THE fallout from Covid-19 has resulted in a significant impact on various sectors across the board, especially energy consumption, as the economy is operating at only about 45% capacity amid the Movement Control Order (MCO).
The International Energy Agency estimated that electricity demand in countries with partial and full lockdown has declined by around 15% in markets where strong confinement has been adopted.
“This is a huge amount for a sector that tends to be highly predictable and where planners seek to precisely forecast energy demand in real time in order to match with supply,” Institute for Democracy and Economic Affairs (IDEAS) senior fellow Dr Renato Lima de Oliveira told Bernama.
Energy is a key input of all economic activities, and when business suffers, such as during recessions, it hurts the demand for energy consumption.
“The major difference this time is that the shock has been less gradual than a typical economic recession and it has impacted much more oil than electricity consumption,” said de Oliveira
How Malaysia’s energy sector fares
Single Buyer Malaysia, a ring-fenced entity entrusted to manage, plan and procure electricity, recorded 25,245.902 megawatt (MW) of current installed capacity as of Feb 9, 2020 but current demand stood at 12,729 MW as of April 13, due to business closure amid the MCO.
De Oliveira said the Malaysian economy is increasingly based on the services sector, so a hit to the power industry as manufacturing halts during the MCO will be smaller than what would have been the case some years ago.
“Since 2004, the share of the power industry in the gross domestic product (GDP) has been going mostly down. The good news is that, in the services sector, it is easier to work from home, as many of us have been doing lately, increasing our electricity consumption at the household level,” he added.
Comparatively speaking, the hit to the economy would be even worse if most jobs required the workers to be at the factory floor, said de Oliveira.
State-owned utility provider Tenaga Nasional Bhd (TNB) has reported that electricity demand may drop due to Covid-19 but expects its earnings to be largely unaffected as the group is shielded by the regulated asset base structure for power transmission and distribution, as well as the power purchase agreement schemes for electricity generation.
Hong Leong Investment Bank Bhd noted that TNB will be compensated in the upcoming imbalance cost pass-through review to address the shortfall in earnings due to lower than assumed power demand.
In light of Covid-19, TNB’s 51%-owned subsidiary Southern Power Generation Sdn Bhd (SPG) has made a force majeure declaration due to the MCO and restrictions in countries where the engineering, procurement and construction (EPC) specialists supporting the project reside.
Force majeure refers to unforseeable circumstances that prevent a party from fulfilling a contract.
The force majeure declaration would incur a possible impact to SPG’s 2x720MW combined cycle gas-fired power plant project in Pasir Gudang, said Malaysian Rating Corporation (MARC) recently.
The construction of the power plant is at 99.5% as of end-February, with the remaining minor works related to road pavement and drainage. The commissioning works stood at 77% and the scheduled commercial operation date is July 1, which is likely to be delayed.
The first phase of the MCO from March 18 to 31 required non-essential businesses to stop operations, while the public was ordered to stay home to curb the pandemic. It has been extended twice and now runs to April 28.
De Oliveira said the continuation of the measures to keep people at home will affect the demand for energy.
“It is a high price we are paying for what hopefully will be a greater good with the control of Covid-19, less crowded hospitals, and the possibility of fully re-engaging in economic activities without the shadow of a growing number of infections,” he added.
The oil market
In contrast, the decline in the oil market has been even higher by as much as 27%, as flights were cancelled, people parked their cars outside their home and worked from home, and goods have not moved across countries, said de Oliveira.
Brent crude eased 0.76% to US$31.50 per barrel (US$1=RM4.32) at the time of writing, which is about a stunning 50% drop year-to-date.
“This has been a true catastrophe for the oil market at the same time that Saudi Arabia had discounted its selling price and promised to pump more oil, leading to historic price drops. So, the power sector, comparatively speaking, has been spared of the worse and will more likely quickly recover once the economic engine restarts.
“This is unclear for oil, particularly if work-from-home arrangements continue, reducing demand for liquid fuels, and sanitary barriers are imposed for people crossing countries, which will lead to fewer flights,” he said,
The 13-nation Organisation of the Petroleum Exporting Countries (OPEC), Russia and other allies met on April 12 to clinch a deal to reduce production by 10 million barrels per day, the biggest cut ever, to float oil prices.
The oil market has been severely affected by Covid-19, as the commodity market witnessed a slowdown in demand.
Initial efforts to cut oil production were blocked by Mexico, after the country cast doubts on OPEC’s plan and refused to sign up for its share of cuts.
Prolonged depressed oil prices and revenue environment, as well as production decline would likely continue to present major challenges for oil and gas companies, especially for those at risk of being unable to refinance debts or meet existing debt covenants.
Energy efficiency across countries
It is also important to point out the differences in energy efficiency across countries and as economies industrialise, they tend to increase their energy consumption per wealth created.
This is measured by the energy intensity index, which calculates how much energy one needs in order to generate one unit of economic output.
“However, when economies shift from a manufacturing-based growth to a higher share of services, like most highly-developed countries nowadays, wealth tends to grow faster than the need for energy.
“The result is that they become more energy efficient, as they need less energy to generate more wealth,” said de Oliveira.
Compared to South Korea, Vietnam or Thailand, Malaysia is more energy efficient at 4.682 megajoules (MJ) per US dollar of GDP, as well as better than the world average of 5.131 MJ.
But it is still far from the average consumption of the European Union member states of 3.767 MJ.
The transformation towards a high-value-added services sector is not done yet, but the trend is clear. This will allow it to grow faster than the need to add more power generation to the grid. — April 15, 2020, Bernama
