Pandemic Sparks Slump in Electricity Prices.
Wall Street trading floors have emptied. Spring has arrived north of the equator. Oil and gas markets have cratered. The result is a precipitous decline in electricity prices in the U.S., Europe and parts of Asia.
Closures of office blocks, shops and factories have throttled power demand, dwarfing the amount of electricity required to work from home. Globally, the International Energy Agency expects the biggest decline in electricity consumption since the Great Depression. It is as if Germany and France were both turned off for the year.
In the U.S., the drop has been most severe in New York City, center of the nation’s epidemic and home to a services sector that usually devours electricity. Wholesale power prices averaged $16.57 a megawatt-hour in the first six days of May, according to S&P Global Platts, down by more than a quarter from the start of the 2020.
Electricity trades in much the same way as raw materials like oil. In much of the U.S., power-plant owners sell electricity to utilities in a competitive wholesale market overseen by regional operators. Utilities then distribute power to customers. Both power companies and utilities protect themselves against price swings with futures, which investors use to bet whether the market is going up or down.
A key difference between electricity and oil is that power is hard to store. When there is too much to go around, particularly on windy days in places like Northern Europe, producers sometimes pay to give power away. U.S. crude futures behaved like electricity when storage space for oil dwindled in April, dropping below $0 a barrel for the first time.
In Europe, negative electricity prices have become commonplace. In auctions for the joint Germany-Luxembourg market on the European Power Exchange, prices turned negative five times in the year through April, more than all of 2019.
The crunch is shifting the math of electricity production in favor of renewable energy sources. Coal plants, among the costliest to run in the U.S., typically deliver bursts of power to the grid when demand increases. Much of that electricity isn’t needed right now. Forty percent of the world’s electricity could be generated from low-carbon sources—nuclear, wind and solar power, plus other renewables—this year, according to the IEA. That would be the highest level on record.
12 Minute Affiliate is a revolutionary new system that simplifies the process of making online commissions with affiliate marketing.
Electricity prices were falling before the pandemic due to a surfeit of cheap natural gas, said Paul Cusenza, chief executive of Nodal Exchange, which runs a market for power futures. A 30% drop in U.S. gas prices over the past year—accelerated by the recent crash in energy markets—has pushed electricity prices down.
“Less demand, more low-cost generation and cheap gas,” said Dan Eager, principal analyst for European power at Wood Mackenzie. “You add that together and you have very, very low prices.”
Electricity takes an intricate route from the station where it is generated to the device it powers, hurtling down a 160,000-mile network of high-voltage cables that crisscross the U.S. before traveling to consumers along one of millions of low-voltage lines.
Wholesale prices are largely set a day ahead of time. Regional authorities forecast how much electricity will be needed at every hour the following day, based on factors like the weather. Producers bid to generate that power. Smaller trades take place on the day itself, fine-tuning supply to meet demand.
A bump in prices that takes place each weekday morning as New York City gets to work now comes an hour later, and is less pronounced, because offices aren’t opening at the same time. The city’s electricity prices were less than half their average for the time of year at the end of April, according to Nodal Exchange.
Electricity usage has started to creep higher in states that are relaxing restrictions. Still, mainland U.S. demand was 5% lower in early May than it would have been without quarantine measures, said Platts analyst Manan Ahuja.
The world will consume 5% less electricity this year than in 2019, the IEA forecasts. That is eight times the size of the decline that took place during the 2009 financial crisis. It equates to more than 1,000 terawatt-hours in lost demand, enough to power France and Germany combined.
Electricity prices normally fall in spring, before rising when air conditioners are turned on for the summer. The coronavirus shutdown has exacerbated that seasonal slump, slashing New York City’s electricity demand by 14%, according to the New York Independent Service Operator, which runs the state grid.
⇑⇓ Start Trading Now or Try a FREE Demo Account ⇓⇑
“There’s still a very, very large number of [coronavirus] cases in New York City,” said Richard Dewey, president and chief executive of the NY-ISO. “I don’t anticipate the demand going up very much, at least not measurably, for probably a few weeks.”