A PERFECT STORM
Boost Energy Insight in Collaboration with Sproule
Estimating the Effects of COVID-19 & Oil Prices on the Alberta Power Market
July 7, 2020
Executive Summary
Alberta’s economy has recently been impacted by a combination of extreme and unusual challenges. Oil prices have settled near record lows, while the COVID-19 pandemic has caused mass economic upheaval and radically changed daily life for millions of Albertans.
Both oil producers and power generators have borne the brunt of these challenges. While oil production cuts have made many headlines, May also saw the lowest monthly provincial electrical demand since 2016 – and also the lowest monthly power price since 2017.
- How much of the ongoing weakness in the power market is due to low oil prices vs. the coronavirus pandemic?
- How are potential layoffs and work-from-home arrangements changing residential electrical demand, and to what extent does this offset any reductions in commercial demand?
- What do recent load reductions tell us about the relationship between the oil & gas and electricity markets in Alberta?
- Does recent power market weakness indicate the potential for long-term secular stagnation, or are there prospects for recovery on the horizon – even reason for optimism?
In a comprehensive analysis of recent events, we untangle the effects of low oil prices and COVID-19 on the power market. We also perform a deep dive on the relationship between oil production and electricity demand to provide insight for future downturns.
From these analyses we draw insights that can help both power generators and oil producers understand the current market turbulence and prepare for the future.
Recent Trends in Electrical Demand
Recent electrical load reductions have been severe, estimated to be 588 MW y.o.y. or approximately 750 MW relative to seasonally-adjusted 2019 averages.
Impact of COVID-19
We estimate the net impact of COVID-19 on Commercial and Small Industrial loads is a combined y.o.y. reduction of approx. 450 – 550 MW. Increases in Residential loads resulting from work-from-home arrangements, layoffs, and furloughs, have offset these losses by 100-200 MW y.o.y. The net impact of COVID-19 is estimated to be a loss of approximately 300 – 400 MW of load. This result is supported with scenario analysis of changes in electrical end-uses by sector.
Impact of Low Oil Prices
We estimate that oil & gas loads together comprise approximately 47% of provincial electrical demand (including both Upstream & Midstream loads). Further, we estimate the impact of recent oil production cuts to be a reduction of approximately 250 – 400 MW (relative to 2019 average, normalized for seasonality) including both Upstream &Midstream loads. Of this, we estimate approximately 250 – 300 MW were from Upstream loads alone.
Understanding the Oil-Electricity Relationship
We take a rigorous approach to illustrating the relationship between oil and electricity, beginning with a detailed analysis of breakeven costs for existing oil production. We find that operating costs account for between 35 – 70% of existing production breakeven costs; royalties account for 5 – 25%; transportation & blending accounts for 15 – 30%.
We apply this breakeven cost analysis to estimate a supply curve of Upstream electrical loads and draw insights on the volume of MW at-risk at each oil price point.
We also support our estimates of total load reductions from the oil sector with a statistical analysis of the electrical intensity of oil production on a kWh/bbl basis.
Impact on the Power Market
We find that COVID-19 and low oil prices have had a major depressing effect on the power market and that each factor individually is sufficient to restrain prices on its own. Recovery will therefore be required in both areas in order to restore recent load losses. The power market can rebalance in the meantime however with supply-side changes, some of which have already begun to occur in the form of import capacity restrictions and increased commercially-offline volumes. Additional bullish supply-side factors include additional outages in 2021, expiration of PPAs in 2021, and deferral of new-build power plants.
For more more information please contact the authors.
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Andrew Keeping
akeeping@bst.energy
Michael Lozinski
mlozinski@bst.energy
Jesse Solheim
jsolheim@bst.energy
Christoffer Mylde
christoffer.mylde@sproule.com
Liam O’Brien
liam.o’brien@sproule.com
Sheldon McDonough
sheldon.mcdonough@sproule.com
Boost Energy Ventures (Boost) is a boutique advisory, analytics, and software development firm focused on the electricity sector. Boost interprets data and distills complexity to help clients build successful businesses in the face of an emerging energy transition. Our team provides strategy, asset development support, market forecasting, transaction and valuation modeling, and market analytics.
About Sproule
A global energy consulting firm, Sproule provides technical and commercial knowledge to help clients discover value from energy resources around the world. Sproule is anchored by deep geotechnical and engineering expertise and a strong commercial understanding of energy markets and policy requirements. Sproule helps E&P companies, financial institutions, and governments minimize risk and optimize business decisions.
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