Beyond Corona: The road ahead for Utilities

Introduction

In 2019 the power & utilities sector was in a strong position with substantial capacity additions, especially from the renewables sector (reaching an all-time high of US$ 282 bn in 2019), emissions plateauing (for the first time in history), and the sector on track for sustained growth. Covid-19 has impacted our economies globally, including the power and utilities sector. The sector has nevertheless - and proudly - shown strong resilience during these challenging times and made sure that ‘the lights have stayed on and electons kept flowing’. As demand recovers post the crisis, it is time for companies to shift attention from short run stabilization and crisis mode to start thinking and planning ahead for the post-crisis world. 

Key Implications

The fundamental drivers and trends in the European electricity sector (decarbonization, decentralization, and digitization) are not expected to change because of the crisis. However, the speed and magnitude of the change is likely to be impacted by the present crisis. Specifically, there are 4 key trends driven by the crisis, which will impact market fundamentals.

• Change in demand and prices: Public health measures, factory shutdowns, travel limitations etc. have caused electric power demand to drop by more than 15% since the beginning of the crisis. While this figure is expected to reduce as economies start re-opening, a looming recession driven by the crisis will prolong the time taken to reach pre-covid demand levels for electricity. Additionally, the combined effect of lower commodity prices and falling demand is putting significant downward pressure on electricity prices and the peak-base load spread. Sustained lower electricity prices and lower spreads, could reduce the likelihood of subsidy free renewables and hinder new investments.
• Disruption in supply and operations: Travel and trade restrictions have impacted supply chains, leading to delays, substantial price increases, disruptions in on-going projects and potentially impacting the upcoming project pipeline. While supply chains (including renewable energy) will be restored in the medium-term, there is a possibility for increased localization efforts - moving away from a global delivery model - with rebalancing of supply security risk and cost benefit considerations in the critical parts of the value chain.
• Impact on investments and portfolio shift: With public utilities and oil majors focusing on crisis response, and reducing overall capital expenditures, new investments and overall M&A activity could be impacted in the short term; though, ongoing investments are expected to continue. Companies with weak financials will struggle to survive or risk becoming a target for acquisition – especially for cash-rich PE and infra funds, which are actively seeking investment opportunities. Specifically for renewables, as companies emerge from the immediate after-effects of the crisis, there could be higher M&A activity in the sector and more portfolio shifts in line with overall strategy.
• State policy positions: With government policies and actions focused on addressing public health issues, climate and decarbonization reforms could be deprioritized. Such a situation impacts the pace of the energy transition journey with emphasis on providing overall economic stimulus and protecting the workforce. Additionally, expansion of government debt may constrain financing of energy transition. Hence, it is imperative for governments to stimulate the ‘Green Economy’, incentivizing investment in renewables and reiterating focus on sustainability.

Call for action

While power and utility companies are expected to follow their previously laid out strategies in the long term, companies should start also thinking ahead to recover from the crisis with a competitive advantage and accelerate the change agenda. Broadly, focus areas include continuing to work on building critical infrastructure needed for the power sector of tomorrow, and investing in realizing the digitization agenda. Specific actions include:

• Offer shovel-ready infrastructure projects with robust business cases for government stimulus spending that are attractive for policy-makers (e.g. large network reinforcements, CCS, etc.)
• Consider capability acquisition to build and protect competitive advantage
• Take advantage of approaching slack in labor market to hire talent and build critical capabilities
• Accelerate investments in future infrastructure (e.g. hydrogen) to decarbonize industrial powers and create new barriers to entry for others
• Accelerate the digital agenda to offer “more service at lower cost” and improve efficiency of maintenance and operations
• Innovate to offer products and services across traditional value pools that involve technologies such as virtual/ augmented reality to create an integrated energy solution
• Build integrated digital platforms, play in the emerging downstream energy services market and tap into new revenue models