So far, the hardest hit power grid is New York, with load down 7 and prices off by 10 percent. That’s expected, given New York City is the current epicenter of the US health crisis.
Next is New England, with 5 percent lower demand and 8 percent reduced wholesale prices for the week from March 19-25. BNEF says the numbers could go higher following advisories and orders issued March 24 for some 70 percent of the region’s population to stay at home.
Demand on the biggest grid in the US, the PJM (Pennsylvania/Jersey/Maryland), is 4 percent lower, with prices dropping 8 percent. BNEF believes there will be more impact as stay at home orders are ramped up in several states.
California’s power demand for March 19-25 was 5 percent below what BNEF’s model expects without COVID-19 impact. That reflects a full week of stay-at-home orders from Governor Newsom issued March 19.
Health officials in Los Angeles and elsewhere expect a spike in COVID-19 cases in coming weeks. But BNEF’s model now actually projects rising electricity load for the state, due to what it calls "freakishly mild weather a year ago."
Rounding out the report, power demand is up for a band of southern states stretching from Florida to the desert Southwest, with weather more than offsetting public response to COVID-19 so far. BNEF says the Northwest’s grid "has not yet been highly impacted," while the Southeast is "generally in line" with pre-virus expectations.
Clearly, all of this data can change quickly and radically. Only California and New York are currently in full shutdown mode. Following them are New England (70 percent), the Midwest (65 percent), Texas (50 percent), PJM (50 percent) and the Northwest (50 percent).
In contrast, only small parts of Florida, the Southeast and Southwest are restricting movement. That could mean a big future increase for shut-ins, with a corresponding impact on power demand.
Also, weather will play a major role on what happens to actual electricity demand, just as it always does. A very hot summer, for example, could offset virus-related shut-ins, just as it apparently is now in states like Texas. And it should be pointed out that regions vary widely by exposure to recession-sensitive sources of demand, such as heavy industry.
Most important for investors, however, is the built in protection US utility earnings enjoy from declining power demand. For one thing, US power grids in California, ERCOT (Texas), MISO (Midwest), New England, New York and PJM have wholesale power markets, where producers compete for sales and the lowest bidder sets the price.
In those states, most regulated utilities don’t produce power at all. In fact, companies’ revenue is decoupled entirely from demand in California, as well as much of New England. In the roughly three-dozen states where utilities still operate as integrated monopolies, demand does affect revenue. But the cost of electricity is passed through directly to customers, whether produced or purchased.
A number of US electric companies have invested in renewable energy facilities. These sell their output under long-term contracts primarily with other utilities and government entities.
This isn’t a risk free business: For the past year, generators selling electricity to bankrupt PG&E Corp (PCG) have had their cash trapped at the power plant level as surety for lenders. But even PG&E has honored its contracts. And with states continuing aggressive mandates for renewable energy adoption, growth doesn’t appear at risk to COVID-19 fallout either.
The wholesale price of power from natural gas, coal and many nuclear plants was already sliding before COVID-19, due to renewables adoption and low natural gas prices. But here too, big producers like Exelon Corp (EXC) and Vistra Energy (VST) have employed aggressive price hedging near term, with regulated utilities and retail businesses protecting long-term health, respectively.
Bottom line: It’s early days for the COVID-19 crisis and much can still change. But so far at least, the US power industry is absorbing the blow of reduced demand, just as it’s done in previous crises.
That means future selloffs in the ongoing bear market are buying opportunities for best in class electric utilities, not a reason to sell. For top candidates, see the Conrad’s Utility Investor Portfolios and Dream Buy List in the March issue.