Electric utilities require a paradigm shift in their management of supply chains to build the electricity grids for the Energy Transition

According to the International Energy Agency $25T – equivalent to a quarter of the world’s economic output today – will have to be invested over the next 25 years globally to ready our electric transmission and distribution grids for the Energy Transition. Most of that investment will flow into the materials and services supply chains required to build the infrastructure.

As a result of that investment surge, utilities are operating in a constrained supply market environment, where critical parts of the supply chain are subject to severe capacity shortages and long lead times (see Exhibit). For example, HVDC cables and AC/DC converter stations have a lead time of 6 – 7 years now and power transformers up to 4 years. In many Western countries the demand for HV linesmen in a few years exceeds current market capacity in the country by a factor of 2 – 5. Many critical supply categories are also subject to considerable price rises over the last 3 years, sometimes by 100 – 150%. Those price rises were initially fueled by raw material and labor cost increases. More recently they are however more a reflection of an increasing misbalance between demand and available supply.

This situation considerably risks delaying the necessary grid build out and hence the Energy Transition. Addressing it will require a different approach & new capabilities at electric utilities to managing the supply chain:

1. To secure scarce supply capacities, utilities might have to switch from the legacy practice of project specific spot tenders (with typically high scope certainty) to bulk sourcing across project portfolios – possibly with accompanying upfront contractual commitments. Examples for that approach include TenneT’s €30B tender in 2022/23 for 14 HVDC offshore grid connections, National Grid’s current ￡59B tender for equipment & services for up to 15 HVDC projects and Amprion’s recently launched double-digit €B tender for the civil works for 2 HVDC onshore underground cable projects (with construction works only starting from 2029 onwards). Contracting under considerable volume, scope and timeline uncertainty of far out projects has different commercial risk trade-offs for utilities, however. A range of measures exists to mitigate the exposure to uncertainty. They include timeline flexibility for specification commitments, the usage of supply market specification standards, contracting optionality for later projects, more flexible pricing models (for example progressive price conversion, where initial unit level pricing is converted into a fixed or a target price once the scope is reasonably certain) and more collaborative contracting approaches, such as early contractor involvement combined with target pricing. Some of these measures are still rarely applied in the utility sector today.
2. To enable such sourcing approaches, utilities should deploy a much more advanced demand planning that allows them to forecast future category sourcing demands based on their prospective project portfolio. It should also allow to consider several outcomes through different scenarios and levels of certainty. To facilitate this, utilities might require a more integrated master data structure that translates projects automatically into specific demand volumes across spend categories. Those can then be mapped against supplier capacity in the market.
3. Similarly, utilities require a more detailed management of their n-tier supply chains in response to industry capacity risks. For equipment this means having transparency on multi-year supplier manufacturing capacity (including capacity expansion plans) and on competing demand for that capacity from peers. For services it means identifying early on future bottlenecks in skilled jobs (for example specific engineers, such as for technical design and for commissioning; specific technicians such as linesmen and cable jointers) and in construction machinery (for example puller tensioners for overhead lines).
4. In some instances, this might require a shift in project/program delivery models to allow for better control over the supply chain (for example from industry typical EPC to EPCm or owner self-perform/multi-contracting) or tweaks to existing delivery models (for example direct sourcing of critical equipment and free issuing to an EPC).
5. Many utilities also have an opportunity to access additional supply capacity by readying alternative supply sources outside of their core supplier field. A host of newer suppliers (often, but not only, from Asia) in many of the critical spend categories has emerged over the last several years. However, overcoming the typical anchoring of engineering departments in the “tried and tested” will require a concerted effort to instigate change.
6. In response to demand scarcity utilities should also strive to become the ‘client of choice’ for critical suppliers. This should involve a much stronger engagement (also from senior executives) and collaboration with suppliers. Examples for this are periodic sharing of updated demand forecasts, adhering to industry technical standards, more collaborative contracting and less onerous tender processes (to free up scarce supplier resources). It may also include facilitation of supply capacity expansion and closer collaboration on technical innovations.
7. Additionally, utilities should continue to seek strong regulatory & government engagement to establish earlier certainty on future projects – enabling higher supply contracting certainty – and to develop industrial and labor capacity in the supply chain.

The role and remit of Procurement in utilities clearly needs to change in this context. To meet its heightened value expectations, Procurement needs to become a deeply integrated business partner and build new capabilities. And while this is primarily a task for Procurement leadership, it requires considerable support from executive management to facilitate that change.

About the authors:

Martin H?gel , Partner and Director, BCG

Oxana Dankova, PhD , Partner and Director, BCG

Boris Sidopoulos , Partner and Associate Director, BCG

Jianpeng Wang , Principal, BCG

Daniel Weise , Managing Director and Senior Partner, BCG