Coronavirus: The Impact on the Electricity Market
It is difficult at this point to determine the full extent of the coronavirus pandemic’s impact on the electricity sector. Some effects will be felt in the short term, while others will be felt over the longer term. Intuitively, we can already begin to see the outlines of what lies ahead.
Boris Solier, University of Montpellier and Jacques Percebois, University of Montpellier
Shutterstock
Electricity is a basic necessity, and like any public service, it is governed by three principles: continuity, equal treatment, and adaptability.
It is the first of these that is crucial here. There is no cause for concern on that front, as the operators (EDF, RTE, and Enedis) have contingency plans in place to ensure that nuclear and thermal power plants will continue to operate—even with a 40% staff absence rate during a peak of the epidemic—and that the power grids will remain operational.
Priority is given to operational staff, who keep power plants running and repair power lines. Support staff can continue working remotely. In fact, they must come to the site as little as possible to avoid infecting the staff who operate the power plants, particularly nuclear ones, as happened at the Flamanville Nuclear Power Plant, where the “pandemic plan” was activated on March 16, 2020.
A decline in electricity demand
Electricity demand fell in March, mainly due to the decline in economic activity. The electricity transmission system operator reported a “15% decline” on March 18.
The cause is the slowdown or even shutdown of industry, businesses, and public transportation (high-speed trains, subways, and trams). This situation is therefore likely to worsen.
The growing reliance on digital technology due to remote work and lockdowns (digital technology typically accounts for about 10% of electricity consumption in France, and consumption in this sector is estimated to have increased by 40 to 50% during the pandemic) is unlikely to offset the decline in electricity demand in other sectors—far from it.
It should also be noted that the Energy Regulatory Commission is asking EDF and RTE to discontinue the peak-hour pricing system, which allows certain customers to benefit from rates that vary depending on the time of year—a clear indication that electricity demand is declining. Under this system, the price paid by the end consumer is relatively low for much of the year, when consumption is low, but rises sharply during periods of high consumption—particularly in winter—encouraging consumers to reduce their demand.
We can also expect daily peaks to be smoothed out, meaning that the electricity demand curve will flatten.
Traditionally, electricity consumption peaks around 8 a.m., when businesses begin their operations. The slowdown in economic activity and the lockdown measures put in place are thus helping to reduce this daily consumption peak and smooth out the demand curve. “The use of demand response programs to limit consumption peaks now appears to be of little use and could, moreover, lead to higher bills for the consumers involved,” the CRE also notes.
RTE
Electricity prices
France currently has a surplus of electricity capacity, and the weather is fairly mild, especially as we head into spring. There is therefore no cause for concern regarding the supply of electricity. Demand, on the other hand, is likely to decline sharply once again. This has and will continue to have an impact on prices in the wholesale electricity market—and, by extension, on the revenues of electricity producers and suppliers (EDF and alternative suppliers).
Since power plants are dispatched onto the grid in order of increasing marginal cost, generation sources with the lowest variable costs (renewables and nuclear) are prioritized to meet electricity demand. Gas- and coal-fired power plants, which have significantly higher variable generation costs, are therefore most likely to be affected by a decline in consumption.
Admittedly, gas prices are very low since they track oil prices, which are themselves in free fall, but the reduction in the cost of producing a thermal kWh will not alter the principle that priority is given to renewable energy sources (run-of-river hydro, solar, and wind) and nuclear power. On the contrary, the decline in demand could accelerate the already underway decline of coal in electricity production in Europe.
As the wholesale price per kWh falls, the price including tax for end consumers should also drop slightly. It’s worth noting that the cost of electricity accounts for only one-third of the bill we pay; the rest consists of transmission and distribution costs and taxes.
At the same time, the price per ton of CO₂ has plummeted on the European market, falling from €24 on March 10 to €15 on March 23 in just a few weeks, due to the decline in thermal power generation and, consequently,CO₂ emissions in Europe.
Although France’s electricity mix is more than 90% carbon-free, this is expected to further drive down wholesale prices due to interconnections with other Western European countries that emit moreCO2.
EEX, CC BY-NC-ND
Market capitalization
The decline in revenue for electricity producers and suppliers will lead to a drop in their stock market value. The market capitalization of these operators is expected to follow the trend observed across global stock markets.
Certain investments in electricity generation (such as gas-fired power plants) will become “stranded costs” because they will only be called upon to operate for a small number of hours per year, which will make it impossible for them to remain profitable.
Ultimately, this situation will likely lead to bankruptcies among the most vulnerable operators, or at least to a wave of mergers and acquisitions. This is true on a global scale, and probably in Europe as well; it is less certain in France, given the dominance of the incumbent operator, which remains largely state-owned.
A decline in investment is on the horizon
It is undoubtedly in the area of investment that the long-term effects will be most severe. The sustained decline in electricity demand—which is expected to continue if France enters a prolonged recession (negative economic growth)—will be accompanied by a sharp drop in operators’ revenues and cash flow.
As a result, we can expect delays in certain nuclear renovation projects, as well as a reduction in investment in new projects (renewable energy and even new nuclear power).
Similarly, the plunge in oil prices significantly increases the relative cost of investing in low-carbon energy and risks undermining energy efficiency, due to a lack of financial resources and because electricity bills for end consumers will have fallen slightly. The fight against global warming and the reduction of energy consumption are likely to take a back seat in the coming months for many economic actors—starting with public policymakers.
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 put off indefinitely.
Let’s also not forget that electricity accounts for only a quarter of the 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 impact on the electricity sector. It is difficult to anticipate all the interactions, especially since it is unclear how long the global crisis will last and what its longer-term effects on the economy will be.
Boris Solier, Associate Professor of Economics, Research Associate at Art-Dev and the Chair in Climate Economics, University of Montpellier and Jacques Percebois, Professor Emeritus of Economics, Research Associate at the Chair of Climate Economics (Paris-Dauphine), University of Montpellier
This article is republished from The Conversation under a Creative Commons license. Readthe original article.