What to expect in the electricity sector now that Australia is in COVID-19 lockdown

First and foremost, the focus will be on keeping the lights on. Electricity production and delivery is clearly under the list of essential services so work will continue, albeit with new hygiene and social distancing protocols in place. AEMO has now fully activated its pandemic response and business continuity plans. Australian governments are collectively overseeing the sector through the National Energy Coordination Mechanism announced following last Friday’s COAG Energy Council teleconference. Generators and networks have jointly set out their efforts, which as well as the protocols noted above include stockpiling of fuel – which is almost all locally sourced – and other essential inputs. The challenges will be if significant numbers of critical staff are unable to come to work due to sickness or quarantine requirements. This would be compounded if there was a significant physical issue such as a major generator or transmission line outage.

On the positive side, the management of the physical system will be eased by the reduction in demand due to the shuttering of many offices and businesses  -although there will be a pick-up in household demadn, and most large industrial users will be seeking continuity of operations. It’s unclear yet how big the drop in demand will be, but especially seeing as we are through the summer peak (noting that Tasmania and regional NSW are winter-peaking areas) but rather than worrying about how demand peaks will be met, the market operator is likely to be more focussed on minimum demand events. When these coincide with high renewables output (typically a windy night or a sunny weekend afternoon) then AEMO may have to direct on thermal generators to ensure adequate supply of essential system services, such as inertia system strength and frequency control. We may see an upturn in these directions, along with minimum demand records and extended periods of negative pricing, which the team at NEM Risk Bulletin will analyse and report on going forward.

The other aspect of the challenge will be a financial one with many households and business customers struggling to pay their bills as their income drops. While some retailers have already contacted customers with offers of additional help, the government-funded representative of small energy users has called for “rapid co-ordinated and ambitious action” by the industry to support customers. The flip side of this is that energy companies themselves, especially smaller retailers, may not have the financial resources to support a huge escalation in bad debts unless they in turn get some relief. Ultimately, the pain of unpaid bills may need to be shared through the supply chain. Network costs, for example, can account for up to half the bill, and the regulatory mechanisms they operate under can be adapted if necessary to allow recovery of lost revenue in a future period.