Earlier in the year, we discussed how NEE’s significant weighting in the UTY and strong performance was helping the utilities index keep pace with the broader market. As the sector has struggled to find its footing in recent weeks, we wanted to once again highlight NEE’s impact on the index, as the sector’s underperformance without NEE is even more notable. Much like Technology has become the whole show at ~40% of the S&P 500, on a smaller scale NEE has been a strong driver of the UTY. NEE now makes up 18% of the index – up from 17% earlier this year (D, DUK, and SO are the next biggest weightings at 9-10%). Since the end of 2019, the UTY has lagged the S&P 500 by just 0.5%. However, when excluding NEE this grows to 5.5%. Quite impactful for just 5 months of performance.
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We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 7% WoW, but down 7% YoY for the week-ended 5/30. Relative to the 4-year average, demand was down 6%. While the previous two weeks showed modest further deterioration in the trend, demand still seems to be tracking within the range of upper-single-digit percentage declines. Most notable though was the decline in ERCOT (Texas) demand this week, as it had largely been bucking the demand decline trend. We remain in a shoulder period from a weather perspective, where degree days are less impactful. Total degree days (HDDs and CDDs) were down again, but only by 11%, as the seasons change. Cooling degree days were up 8% versus last year and 37% versus normal when looking across the U.S. in aggregate. Heating degree days were down 62% versus last year and 68% versus normal.
Just a month ago in our Utility Trader, we upgraded the Regulated Utilities sector to Market Outperform for the first time in several years. We then followed up last week with a more in-depth reiteration as the group continued to underperform. The sector finally woke up the last 2 days beating the market by 350bps. For the month, however, utilities ended up 60bp behind the market (up 3.9% vs S&P 500 up 4.5%) and they still trail by 220bps YTD (down 8% vs the S&P down 5.8%). We have spent most of this year trying to explain why utilities have been underperforming. More than anything, we think it has simply been a function of a very narrow stock market focus on growth/momentum stocks and then on virus recovery plays.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 4% WoW, but down 9% YoY for the week-ended 5/23 – the worst YoY mark since we started tracking this data in mid-March. Relative to the 4-year average it wasn’t much better – demand was down 8%, which was close to the worst we’ve seen. Mild weather likely isn’t helping, but we’re becoming increasingly concerned on this trend. Total degree days (HDDs and CDDs) fell by nearly 30% WoW. Heating degree days were down 21% versus last year and 6% versus normal when looking across the U.S. in aggregate. Similarly, cooling degree days were down 23% versus last year and 4% versus normal. See more detail within for charts and tables, as well as the slides that we will continue to update intra-week.
The decline in U.S. power demand has been well-documented – down 3% in Q1 and trending down high-single digits since then, as seen in our weekly tracker. The drop in coal demand has been more dramatic as it continues to lose market share – down 30% in Q1 and below 20% of the total power mix for the first time since it became a widespread fuel source. EIA is projecting the trend continues – forecasting a 25% decline in coal demand for the full year. Low gas prices and mild weather have only made matters worse on top of coronavirus. At the same time, the resource type is also ceding market share to low-cost renewables. According to the EIA, renewables generation exceeded that of coal on every single day in the month of April. For context, renewables surpassed coal on just 38 total days over the course of 2019!
Last week, ERCOT published its semi-annual CDR (link) report and SARA (link) for the upcoming summer. Overall, changes in the reserve margin outlook were relatively modest, with COVID19 demand impacts weighing on 2020, and incremental supply increasing 2022-2023 (2021 was actually down on wind delays). Reserve margins are forecasted 12.6%/17.3%/19.7%/18.0% in 2020-2024 from 10.6%/18.2%/17.3%/15.2% previously. The 2020 demand forecast was lowered 1.5 GW to reflect COVID19 impacts, but would still be a record. COVID19 wasn’t factored into the 2021+ outlook, but scenarios show a potential 2-3% uptick in reserve margins. On supply, 6.54 GW of new capacity was added – 1.5 GW wind, 4 GW solar, 700 MW storage, and only 363 MW gas. One planned gas plant (Halyard) was dropped from the outlook, but one mothballed coal plant (Gibbons Creek) returned – offsetting. The Oklaunion retirement is now factored in (650 MW), but Decker Creek still is not (730 MW).
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was down 1% WoW and down 6% YoY for the week-ended 5/16. Relative to the 4-year average, demand was down 9% – the worst reading since we started tracking this data in mid-March. The flattish WoW print is less impressive as we move towards the higher-load months. While many states are starting to reopen and some believe we have bottomed, power demand may not be out of the woods yet, as the declines have ticked up to the high-single digits on a YoY-basis, after previously hovering around the mid-single digits. Weather is beginning to play less of a factor in a shoulder month. Heating degree days were up 17% relative to last year and up 41% relative to normal when looking across the U.S. in aggregate.
Most utilities reaffirmed their 2020 guidance and nearly all reaffirmed their LT growth rate outlooks. Specifically, 21 companies reaffirmed 2020, 7 cut their 2020, and 3 suggested a potential future cut. Our bottom-up 2020 and 2021 outlooks show 2.7% and 6.6% growth, respectively, modestly down from prior estimates of 4.0% for 2020 but up from 6.0% for 2021. Mild Q1 weather and recession-driven weakness in C&I sales are being offset by higher-margin residential sales boosts and accelerated cost cutting. There is risk in the event of a muted recovery, but we leave earnings season more confident utility fundamentals can hold up through this crisis. The stocks seem lost between a momentum stock bubble and a preference for recovery plays, but we think investors will come back to utilities as they refocus past the virus cycle.
This Wednesday (5/13), ERCOT is set to release its semi-annual Capacity Demand Reserves report. This features an updated reserve margin outlook over the next 5 years. While demand growth has been a solid offset, most recently the influx of renewables has been considerable. Net-net the two most recent renditions of the CDR have seen reserve margins move up. This has become somewhat of a trading event, typically to the downside. On the date of the last 5 CDR updates, NRG/VST have traded down in 4 of them, with an average stock decline of 1.2%. The two most recent ones have resulted in even more dramatic sell-offs of 2.5% and 4% respectively. Ironically, the move in forward power prices on this event has been far less severe. We’re hopeful the market is better prepared this go-around. However, we are cautious the renewables influx continues and there could be new gas peakers.
We’re updating our commentary on U.S. power demand in accordance with updated EIA data, as well as the latest weekly weather data from NOAA. Power demand was up 2% WoW and down 6% YoY for the week-ended 5/9. Similarly, demand was down 6% relative to the 4-year average. This was the best WoW result and only the second positive move, since we started tracking the data in mid-March. That said, we are moving towards the higher-load months where this should be expected. On a YoY-basis and versus the 4-year average, demand fell 6%. This is consistent with the recent run-rate and an improvement from the prior week’s low that showed an 8% decline YoY and versus the 4-year average. Heating degree days were up 49% relative to last year and up 30% relative to normal when looking across the U.S. in aggregate. Everywhere except the West coast saw lingering colder weather before summer kicks off.
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