Disruption to the energy sector as a result of coronavirus (Part 1)

While it’s still too early to have a crystal clear understanding of the full extent and economic impact triggered by the coronavirus pandemic, many sectors are likely to be significantly different going forward. For the energy industry, that is expected to result in price volatility as we progress through 2020 and beyond.

We heard Rishi Sunak, the Chancellor, say it was clear the pandemic would have a very significant impact on the UK economy. More recently, the first official estimate of economic activity (GDP) confirmed that, despite lockdown officially only starting on 23 March, in the first three months of this year the UK experienced the sharpest economic contraction since the peak of the financial crisis in 2008, falling 2.0%.

Source: Office for National Statistics (link)

The widespread challenges to economic activity are set to continue and any hope of a rapid bounce back could be wishful thinking. The Office for Budget Responsibility has estimated that GDP could fall by more than a third in the second quarter of the year and by 13% for 2020 as a whole. With business activity effectively brought to a standstill globally, the International Monetary Fund has also warned of an economic slump unparalleled and eclipsing the Great Depression of the 1930’s.
Baringa Partners, a management consultancy, produced a report in April 2020 which explores the current situation, possible outcomes for power markets and the impact of policy change. Here we outline the key aspects of their report.

Electricity

• Lower electricity demand levels have led to oversupply situations being observed and could lead to an increased risk for negative price events and curbing of renewable generators. For some renewable generators operating under existing support schemes, these risks could be more material than lower wholesale market price levels.

Gas

• There was already pressure on natural gas prices in Europe even before Covid-19 due to continued high levels of Liquefied Natural Gas (LNG) supply, weaker Asian LNG demand, resolution of the gas deadlock, and high European gas storage levels.

Oil

• Brent crude prices dropped 36% in Y+1 contracts and 28% in Y+2 contracts between March and the beginning of the year.

Carbon – EUA

• A 35% drop in March compared to the start of the year once the outbreak reached Europe. Reduced economic activity, remote working and lower travel demand has reduced carbon emissions by 35% in March compared to the start of the year, meaning lower European Union Allowance (EUA) carbon prices. Post Covid-19, EUA carbon prices may depend on energy policy objectives and supply/demand considerations.

• The impact has been felt across wholesale power markets, mainly due to the drop in commodity prices with Year-ahead contracts falling 18% in GBP terms, equivalent to £8.4/MWh.
• Sourcing and supply chains have been impacted across the power industry as a result of reduced capacity, borders closed and logistical delays affecting finances.
• A material impact on financial institutions may be higher credit losses, which means the availability of capital for long-term investments may be impacted.

The impact of the evolving situation represents a large and unexpected supply and demand shock for the energy industry and pricing, in particular electricity prices and Renewable Generators, combined with lower consumption, a significant reduction in travel and an oil price war that has caused price volatility for electricity, gas and carbon.

Tune in next week for Part 2. Farm Energy NI are well informed of the developing situation, guided by advice from the appropriate authorities and can answer any of your questions or concerns. You can contact them at: www.farmenergyni.co.uk or 028 7930 0606