A Coronavirus Update
Special Report
March 11, 2020
Coronavirus and Power Procurement
We are all becoming aware of the potential for economic disruption due to the COVID-19 pandemic. The impact on facilities will likely vary from industry sector to industry sector. For instance, within the commercial and industrial (C&I) industry, production runs, raw material availability, and demand should be drivers for consumption, probably falling with negative impacts. Within residential, either individual or multi-family, then degree of use might increase as stay at home and remote working increases. Commercial office space is yet another sector where consumption will be driven by occupancy, as well, perhaps falling into the space between decreased C&I and increased residential usage. These changes deserve attention.Net grid consumption will decline in all likelihood. Curtailing/closing operations will be the hardest hit with C&I. Residential usage will likely increase and commercial space will likely fall somewhere in between this and the industrial part of C&I. Each sector deserves analysis and different answers may well pop up. It should be a buyer’s market that enjoys the good side of panic.
C&I
Car companies, electronics, pharmaceuticals, oil companies and others suffer to some degree. The global nature of things spreads the effects over a weakening economy. Planning ahead will likely be defensive until and unless there’s light at the end of a tunnel of uncertainty. Cutting back is easier if power procurement has been real-time (LMP), a strategy used by large numbers of large users. If power procurement is a fixed price, then things get trickier.
The forward curve is low so the price is hopefully not as worrisome as amount of usage. What are the bands of consumption? A 20% drop is not as safe as it was when signing a procurement agreement. If it’s time for new procurement, parties need to consider the risk of over-buying. Strategies involving block and index is a way to lay off volume risk via LMP.
Residential – Individual or Multi-Family
Apartments, houses, campus dorms, and senior care facilities will likely see increased usage as quarantining takes on different faces. More stay at home paths mean more power usage. Pricing strategies will include the possibility but, eventually, normalcy will return with the pandemic fading. No one knows when, but it will happen. Given the low price curve, locks will be attractive but don’t disregard usage bands. Individuals aren’t a concern but multi-family, etc., should be in regards to the range of usage expectations. Contract language is always a key element but even more so today. Get help in decisions to be made.
Commercial Office Space
Assuming a building’s occupancy rate doesn’t materially change, consumption more than likely will. More remote work will mean less usage at the office. Will bands be a risk? Probably. Should real-time pricing be the strategy? Probably, in part, if the facility’s risk tolerance is suitable when compared to usage bands violation. A full reliance on LMP is not as preferable as the block & index model. Using LMP for variable consumption seems the best defensive play in general but individual circumstances should drive decisions.
An Energy Market Price Look
The collapse of crude oil prices might suggest that all energy will drop. Crude, the global commodity, suffers from suppliers panic. Budgets and projections just flew out the door. Where traders see opportunity, producers see risk. How they manage this risk is to be decided. This doesn’t appear to be the case with natural gas and power.
Why does spot NYMEX natural gas hold support in the middle of crude’s debacle?
We believe it’s a function of real buyers in the market for real resolution of energy needs, be it gas to the burner tip, LNG, or power generation. Economic power prices are apparent but at levels above all-time lows. Heat rates offset downward feedstock pressure and the lights need to be on. The energy complex panic meets energy requirements today.
