It’s an unprecedented time for power generators worldwide. Utilities, grid operators, equipment manufacturers, and others working to keep the lights on know that a reliable supply of electricity is more important than ever as the world battles through the coronavirus pandemic.
Dino Barajas, who recently joined the finance arm of DLA Piper in Los Angeles, has extensive experience representing lenders, investors, and developers in domestic and international project financing matters for the energy, power, infrastructure, and commercial industries. He now serves as co-chair of DLA Piper’s U.S. Projects and Infrastructure practice, as well as the Latin American Corporate and Finance practice.
Barajas has led the Latin America practices at three international law firms, with numerous recognitions for his deal-making counsel. He has previously provided commentary for POWER regarding the market for U.S. natural gas exports to Mexico, and on Mexico’s power sector. Barajas on April 14 spoke with POWER about how the coronavirus is shaping U.S. and global power markets, and altering the operational landscape for power generators.
POWER: The COVID-19 pandemic has meant utilities and other power generators worldwide have implemented staffing protocols that perhaps they’ve never previously utilized. Are there elements of these plans that these groups might keep in place post-pandemic, such as having more staff work remotely, and making more permanent changes to their work sites in order to house—if even temporarily—critical staff on-site?
Barajas: Many power generators are currently evaluating the need to staff multiple shifts of teams to counteract the effects of having critical operators not being able to adequately staff power plants in the event of a designated shift being infected. Training of new replacement teams has become a critical path issue for many power plant owners as each power plant will have operational nuances and require some training period for a standby substitute operating team.
Another issue which may need to be evaluated will be the availability of qualified staffing near existing facilities. As more power generators require highly trained operators to staff alternate shifts, there may be staffing shortfalls in certain regions. Asset managers may need to consider ways of utilizing staffing teams for multiple sites depending on which teams are affected and require a mobile, temporary operations team to cover entire regions.
POWER: Do you think the pandemic will bring about regulatory changes from the North American Electric Reliability Corp. (NERC), Federal Energy Regulatory Commission (FERC), Environmental Protection Agency (EPA), and other U.S. agencies? We’ve already seen a lifting of some regulations, such as the EPA lowering some pollution standards and waiving compliance rules; could these lead to more permanent changes?
Barajas: Given that the nation’s power grid is an essential service underpinning the effective functioning of all aspects of our society, we will likely see the prioritizing of critical supplies and inputs for power plants should they become scarce. The proper functioning of baseload power plants, which provide the backbone of the power grid, will need to be protected at all costs to prevent catastrophic effects on other important industrial and commercial sectors. The reserve margins within various power markets in the United States will be the saving grace for certain parts of our country, where excess power capacity will provide a safety margin to potentially offset some power plants going offline in the event operating teams fall victim to the COVID-19 pandemic, and having those plants not being able to operate while replacement operators are located.
POWER: Are there regulatory changes in store for power generators in foreign countries due to the pandemic?
Barajas: In the event there are shortfalls in power supply, which result in temporary brownouts in foreign countries, many jurisdictions may reconsider mandating reserve power supply margins or battery storage reserves to allow for supply cushions for future unforeseen outages or power supply shortages. Given the global nature of the current COVID-19 pandemic, future operating protocols will likely require some level of safeguards in the event that the medical and scientific communities deem the threat of another pandemic or the reoccurrence of the COVID-19 pandemic to be a likely possibility in the future.
POWER: What impacts are we likely to see for power markets, not just in the U.S., but globally? Will we see changes in power auctions? Are utilities likely to ask for rate/tariff relief to recoup revenue?
Barajas: Power markets will likely see a negative pressure on energy pricing given that lower industrial and commercial activity will result in less electricity demand in the short-term, and thus, an oversupply of power generation. Power plants who were already operating on thin profit margins will be challenged to absorb decreased revenues over a long period of time, and may be forced to restructure their operating and debt obligations. In the event that too many power plants are forced into restructuring scenarios, power supplies may temporarily shrink over time thus leading to a shortfall in power generation and increased pricing as power demand returns once industrial and commercial activity begins to normalize.
POWER: Are energy companies at risk of bankruptcy the longer the pandemic continues? Some oil and gas companies (Whiting among others) already have filed. Do you think any power generators, particularly in the U.S., are at risk?
Barajas: At the moment, falling fuel prices are helping fossil fuel power generators avoid the perfect storm of falling energy prices due to reduced energy demand while absorbing high operating costs. If continued market pressures either raise operating costs for power generators, or result in a continued drop in energy prices due to lack of demand, then we will likely see power plants with higher unavoidable operating costs seek bankruptcy protection as a means of renegotiating their operating and debt obligations.
POWER: How do you see the impact of the pandemic on coal-fired power generation? Natural gas? Renewables?
Barajas: With falling energy prices in certain markets, those projects with the highest unavoidable operating costs will continue to suffer as the COVID-19 pandemic depresses industrial and commercial activity, and thus, lowers energy demand. Additionally, those power generation technologies requiring a continuing supply chain will also be at risk if higher infections affect the ability to supply necessary inputs required for the continued generation of power or the maintenance of power generation facilities.
POWER: What major issues, if any, has the pandemic highlighted for the power generation industry?
Barajas: System redundancy and supply chain protection have been the two major themes that have been highlighted during this crisis. Policymakers will likely need to evaluate the entire stability of the power generation system to ensure safe and continuous functioning of one of the country’s most critical services. The industry to date has done a remarkable job of showing its resiliency, but future stresses may uncover stress points, which may need to be addressed.