Energy spending to take a tumble in 2020

Mike Zaccardi, CFA, CMT

Energy spending across the USA is set to take a sharp drop in 2020. With fewer miles being driven, very low gasoline prices and cheap home energy bills, total end-use energy expenditures as a percent of total spending should hit the lowest levels in decades. The EIA typical produces a report on this subject every year or two.

What does this mean for utilities? Lower revenue to pay for high fixed-cost investments like power plants. But it also means lower wholesale market purchases to serve load. So like many areas of the market, there are winners and losers.

The winners may be those utilities who primarily serve local demand via buying wholesale power from the Regional Transmission Operators (RTOs). The losers are owners of high-cost power plants, namely nuclear and coal.

What have utilities been doing to combat the trend? Investing in renewables. Wind, solar & storage have seen massive inflows of capital as energy firms seek to diversify their assets. They are not the only buyers though.

Technology firms (Apple, Google, Facebook) and even consumer companies (like Starbucks) are buying power purchase agreements to acquire renewable power. That way the well-known brands can say “we are green – look where we get our power!” But in reality it is just a financial contract.

It will be interesting to see how the wave of lower prices and revenue this year will impact the already changing utility sector.

An unfortunate wrinkle this year due to COVID-19 is the loss of industrial demand and even pockets of the country were residents are forced to make the decision to buy food or pay their electric bills. Municipal utilities are doing what they can to help, but with that comes financial hardship of the utility. Munis may have to turn to the federal government for assistance in maintain adequate cash flows.