What impact will COVID-19 have on the US power sector?

Accounting for likely effects of the pandemic on US economic activity, the US Department of Energy’s Energy Information Agency (EIA) recently released their April 2020 Short-Term Energy Outlook, providing revised forecasts for energy use, electricity generation, and prices in 2020 and 2021.

EIA predicts COVID-19 will have a large effect on both US energy use and greenhouse gas emissions in 2020, despite other more modest forecasts of global climate impacts. It will contribute to near-record declines in US coal use, likely resulting in the largest annual decline in CO2 emissions on record. For the first time, both renewables and nuclear will likely generate more electricity in the US than coal. However, coal will likely rebound the following year, yielding a net reduction in generation and emissions since 2019 that may not be much larger than what would have occurred without the pandemic, given coal’s ongoing decline driven by market forces.

Notably, EIA optimistically assumes a sharp rebound in economic activity in Q3 and Q4 2020, so much larger impacts are possible if COVID-19 reemerges or economic recovery proves slower than anticipated.

While EIA predicts that electricity consumption will decline by 3% in 2020 compared to 2019, the largest forecasted impacts are to the energy mix, shown in the figure below.

Coal generation is expected to decline a staggering 20% relative to 2019, driven by a combination of lower demand, record-low natural gas price, and falling renewable energy costs. Nuclear generation is forecast to fall by a modest 2%, while natural gas generation will increase by around 1%.

COVID-19 seems unlikely to substantially slow down the growth of US renewables, at least in the short-term. To the contrary, EIA projects that utility-scale non-hydro renewable generation will increase by 54 terawatt-hours (TWh) in 2020 – the largest addition on record – and will make up the majority of new generation added this year. However, it remains to be seen how large an impact the economic downturn and both federal and state-level responses will have on renewables — if, for example, developers back out of projects or if state governments relax renewable portfolio standards in the name of economic recovery.

Falling coal use, coupled with a large fall in oil use associated with COVID-19, will likely result in a record 7.5% decline in US CO2 emissions in 2020 – a reduction of 383 million tons CO2. However, emissions are expected to rebound in 2021 as oil use recovers and coal use increases due to likely higher natural gas prices driven by falling production.

Importantly, many of the changes EIA forecasts for the US energy system in 2020 and 2021 are driven both by market forces and COVID-19-related disruption, so while some developments this year are unique results of the response to the pandemic, others are longer-term trends intensified by the ongoing economic situation. Much depends on the severity of the economic downturn; if we have a sharp V-shaped recovery like EIA projects then non-COVID-19 factors will likely play a larger role in 2020 changes, but a drawn-out L-shaped recovery would mean greater impacts on electricity demand and energy system investments. The choices the government makes in recovery spending – and which industries it subsidizes or bails out – could also have an important impact.

Electricity use to modestly decline

The EIA forecasts that overall electricity use will only fall by 3% in 2020 compared to 2019, equal to 117 terawatt-hours (TWh). Declines during the economic lockdown in Q2 will be much larger. Recent data suggests US electricity use is currently down around 7% for the whole country and 13% in New York, the hardest-hit region. But again, the EIA forecasts assume a strong economic recovery in Q3/Q4 — and an overall drop in US GDP of only 2% in 2020 — so actual declines in electricity use could be much larger. For example, recently released IMF estimates predict a much larger 5.9% decline in US GDP in 2020.

While the decline in electricity use is projected to be small overall, it will differ substantially across economic sectors. Electricity use is only expected to decline around 1% in the residential sector, while declines of 4% are expected in the industrial sector and 5% in the commercial sector.

Near-record declines in coal

Coal will see the largest change in generation in 2020, falling by 193 TWh. This represents the fourth largest annual decline in coal generation on record and the largest percent decline — a drop of 20% compared to 2019. Large declines in coal generation are already apparent, with coal down 36% in March 2020 compared with the same month last year. Utility coal stockpiles are building up, with power companies expected to run out of space to store coal shipments by early summer. Coal production is expected to see similarly large drops, with the EIA forecasting a 22% decline in 2020.

The figure below shows US electricity generation from coal from 1980 to 2019, as well as EIA forecasts of coal generation in 2020 and 2021. It is important to note that much of the reduction in 2020 coal use is not COVID related, though the reduction in overall electricity demand will certainly contribute to the near-record expected decline in generation. Rather, declines in 2020 coal use will be primarily driven by price competition from low-cost renewables and natural gas.

EIA’s forecasted coal recovery in 2021 is similarly less about increased electricity demand – which is only projected to rise by 1% in 2021 compared to 2020 – and more about assumed changes in fuel prices. EIA expects natural gas prices for electricity generation to rise by 46% between 2020 and 2021 driven by a reduction in associated gas production from oil wells as many oil shale companies go bankrupt or severely curtail operations due to low oil prices. This rise in prices is projected to lead to a reduction in gas use and a corresponding increase in coal use. The extent to which these price changes materialize remains to be seen; some in the coal industry also worry that reductions in production due to declining 2020 coal use may blunt any 2021 recovery.

