Coronavirus: consequences for the electricity market

For the moment, it's difficult to determine the full impact of the coronavirus epidemic on the electrical sector. Some effects will be felt in the short term, others in the longer term. Intuitively, however, we can already sketch the outlines.

Boris Solier, University of Montpellier and Jacques Percebois, University of Montpellier

Electricity is a basic necessity, and like all public services, it is subject to three principles: continuity, equal treatment and adaptability.

The first of these is vital. There's no fear here, because the operators (EDF, RTE and Enedis) have plans in place to ensure that nuclear and thermal power plants will continue to operate - even with 40% absenteeism in the event of a peak epidemic - and that the networks will be in working order.

Priority is given to operational staff, who run the power plants and repair the power lines. Support staff can continue to work from home. Moreover, they need to come on site as little as possible to avoid contamination of agents who operate power plants, particularly nuclear ones, as happened at the Flamanville power plant, where the "pandemic plan" was activated on March 16, 2020.

Lower electricity demand

Electricity demand fell in March, mainly due to the slump in economic activity. The electricity transmission system operator announced "a trend of -15%" on March 18.

This is due to the slowdown or even stoppage of industry, commerce and transport (TGV, metro, tramway). A situation that is set to intensify.

The growing use of digital technology for telecommuting and containment (digital technology usually accounts for around 10% of electricity consumption in France, and consumption in this sector is estimated to have risen by 40-50% in the context of the epidemic) is unlikely to offset the fall in electricity demand in other sectors - far from it.

It should also be noted that the French Energy Regulatory Commission is asking EDF and RTE to stop applying the peak-time system, which allows certain customers to benefit from tariffs that vary according to the time of year, proving that demand for electricity is falling. With this system, the price paid by the end consumer is relatively low for a large part of the year, when consumption is low, but rises sharply during periods of high consumption, particularly in winter, encouraging them to reduce their demand.

We can also expect a flattening of daily peaks, i.e. a flattening of the electricity demand curve.

Traditionally, electricity consumption peaks around 8am, when businesses start up. The reduction in economic activity and the containment measures put in place tend to attenuate this daily consumption peak and smooth out the demand curve. "The use of load shedding tariffs to limit consumption peaks now seems of little use and could, moreover, lead to an increase in the bills of the consumers concerned", adds CRE.

Electricity prices

France has rather too much electricity capacity, and the weather is fairly mild, especially as we're heading into spring. So there's no need to worry about electricity supply. Demand, on the other hand, is still likely to decline sharply. This has, and will continue to have, an effect on wholesale electricity prices - and in turn on the revenues of electricity producers and suppliers (EDF and alternative suppliers).

Since power plants are called up to the grid in order of increasing marginal cost, the generation resources with the lowest variable cost (renewable and nuclear) are used first to meet electricity demand. Gas- and coal-fired power plants, whose variable production costs are significantly higher, will therefore be the most likely to be affected by lower consumption.

Although the price of gas is very low, since it follows the price of oil, which is itself in free fall, the reduction in the cost of producing a thermal kWh will not alter the principle that priority is given to fatal energy sources (run-of-river hydro, solar and wind power) and nuclear power. On the contrary, falling demand could accelerate the decline in coal's share of Europe's electricity production, which has already begun.

With the wholesale price of kWh falling, the price including VAT should also fall slightly for the end consumer. It should be remembered that electricity supply accounts for only a third of the bill we pay, with the remainder corresponding to the cost of transmission and distribution and taxes.

At the same time, the price of a tonne of CO₂ collapsed on the European market, dropping from 24 euros on March 10 to 15 euros on March 23 in the space of a few weeks, due to the drop in thermal electricity production and therefore_CO2 emissions in Europe.

Although France's electricity mix is more than 90% decarbonized, this should reinforce the fall in wholesale prices due to interconnections with other Western European countries with higher_CO2 emissions.

Market capitalization

Falling revenues for electricity producers and suppliers will lead to a decline in their stock market value. The market capitalization of these operators should follow the trend observed on all world stock exchanges.

Some power generation investments (e.g. gas-fired power plants) will become "stranded costs", as they will only be required to operate a small number of hours per year, making them unprofitable.

In the long term, this situation will no doubt lead to the bankruptcy of the weakest operators, or at the very least to a wave of mergers and acquisitions. This is true on a global scale, and probably in Europe too; it's less certain in France, given the weight of the incumbent operator, which remains largely state-owned.

A drop in investments to come

It is undoubtedly in terms of investment that the long-term effects will be most severe. The long-term decline in demand for electricity, which is likely to continue if France enters a long-term recession (negative economic growth rate), will be accompanied by a drop in operators' revenues and cash flow.

As a result, we can expect to postpone some nuclear refurbishment investments, but also to reduce investment in new projects (renewable energies or even new nuclear power).

Similarly, the plunge in oil prices is considerably increasing the relative cost of investment in low-carbon energies, and is likely to affect energy efficiency, due to the lack of financial resources and the fact that electricity bills will have fallen slightly for the end consumer. The fight against global warming and the reduction of energy consumption are likely to take second place in the coming months for many economic agents - starting with public decision-makers.

It is likely that, for all these reasons, the process of liberalizing the energy sector will be slowed down and the reform of the electricity market postponed indefinitely.

And let's not forget that electricity accounts for only a quarter of the total energy consumed. final energy consumption in France. Petroleum products account for the bulk of this consumption (46%). The situation in other sectors will also have a direct or indirect effect on the electricity sector. Anticipating all the interactions is tricky, especially as we don't know how long the global crisis will last, or what longer-term effects it will have on the economy.

Boris Solier, Senior Lecturer in Economics, Associate Researcher at Art-Dev and Climate Economics Chair, University of Montpellier and Jacques Percebois, Professor Emeritus in Economics, Associate Researcher at the Climate Economics Chair (Paris-Dauphine), University of Montpellier

This article is republished from The Conversation under a Creative Commons license. Read theoriginal article.