Global lockdowns slam energy demand

Power use in Italy slumped 7.4% Wednesday from a week earlier after the government shut schools and told workers to remain home. The World Health Organization has now officially declared the outbreak a pandemic.

That trend is threatening to spread across the globe as countries from Germany to the U.K. to the U.S. weigh stricter measures to keep the virus from spreading. It shows that a broad economic slowdown is becoming more likely as millions of people stay home, slashing the need for electricity in offices, theaters, restaurants and elsewhere.

"We would expect to see demand look more like a weekend," said Adam Jordan, an analyst at the U.S. energy research company Genscape.

In northern Italy, the average power load on weekends and holidays is about 20% lower than levels seen during the workweek. Peak demand in the country on Monday was 5.9% lower than the week before, according to data from the grid operator Terna. That was the day the government announced nationwide restrictions on movement and gatherings, expanding a lockdown that previously had been limited to the country's north.

Italy's experience provides "some insight as to how power demand might be affected across the rest of Europe if the virus continues to spread at its current rate," BloombergNEF analyst Tom Rowlands-Rees wrote in a report.

In China, carbon emissions have plummeted about 25% since quarantines began, said Daniel Grunwald, a U.S.-based analyst at Morningstar Inc.

"We can safely assume traffic and power generation will stagnate considerably here as well as it has in Asia and Europe," Grunwald said.

U.S. utilities may see a "sizeable drop" in electric demand from commercial customers as schools and office spaces are shut, Scotiabank analysts led by Andrew Weisel said in a research note Wednesday. It's less clear how that will affect revenue.

"The stay-at-home mentality could boost residential volumes, which are materially higher margin," Weisel said.

It's not just offices. In Germany, a temporary shutdown of factories and plants will have a significant impact on electricity demand in Europe's biggest economy.

German Chancellor Angela Merkel promised Wednesday to do "whatever is necessary" to limit the impact of the coronavirus. In Britain, Chancellor of the Exchequer Rishi Sunak said up 20% of the working population may need to be off work, hitting production capacity and consumer spending.

"Industrial demand is 40% of German power output, so if that were reduced significantly, effects could be more sizeable," said Hanns Koenig, principal analyst at Aurora Energy Research Ltd. "If the coronavirus leads to a recession, the financial crisis in 2009 could be a proxy where demand dropped by 6%. So a reduction in the 5% to 10% range across sectors wouldn't be implausible."

Grid operators say that reduced demand won't hinder their ability to deliver adequate power, as they're used to dealing with this scenario on holidays and weekends. They're more worried about keeping the virus out of their control rooms.

The difference between highest and lowest demand is 39% on weekends in Germany, 24% in Britain and 42% in France. If consumption is reduced even close to those levels on a daily basis it would cut profits at power stations. Reduced consumption will mean lower prices and cut the running hours of power plants that switch on during peak times.

The unprecedented shift in work patterns is also making it difficult to make forecasts, said Cody Moore, head of gas and power trading at Mercuria Energy America. Grid operators must predict demand for each hour of every day. Right now Mercuria is looking at historical patterns and factoring in weather, season, power supplies and other constraints to determine what happens when people don't go to work or school.

"We have grid operators that are trying to forecast scenarios that they've never seen before," Moore said. "The only thing we can conclude for sure is it probably increases volatility."