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The Impact of COVID-19 on Midwest Economies and Electric Energy

May 13, 2020

By Harry John, Ph.D. Economics, Lead Forecaster, Power System Engineering

Contributors:
Rich Macke, Vice President, Economics, Rates and Business Planning
Elena Larson
Shaurice Moorman
Tom Butz
Nick Nelson

Midwestern states’ economies have been severely impacted by businesses stoppage due the COVID-19 pandemic lockdowns. The shutdown of businesses has led to over 3.7 million unemployment claims in the region, as of the end of April (see Table 1). Unemployment claims are the highest in Michigan and Ohio, with key steel and auto industries closures. The pause in economic activities is compounding an already fragile Midwest economy beset by a weak agricultural sector and dwindling oil prices.

Power System Engineering (PSE) estimates Midwestern states’ real gross domestic product (RGDP) to decline between 2.8% to 5.5% in the first quarter of 2020¹ as a result of business closings. The anemic economic conditions predicted in the first quarter of 2020 will remain until the second quarter 2021, when moderate growth is expected.

Figure 1: Midwest States’ Continued Unemployment Claims as of April 29, 2020

Many regions are experiencing slow economic activities, as unemployment claims surge due to the stoppage of business activities. The cessation of businesses across the country has impacted the nation’s economy, as first quarter real gross domestic product declined 4.8%. The Bureau of Economic Analysis reported April 29 that the nation’s economy declined for the first time in more than a decade (see Figure 2, below).

Figure 2

Although the GDP estimate portrays a weak economic condition, it was based on incomplete data that are subjected to further revision. The “second” estimate for the first quarter, based on comprehensive data, will be released on May 28, 2020. The deteriorating economic activities and growing job losses resulting from business shutdowns are certain to have an impact on the energy industry.

Electric providers across the nation will be impacted as many businesses pause activities due to COVID-19, resulting in less energy consumption and peak demand. The magnitude of the impact to electric providers will largely depend on the their customer mix, e.g. residential versus industrial, and commercial, and/or the key industries served. Electric providers that depend largely on industrial and commercial customers for a sizable portion of its revenues will tend to be impacted the most.

The Impact on Electric Energy and Demand

Many regions are experiencing reduced energy consumption and peak demand, with the potential for revenue losses. Economists and energy experts are of the belief that this will impact investor-owned, municipal and cooperative utilities.

Energy experts project some electricity providers – depending on states, region, and customer mix – could experience a 3% to 6% decline in energy consumption and roughly 2% to 4% drop in peak demand.

What Are the Plans for Utilities Going Forward?

The length of businesses shutdown and the extent of the lasting impacts are uncertain. PSE experts have been consulting with clients and staying engaged to prepare for the changes that may affect electric providers going forward.

Below are some examples of what PSE is seeing/hearing from our clients:

• Slow down/reduction in the oil load is a concern for those who have a high penetration of oil load, such as some of our clients in ND, CO, KS, and OH.
• Utilities are watching developments at meatpacking plants in their respective territories, especially those with increasing COVID-19 outbreaks. These facilities are typically steady and substantial industrial loads, so shutting down those plants – even temporarily – will have an impact.
• Utilities are extending “no-disconnect” policies, removing late payment charges, and providing extended payment plans to assist their customers who are financially impacted by COVID-19, at the risk of their own cash management policies and general fund levels. In addition, this could have an impact on the level of bad debt that should be accrued on the balance sheet, which will eventually affect the income statement and rates.
• Some electric cooperatives have made additional capital credit retirements outside of their normal rotation, while others have changed the policy of retirements from a FIFO (First In, First Out) to a LIFO (Last In, First Out) or Percentage method, in order to either credit their bill, or put a check in their hands. These changes can have impacts on equity management policies, capital credit policies, and possibly debt management for the cooperative.
• Utilities are reaching out directly to large industrial loads to understand how they are being impacted and how their future plans might be impacted.
• Utilities are revising budgets for revenues and expenses to gauge a range of potential impacts of business closures.

Depending on the situation, PSE experts are suggesting:

• Performing revenue and margin sensitivity related to potential loss of load related to key accounts or industry most affected by COVID-19.
• Continuously monitoring, evaluating, and discussing the financial situation and “trigger points” with executive management and Directors for possible actions on revenue deficiencies resulting from load reduction. For example, at what point does the utility need to take certain actions to protect its financial condition in consideration of the customer impact?
• Analyzing fixed cost recovery in rate design to smooth out future disruptions.
• Considering term payment plan options to help customers with past due amounts as they transition back to work.
• Although RUS minimums will be waived for electric cooperatives, this should not guide business decisions.
• Assessing the viability of what it will take to reinstate loads given that, in some industries, it’s not as simple as “flipping the switch” as there can be significant start-up costs.
• Establishing ranges of sales forecast cases to understand a possible “new normal” (lower population density of group gatherings, at restaurants, etc.).
• Assessing the impact of losing higher load factor loads vs. losing loads that are lower load factor.
• Evaluating the changes in EV sales, energy efficiency programs, energy storage, and DER due to COVID-19.
• Commission-regulated utilities may request revenue decoupling riders or plans.
• Noting that, in some cases, deferring rate cases will be a strategic move since it will be difficult for utilities to receive authorization to increase rates to what they consider a reasonable return due to the current market conditions on capital costs and general hardship being experienced across the country due to COVID-19.

Power System Engineering (PSE), is a full-service consulting firm for electric utilities, independent power producers, industrial facility owners, energy resource developers, and more. Since 1974, we have provided industry-leading engineering, economic, and planning solutions to utilities of all types.

PSE is committed to uniting proven approaches with innovative solutions.

References:

S&P Global Report March 19, 2020.

Utilities beginning to see the load impacts of COVID-19 as economic shutdown widens, Emerging solutions, Rocky Mountain Institute (RMI), March 23, 2020.

North American power market seen disrupted for at least 18 months, Rocky Mountain Institute (RMI), April 9, 2020.

Brattle Economic Assessment April 14, 2014.

Managing the Impacts of COVID-19 on Power and Energy with Demand Response, March 2020, Load Management Group.

COVID-19 Bulk System Impacts: Demand Impacts and Operational and Control Center Practices, Electric Power Research Institute (EPRI), March 27, 2020.

Electric Cooperatives Face $10 Billion in Lost Revenue from COVID-19, NRECA, April 22, 2020.

Bureau of Economic Analysis

St. Louis Federal Reserve Bank (FED St. Louis Database)