COVID-19 is not an epochal crisis for the energy industry.

It is increasing the pace of change in existing patterns that were very identifiable and notably evolving before the novel coronavirus took its portentous leap from creatures to humans.

Crises tend to exacerbate tough situations for both societies and economies and oftentimes shine a light on weaknesses and existing problems.  They also seem to accelerate pre-existing trends.

The flattening of the U.S. demand curve is one trend that is likely to continue after a vaccine helps rid our planet of this terrible plague.

Lower peaks mean lower prices…

NYC Zone J: Average Hourly Energy Prices by Week
Source – Level10 Energy.
Correlation between the residential load profile for a given day in 2020 and the mean weekday/weekend load profile from the same month in 2019.

As discussed in last month’s post (“The Potential Impact of “Perpetual Weekend” Load Profiles”), pandemic-related teleworking is impacting the traditional load demand profile. If the trend continues, load data indicates some degree of:

  • More gradual morning ramping
  • Higher midday loads
  • More gradual (less steep) ramping during the evening peak

There are four things in life we know to be one hundred percent true:

  1. You don’t tug on Superman’s cape.
  2. You don’t pull the mask off the Lone Ranger.
  3. You don’t spit into the wind
  4. You NEVER bet against technology.

By 2025, energy markets will be fundamentally altered by new technologies and evolving demand profiles.

Distributed energy resource (DERs) will flatten the demand curve going forward. Like all technology advances, the speed of change will likely catch people by surprise.Satya Nadella, Microsoft CEO, recently stated, “We’ve seen two years’ worth of digital transformation in two months…”

Moore’s Law on steroids.

The financial implications of the current transformation will impact all energy market stakeholders; especially utilities.

FERC Changes the Game

On September 17, 2020, FERC passed its long-awaited Order 2222 that opens the country’s wholesale energy markets to DERs including rooftop solar, behind-the-meter batteries and electric vehicles.

According to FERC Chairman Neil Chatterjee, “Projections indicate that from 65 to more than 380 gigawatts of DERs could be added to the country’s power grids over the next four years.”

Experts rightly have called the rule “a game-changer”.

Order 2222 fully validates what has been a steadily growing trend in the implementation of large-scale DERs designed to improve competition and operational efficiencies in regulated markets.

Source: Wood MacKenzie – United States Distributed Energy Resources Outlook Executive summary snapshot (July, 2020)

Deflationary Technology

Demand Response + Electric Vehicles + Battery Storage = SUPPLY-SIDE SHOCK

The digital revolution is exacerbating deflationary pressures on our economy, and its effects are particularly acute in the energy industry.  Advancements in technology, including increasingly intelligent systems, are welcoming supply-side shocks by allowing:

  1. More extraordinary and effective use of energy delivery assets
  2. Disruption that is driving a faster evolution in our traditional view of generating power to meet load

Tack on the coming decade’s planned (massive) expansion in utility-scale solar power generation and the natural outcome will be a flatter demand curve, lower peak demand, as well as lower wholesale energy prices.

Guild Investment Management Founder Monty Guild notes that, “The assessment of inflation is a critical process for countless private and government analysts, and the consequences of arriving at a given number are profound. Cost-of-living adjustments, Federal Reserve interest-rate policy decisions, and assessment of stock valuations can all hinge on what inflation number goes into the analysis.”

The assessment of either coincident or non-coincident peak demand is critical for utilities and RTOs. Revenue and costs are often budgeted based on peak load numbers and that may soon change – drastically.

Generation investment decisions traditionally seen as meeting a specific demand curve now must be viewed in a different light.

Rate Design & Budget Challenges Lay Ahead

As noted, the decline in energy prices and flattening demand curve will present budget challenges for utilities, especially public power entities expected to infuse money into city or state budgets.  And, the abundance of cheap natural gas plus the zero-variable cost of wind, solar and storage generation will continue to depress energy prices.

Further, peak shaving along with the continuing technological empowerment of residential and commercial customers, will also make utility budgeting and revenue projection more laborious, especially given the traditional (volumetric) approach of simply assigning bills to users of electricity.  Impending budget challenges will underscore:

  1. The difference between variable and fixed costs
  2. The true cost and value of reliability.

While variable costs of providing a carbon free future are zero, the fixed costs of delivering power reliably certainly are not. There are significant fixed costs inherent with critical elements of our growing energy delivery infrastructure, as well as its reliable operation, including:

  • Building out the transmission grid
  • Deploying the requisite gas-fired generation to back-up renewable resources
  • Training and deploying the personnel necessary to operate everything
  • Cyber security

Businesses must cover these and other fixed costs just to survive.  To operate successfully in a new energy world, market operators and participants throughout the U.S. will be engaging in rate design conversations that increasingly will involve how to develop and implement a fixed charge that values capacity or, a time-of-use model.

Conclusion

Crises typically comes in one of two forms:

  1. Those that changes standard
  2. Those that intensify current trends

The COVID-19 crisis has accelerated global trends (such as teleworking) along with certain energy industry trends (e.g., flattening of the demand curve). 

The pandemic has hit us during a period of already rapid evolution. By the end of 2019, energy industry experts were correctly pointing to the three D’s as the future:

Decarbonization
– Eliminating carbon-based fuels for electricity generation

Decentralization
– Reduction in reliance on just a handful of large generation plants

Digitalization
– Effective management and monitoring of all areas in the electricity system, from supply and demand to generation to T&D

COVID-19 has further validated the wisdom of a move toward the three Ds while cementing the need to hasten their adoption as primary tenets of our modern power system.

The disruption potential of DERs on the entire energy delivery and consumption landscape, let alone the ability to forecast generation and demand, will be enormous.  FERC’s landmark Order 2222 will only accelerate the transformation already underway which will fundamentally alter energy markets as soon as the end of 2021.

As Haruki Murakami wrote in Kafka on the Shore, “When you come out of the storm, you won’t be the same person who walked in. That’s what this storm’s all about.”