COVID-19 & the Energy Industry: FAQs & Resources
We hope you and your family are staying safe and healthy.
CFR has been closely monitoring the COVID-19 situation to understand its potential impact on C&I energy users, and we have summarized our perspective on the situation as a series of Frequently Asked Questions. For more information, you can request footage of our April 6 webinar, COVID-19’s Evolving Impact on the C&I Renewable Energy Landscape, via the contact information below. We will update this page frequently as the situation develops.
(1) What is the overall impact of COVID-19 on energy markets and how can I expect it to impact pricing?
- Shifting demand patterns: Under normal conditions, demand for electricity tends to be peaky on the weekday morning and afternoons and flatter on weekends. Widespread commercial closures, work-from-home and social distancing policies across the country due to COVID-19 have shifted weekday electricity demand to a flatter pattern and reduced overall levels of demand moderately (approximately 8-15% observed in March 2020).
- Lower energy costs: We would expect lower demand and flatter demand patterns to reduce peak pricing hours and lower energy pricing while those conditions persist. However, meaningful pricing declines have not yet been very evident, in most markets. In some markets, we have seen consistent low prices in 2020 due to other factors such as mild weather and low natural gas prices. In fact, today’s wholesale energy market prices are not significantly different than would be seen from normal weather variation (i.e., mild winter weather in March 2016 yielded similar pricing to that seen in March 2020) or from declines in natural gas prices (which have declined from over $3/MMBTU to less than $2/MMBTU over the last year). It may be too soon, at the time of writing, to have seen the full impact of the demand changes on wholesale electricity prices.
- Temporary changes: Assuming that pricing does indeed decline as expected, CFR expects these market shifts due to COVID-19 to persist only as long as reductions in commercial activity and work from home conditions last, followed by a gradual return to "normal" as the pandemic abates, which may take some time and have some starts and stops. Underlying this expectation is that the economy also recovers at roughly the same time, which is certainly not guaranteed. In addition, despite declining demand, the energy industry is seeing evidence of declines in natural gas, oil and coal production. The magnitude of the reduction in supply of energy fuels, as compared to the magnitude of the declines in demand, will be influential in determining whether wholesale electricity prices will be depressed over a shorter or longer period.
(2) How will COVID-19 impact the development process for new-build RE assets?
- Permitting delays: Many government and municipal agencies are shut down or slowed down, so the permitting and approvals process for new projects is expected to slow. Projects expected to reach commercial operation in 2020 and, to a lesser degree 2021, may experience more critical delays than later projects with later commercial operation dates.
- Supply chain disruptions: A substantial portion of the supply chain for renewable energy projects is based in China, where manufacturing is ramping back up and less likely to cause significant issue, or in other parts of Asia that have been weeks or months behind China in terms of COVID-19 impacts. But where international supply chain issues are diminishing, domestic logistical challenges lie ahead. Wind projects are slightly more vulnerable than solar projects, as wind’s domestic logistics are more dependent on specialized transportation or installation equipment and its associated highly specialized labor that is very limited in number and hard to replace quickly.
- Near-term CODs: Construction and supply chain disruptions and uncertain financing circumstances are expected to push out the Commercial Operation Date (COD) for some projects as developers and suppliers begin to claim Force Majeure, driven by the afore-mentioned supply chain issues including government edicts and safety considerations for the large groups of people needed to work in close proximity to each other (at times) on these projects.
- Tax credit risk: Construction and supply-chain delays could push out CODs and reduce Production Tax Credit (PTC) and Investment Tax Credit (ITC) values for wind and solar projects, respectively, although this is far more an issue for wind projects as the PTC is ramping down more quickly than the ITC that solar relies on. Solar’s ITC issue is more limited to supply chain disruptions preventing developers from “taking delivery” of ordered equipment within the required 3.5 months which could delay safe-harboring the ITC from one year to the next (engendering an associated drop in ITC qualification level). It remains an open question whether Congress will extend the tax credits or the IRS will consider a grace period.
- Pricing increases: While it is still not completely clear what will happen to renewable energy PPA prices as a result of COVID-19, there are more factors likely to push prices up than down. PPA prices may increase due to the combined effects of supply shortages, labor supply and travel restrictions, unfavorable foreign exchange rates and increased financing costs (in some cases due to tighter underwriting) and more uncertainty about the risk profile of projects (with a major factor being uncertainty about how future energy prices are affected). There may be projects out there that have equipment purchased and have financing commitments that might be able to lower prices if needed in a competitive situation, but this is likely more the exception than the rule.
(3) How is COVID-19 expected to impact project financing?
Common project financing instruments for RE projects remain available, but there is still significant uncertainly around government stimulus, reduced tax liabilities and changing investor expectations and risk tolerance.
- Sponsor equity: Funding sponsor equity may prove a challenge for non-balance sheet players, but the full impact is still yet to be determined.
- Tax equity: While expected shrinking tax liabilities will reduce appetite for small to mid-sized players, major tax investors do not expect to reduce investment in the near term.
- Debt: Reduced interest rates and easier money supply should increase supply and attractiveness of debt, but tightened underwriting criteria could raise risk premiums and lower the effective availability of debt such that the latter factors might be the more impactful ones in the near term.
(4) What are some tips for C&I energy buyers looking to navigate the uncertainty around COVID-19?
- Revisit retail supply: Low energy prices could provide a good opportunity for customers to contract for future retail electric and gas supply and to add or extend hedges. For those on Block & Index electricity contracts, it may be an excellent time to layer in additional blocks or to start purchasing blocks further out in time where you might not have yet procured them. Natural gas pricing is also very attractive at the moment so it’s a very good time to consider extending your purchase.
- Monitor the development process: Prospective RE buyers should favor projects in the later stages of the development process to reduce risk of further delays, and remain aware of potential price increases, supply shortages and labor issues. Buyers with signed RE contracts may still experience supply chain delays and therefore must remain diligent about project timing and milestones. If Congress or the IRS don’t grant some flexibility on tax credit deadlines, there are likely to be some projects that have to default or request an increase in their PPA prices. Ask the project developer for regular development updates and confirm the status of the project's financing plan. Expect approval delays and, where you can, remain flexible and make sure you fully understand the impacts of any delays (particularly on tax credit deadlines). Also make sure you are keeping in regular contact with the developer to ensure delays are reported promptly.
Overall, we are pleased with the resiliency the industry has shown in the face of an unprecedented global crisis. It may be too early to measure the full impact of COVID-19 but we've been very encouraged by our clients and network, who are remain as committed as ever to creating a more sustainable and prosperous future.
If you would like a copy of the footage or presentation materials from the webinar, please email Maggie Yao at email@example.com