COVID-19: How The Pandemic Impacts The Energy Market

In the holiday season of 2019, the term “coronavirus” was somewhat casually referred to, a word you’d hear at bars and restaurants as people huddled together to discuss global events. Fast forward to 2020, and the coronavirus pandemic has gripped the entire world, devastating human livelihoods and economies worldwide. As a result, the deadly virus (scientifically known as COVID-19) has left virtually nothing in our once-ordinary lives unscathed, including the energy sector. 

Economically speaking, the pandemic has caused unimaginable turmoil in the United States. The second quarter of 2020 saw the lowest drop in economic output on record. Between June 15 and July 10 of this year alone, 15,742 businesses listed on Yelp permanently closed their doors. And as of August 2020, 13.6 million people are unemployed. Though the eventual development of a vaccine will breathe some life back into the American economy, significant economic scarring is unavoidable.

The damage caused by COVID-19 is profound and shocking, and it’s rippled into the energy sector as well. 

At A Glance: COVID-19’s Effects on Energy

Traditional and renewable energy sectors alike are feeling COVID-19’s wrath. 

Globally, green energy production is taking a nosedive. China, the world’s main producer of renewable energy technologies (and one of the countries hit hardest by the virus), has stalled in its exports of renewable energy equipment. As a result, other nations receive fewer renewable technologies, such as solar panels, wind turbines and rechargeable batteries. 

In the U.S., electricity consumption has decreased as schools, businesses and industrial facilities close down due to nationwide quarantine orders. The central U.S. saw a decrease by 9%–13% in electricity consumption in March and April, and the U.S. Energy Information Administration (EIA) projects an overall 5.7% drop in annual electricity demand in 2020. A reduction in energy consumption can lead to a host of issues, such as cancellations in the building of new power plants, supply chain disruptions and decreased electric reliability. 

Reduced energy consumption also leads to an increased credit risk for energy suppliers, as the looming economic recession means some customers are unable to pay their utility bills. According to a March 2020 report by management consulting firm Oliver Wyman, just a one percent demand decrease for each of the five largest U.S. utilities could lead to an annual revenue loss of $50-100 million. This is expected to have a detrimental effect along the supply chain and operations. 

To add insult to injury, the pandemic has also stifled demand for oil, which creates a price dip and presents challenges for oil and gas providers. 

Chief among concerns for businesses in the pandemic is reduced cash flow. Energy spending takes up a significant share of most budgets, which means that businesses are pivoting to solutions for keeping the lights on without breaking the bank. For some, that means slashing salaries or pulling dollars from ad spending. Others have taken advantage of work-from-home orders to cut costs.

On the flip side of the coin, working from home has meant residential customers are also bearing the brunt of the pandemic. Many have experienced a spike in their energy bills, especially during the summer months, as they hunker down at home and run air conditioners, computers and essential appliances. 

Going Further: COVID-19’s Long-Term Impact

While energy suppliers are hustling to provide business and residential customers with short-term solutions, COVID-19 will nonetheless have long-lasting impacts in the energy sector. 

Given that energy suppliers have faced significant economic hurdles in the last few months, the phrase “money on my mind” will become somewhat of a mantra for them. But what does that mean for customers?

This means that, to make up for the revenue lost, energy companies will decrease focus on their smaller customers whose financial contributions are minimal. Instead, they are likely to increase competition among their larger customers to maximize revenue. 

Energy companies will also need to re-shuffle their operations to balance the books. Some might invest in automation, migrate their IT to the cloud or funnel certain operating functions to contractors to trim costs. Energy supply companies may also pivot to the residential market, as companies with high residential load were well-positioned to weather the storm as stay-at-home orders fell into place. This will not only help them survive this pandemic, but also prepare them for the next. 

Experts also fear that the delay in renewables investment may curb the expansion of clean energy technologies. Without a contingency plan, long-term sustainability goals could be derailed. However, the disruptions in U.S. businesses and the consequent fall in electricity demand has disproportionately affected coal generation. As a result, the EIA forecasts that renewables will permanently outpace coal in the U.S. power sector. 

Conclusion 

The pandemic has made a significant dent in the energy sector. While its long-term effects on energy will continue to be analyzed over the coming years, what’s clear now is that COVID-19 has dampened demand and prompted energy prices to go south. As a result, non-payment of utility bills throws a wrench in the supply chain, straining energy companies. Energy suppliers are readjusting to meet the challenging demands of this new lifestyle under stringent lockdowns, but will need to focus on larger accounts rather than smaller customers to make up for revenue loss. And while the development of green energy technology has stalled, there are signs that it’s making headway in the U.S.: a small silver lining for trying times.