Nuclear and renewables to surpass coal in 2020

The drop in coal use coupled with record renewable additions expected in 2020 will result in two milestones. First, for the first time both nuclear and renewables – including hydro – will each produce more electricity than coal, and second, renewables will surpass nuclear. The figure below shows historical generation from 2008-2019, as well as EIA forecasts for 2020 and 2021.

Two-thirds of the non-hydro renewables added in 2020 will come from new wind generation, while the remaining third will come from utility-scale solar photovoltaics. Wind generation is expected to increase by 13% compared to 2019, while solar generation will increase by 23%. Hydroelectric generation is forecast to increase by 19 TWh in 2020 – or 7% – recovering from an unusually low generation year in 2019 and returning to roughly 2018 levels.

Even larger non-hydro renewable additions are forecasted in 2021, when the US is expected to add 79 TWh. It is worth noting that these numbers do not include distributed generation such as rooftop solar – which have historically added around 5 TWh of additional generation each year – though it is unclear how COVID-19 will affect residential solar installation rates.

While record renewable energy additions are currently expected in both 2020 and 2021, these are modestly lower – 5% less wind and 10% less solar – than forecast earlier this year as a result of COVID-19, and could be further lowered should economic recovery prove slower than anticipated. An extended economic downturn risks developers backing out of planned projects. Similarly, should the expected 46% increase in 2021 natural gas prices be smaller than anticipated it could result in more gas and less renewable additions. It is also possible that the recession may lead to some states backing off of renewable portfolio standard commitments, at least temporarily, and there is the outside possibility of direct bailouts or price support for coal. On the other hand, renewable deployment could be boosted if economic recovery efforts include an extension of the production and investment tax credits currently set to expire in 2020.

Nuclear generation is expected to fall modestly in 2020 and 2021 as the aging US nuclear fleet experiences more extended downtimes and some less economically viable reactors retire due to price competition from cheap natural gas. While most utility owners of nuclear reactors will likely not make retirement decisions based on a temporary economic downturn, a slower-than-expected recovery could put more pressure on nuclear. The inclusion of nuclear subsidies in economic recovery efforts – or new climate policies enacted post-2020 – could play a role in slowing the expected declines in nuclear generation for the next two years and beyond.

US CO2 emissions will fall in 2020

Taken together, these forecasted shifts in electricity use and the energy mix will likely result in the single largest drop in US CO2 emissions on record – with the EIA forecasting that CO2 emissions will be down 7.5% in 2020. This is slightly larger than the 7.3% in 2009 during the financial crisis, but could end up being much larger if rosy projections for a rapid economic recovery in the second half of 2020 do not pan out.

These emissions reductions will also be driven by the effects of COVID-19 beyond the power sector. Some of the largest impacts are expected in transportation, where the EIA estimates that US vehicle miles traveled will fall 8% and air travel capacity will fall 15% in 2020. Industrial and commercial (non-electric) fuel use is also expected to decline in 2020.

The figure below shows the CO2 emissions in 2018, 2019, and forecasts for 2020 and 2021 as black bars. The changes in emissions from year-to-year from coal, oil, and natural gas are shown as reductions or additions in emissions from the previous year.

About 52% of the decline in US CO2 in 2020 will be driven by falling coal use, with the bulk of the remaining reduction from reduced oil use. The impacts of COVID-19 on reductions in oil use for aviation and personal transport are quite clear, while the reduction in coal use primarily reflects long-term shifts in US electricity generation driven by market forces and supplemented with reduced demand from COVID-19.

Changes to US CO2 emissions in 2021 are much more uncertain, though the EIA forecasts that they will increase by 3.6%. While emissions from oil will almost certainly increase as transportation use rebounds, some of the fall in demand may persist. After the 2009 financial crisis, for example, vehicle miles driven per capita remained notably lower than pre-crisis for the following five years before slowly recovering. Whether similar long-term effects will result from the current crisis depends in part on its duration and the magnitude of lingering economic damage.

The magnitude of coal emission increases in 2021 depends largely on gas prices; if gas prices remain relatively low, it is possible that 2021 may see continued reduction in coal emissions. That said, even if coal use stays flat or declines in 2021, rebounding transportation use and overall economic activity will likely still result in an increase in emissions relative to 2020.

The impact of COVID-19 on the US electricity sector and CO2 emissions will be significant, though its magnitude depends a lot on how large and long-lasting the economic damage will be – something that remains highly uncertain today. Reductions in electricity demand will mainly impact the coal sector which – when coupled with longer-term market forcings – will see large declines in 2020.

COVID-19 to Accelerate US Coal Decline

Apr 16, 2020

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