Electricity demand falls 7pc across Australia's power grid in March with the coronavirus shutdown
Much steeper falls are expected as corporates and manufacturing facilities shut down or vastly reduce their power needs.
NSW and South Australian electricity demand plummeted in March to its lowest level since the national power market was created in 1998, due to the coronavirus, with steeper falls likely as the nation’s economic shutdown expands.
NSW demand fell 6.6 per cent and South Australia dropped 11.1 per cent from a year earlier, to record their weakest March figures in the history of the national electricity market, according to data crunched by Morgan Stanley.
Victoria declined 6.8 per cent, its lowest since 1999, southeast Queensland decreased 6.3 per cent with national demand overall off 6.7 per cent to 15.15 terawatt hours.
Bigger drops are now tipped as corporates and manufacturing facilities shut down or vastly reduce their power needs, offsetting higher demand from households.
“We anticipate demand reduction will accelerate for the remainder of this financial year in line with COVID-19 policy measures,” Morgan Stanley analyst Rob Koh said.
The national grid operator said it expects the pandemic will have a significant near-term effect.
“The coronavirus disease is expected to have significant short term and at this time uncertain longer term impact on electricity demand that will impact the 2020-21 financial year, as a result of changes to consumption patterns and the potential ongoing impact of economic downturn,” the Australian Energy Market Operator said.
In Europe Italy’s electricity demand has dropped 20 per cent, with Spain down 10 per cent, highlighting the risks facing Australia’s electricity sector, Morgans said.
“We think larger falls in demand could happen if Australia’s heavy industry — coal mines, chemical plants — that are grid connected and normally run 24/7, reduces its activity,” analyst Max Vickerson said.
Commercial services account for 28 per cent of demand, with consumers at 24 per cent and manufacturing at 22 per cent.
Average electricity spot prices have halved from a year ago, to between $40 to $45 a megawatt hour range in most states. Those levels are starting to approach break-even for black coal generators in the national electricity market, suggesting if there were further falls in demand operators may cut supplies to balance the market.
Baseload electricity futures for 2021 in Victoria and NSW have fallen below $60 a megawatt hour, in line with a pledge made by Energy Minister Angus Taylor for wholesale prices below $70MWh by 2022.
The big three generator retailers — AGL Energy, Origin Energy and EnergyAustralia — will likely face increasing bad debts in their electricity and gas businesses as the unemployment rate mounts.
AGL in particular could be exposed, with its 2020 financial year net profit forecast at $804m by Morgans, compared to the company’s $780m to $860m target. Morgans also expects its annual dividend to fall to 95c, from $1.19.
Morgans downgraded its AGL rating to “hold”, saying it expects spot power prices to fall by 10 per cent, with bad debts accounting for 2.5 per cent of small customer revenue and 5 per cent of business revenue.
The utility sector’s defensive positioning may not hold during COVID-19, Morgans said.
“AGL has defensive characteristics because electricity demand is usually resilient and its vertical integration protects it from short-term price shocks. However, the challenge presented by COVID-19 is not typical,” Mr Vickerson said. “Social distancing, by necessity, has meant a rapid slowing of demand which could intensify if Europe is any guide for Australia.”
Still, UBS says AGL’s balance sheet provides refuge from volatility, and upgraded the utility to “neutral” from “sell”, expecting annual profit of $840m.
“While a number of companies have withdrawn guidance over the month, we expect AGL is better positioned than most to weather the impact of a COVID-19-led downturn,” analyst Tom Allen said. “There are some near- term challenges, with a growing number of customers under hardship that will require AGL to extend its debtors working capital and bad debts provisions, however AGL’s strong balance sheet positions the company well to support these customers without risk to credit rating tolerances or bank & bond debt covenants.
Origin’s Eraring coal plant, the largest in Australia, could see its profits drop if its output is unhedged and should NSW electricity prices fall.
Its fast start gas generators, including Mortlake, may also see little action in the current market with fewer price spikes and volatility given lower demand.
Lower oil prices will cut earnings at the Origin-operated APLNG gas export plant, potentially lowering Origin’s free cashflow and its ability to pay a dividend, Morgans said, while keeping its “hold” rating.
AGL shares were unchanged on Thursday, at $17.56, with Origin up 3.3 per cent to $4.75.
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