Restaurants, factories and hotels that have shut their doors and sent workers home don’t need much electricity. As that reality sets in, it could take the shine off one of the brightest spots for the renewables market: corporate demand.
Experts say it’s still too early to draw conclusions about the coronavirus outbreak’s effect on power demand, let alone the secondary effect on demand for wind and solar. But renewable energy companies are already grappling with near-term impacts of this unprecedented global economic dislocation, and the conversation has started about the longer-term implications.
While the effect will vary by country, region and the type of end user, demand from commercial and industrial customers is one obvious area of concern, said Rafael McDonald, director for gas, power and energy futures at IHS Markit.
“We're talking about a recession … at least a U.S. recession and probably more of a global recession, and we're expecting that that's going to lead to flat-to-negative power demand growth,” McDonald said Tuesday, speaking on a webinar organized by K&L Gates.
“Commercial demand is going down as restaurants and stores are closing, and we think industrial demand is going to be similarly impacted,” McDonald said. At the same time, “we’re expecting a rebound on the residential side” as workers stay home.
“How much will the boost in residential demand offset the decrease in commercial demand? That's the big thing that we're watching,” McDonald said.
Oded Rhone, CEO of Edison Energy, which helps corporations to source renewable power, said that while it’s a “fluid situation” on the ground, companies are so far showing no sign of letting up on their sustainability goals; if anything, they want to “come out of this crisis better off on the energy side.”
At the same time, “we’re starting to see some slowdowns; clients are very busy with mission-critical issues,” Rhone said in a Friday interview.
“Some of our clients are having to deal with a lot of operational issues, from having to shut down production facilities to having to deal with all sorts of employment issues. So their bandwidth to really be on top of these processes at the moment is substantially reduced. And we’re seeing that — there’s no doubt.”
The importance of corporate renewables demand
Corporate demand for clean, cheap power has helped to propel the U.S. wind market for half a decade, and the solar market is rapidly catching up. From an early focus on big technology companies, the corporate renewables market has rapidly diversified to include a range of industries, from pharmaceuticals to car makers.
Any erosion in that demand, even temporary, would be a blow to America’s renewables industry, particularly as it looks to take maximum advantage of fading federal tax credits.
While the trend of corporate demand for renewables has been less pronounced in Europe, it has gained momentum; Edison Energy, which is a sister company of utility Southern California Edison, plans to open an office in Western Europe to help clients there, Rhone said.
Even in a recession, many of the tailwinds that have fanned the corporate renewables market would remain intact — cheap wind and solar power, volatility in the fossil fuel markets, growing calls for decarbonization from companies’ customers, investors and employees.
However, one of the most important factors whetting corporate appetite for renewables — the basic assumption that energy costs will go on rising — could be called into question if the global economy tips into recession and wholesale power prices sag.
Corporate creditworthiness — an important factor in sealing many renewables deals — could take a hit in a recession, Rhone noted. And if longer-term business outlooks darken, corporations may reevaluate their energy needs.
Reading the tea leaves
For now, the industry is left to pore over the early scraps of information coming out of grid operators and utilities. In Europe, parts of which are several weeks ahead of North America in the pandemic’s trajectory, power demand has taken a significant hit.
Year-ahead power futures in Germany, an industrial powerhouse, are reportedly down 25 percent. “Industrial and commercial customers are consuming noticeably less energy,” Johannes Teyssen, CEO of German utility E.ON, told investors this week.
In the U.S., PJM, which runs the wholesale power market covering 65 million Americans, said the coronavirus outbreak has thus far had only a “moderate impact” on power demand. The reduction in consumption at schools and businesses is being offset to some degree by people running their computers and turning up thermostats at home.
“Basically, weekdays are looking more like Sundays,” said IHS Markit’s McDonald. The message out of PJM is “it’s looking more like a snow day every day.”
Western U.S. grid operators have seen less of an impact, although analysts are closely watching the ERCOT market in Texas for signs of whether the dramatic collapse of oil prices crimps that industry’s demand for power. A growing number of oil companies have become buyers of wind and solar power, adding to ERCOT's momentum as the leading market globally for corporate renewables deals.
At the end of the day, COVID-19’s impact on corporate demand for renewables will depend on the length of workplace shutdowns and the severity of the resulting economic contraction. It's possible that the crisis may have lingering effects on how and where workers operate. The renewables industry, congenitally optimistic, remains focused on the future.
“I think [the market] is going to come back strongly,” Rhone said. “But I cannot put a timetable on that. And in the short- and medium-term, I absolutely expect some bumps in the road.”
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