Measures taken to prevent the spread of COVID-19 in the recent weeks have resulted in significant drop of the electricity prices in Bulgaria and the SEE region, including forward and futures products. Bulgarian spot prices during in period of emergency ranged between 14.84 and 62.72 BGN/MWh, with rates above 60 BGN/MWh being rare. We have witnessed periods where prices on the Bulgarian sport market have fallen to 0.1 BGN/MWh in several consecutive hours. The situation was similar on other European exchanges. The most extreme examples are from Germany, where for a brief moment on March 22 prices of minus 55 €/MWh were observed. On this day, in addition to the preventions from corona virus, the German market was heavily influenced by the generation from renewables due to favorable weather conditions.
Figure 1. Drastic decline in Bulgarian energy futures for April 2020
The effects described above have led to a situation where the electricity purchased from traders on forward basis to guarantee the supply to their customers, is greatly loosing value. At the same time, serious difficulties for fulfilling trade commitments are expected between companies in the sector, due to the sharp decrease in the consumption of business clients in the country. Currently, traders are suffering significant financial losses due to a decline in consumption and sinking wholesale electricity prices. On a forward basis before the pandemic unfolded, forward contracts for the months of March and April 2020 were traded between 100 and 110 BGN/MWh. Currently, their market value is below 60 BGN /MWh and continues to drop. As a result, the difference of 40-50 BGN/MWh is a loss for the traders.
The most noticeable decrease in electricity consumption is evident in Italy. The state of emergency there has been in place for the longest period, because Italy was the first seriously affected country in Europe. Figure 2 illustrates the drastic 20% reduction in the country`s consumption over the last 2 weeks of March.
Figure 2. Average daily load in Italy from the beginning of the year to 29.03.2020.
Electricity traders in Bulgaria report a decrease between 15% and 25% of the consumption on the liberalized market. The situation is still very dynamic to make final assessments, but at the rate at which large energy consumers are ceasing to work, this percentage is expected to increase. It should be noted that there is no significant decline in total consumption. Due to business constraints, liberalized market consumption is declining. At the same time, as more and more people are forced to work and spend most of their time at home, electricity consumption in the regulated segment is rising. After all, these two effects have so far balanced and maintained overall consumption in the country at normal levels. The effects of reduced consumption on the liberalized market, coupled with the low prices in Bulgaria and Europe, put traders at risk of facing liquidity problems. That is, a lack of capital to cover their current obligations to generators.
A number of European countries are already considering implementing support measures for energy companies. An example is Greece, where the government plans to introduce so-called guarantee mechanisms created as an umbrella by the development ministry to combat liquidity issues. There, electricity and gas supply companies, pressured by the financial impact of the corona virus pandemic, will be among the companies to receive liquidity support from the development bank, which will act as a guarantee fund. It is also planned that employees of energy companies will be entitled to state wage allowances in order to preserve their jobs.
In the current situation, priority is given mainly to preserve the human health, but at the same time measures are being implemented to mitigate the economic impact on industry and businesses. Unless adequate measures are taken, the pressure on energy companies will deepen. The consequences of this would be transmitted throughout the energy chain between the generation and consumption because electricity suppliers are main link in that chain.
The article is published in April`s issue of Utilities magazine