmark best-practices. This year we will look into the impact of COVID-19 on the energy market and explore use of Artificial Intelligence, Machine Learning and Blockchain to achieve near accurate electricity price forecasting. Connect with us to join the discussion.