A recent study has revealed that at the end of March, European power and gas utility stocks had lost 29.5% of their value compared to the start of 2020.
According to Anthony Wang at Guidehouse Insights, given their role in operating critical infrastructure and the regulated nature of significant portions of their revenue, utilities are generally well-prepared when it comes to anticipating disasters and managing the resulting financial turmoil.
European players including ENGIE, Enel, and Iberdrola have shown leadership in their employee communication and continuity of operations efforts in response to the COVID-19 pandemic.
Wang adds that even the most vigilant utilities are entering unchartered territory, wherein they face four key challenges with impacts across their value chains. A mix of immediate response planning, cash flow management, and proactive stakeholder engagement will be critical to mitigating these impacts going forward.
Key Challenges Affecting the Power and Gas Value Chain
Supply chain disruptions and workforce limitations
Travel restrictions and physical distancing measures are putting a strain on supply chains and workforce mobility. This increasingly challenges control rooms, operations facilities, and call centres where remote working can be difficult. There is also uncertainty with respect to the workforce – both in ensuring their health and safety and in accommodating flexible working arrangements, for example, in the case of international construction crews.
As supply chain frictions increase, lead times for essential components like transformers, metals, and personal protective equipment could increase by up to 60%. All of this is creating operational risk, derailing investment plans, and causing deferral of all but the most critical projects.
Utilities need to respond to rapid changes within power, gas, and commodities markets. As demand falls due to lockdown measures, there are implications on markets across the value chain.
Daily Average Power Demand in Europe
(Source: European Network of Transmission System Operators for Electricity)
Electricity and gas revenues could be at risk
A significant portion of electricity and gas revenues could be at risk due to customer liquidity issues. Governments across Europe have implemented measures to allow deferral of utility bill payments, and the European Commission has mobilized €8 billion ($8.8 billion) in financing to support small and medium enterprises and mid-caps facing existential threats.
This poses a risk to any power and gas retailer with a sizeable small commercial and industrial customer book. Careful cash flow management will be crucial while ensuring the continuance of core operations.
The policy environment is changing
How governments respond and to what extent this impacts the power and gas sector (will we see an accelerated implementation of Infrastructure 4.0?) remains unseen. Following the EU’s announcement of a green recovery plan, renewable energy industry groups joined forces to call for the integration of stimulus packages and energy transition strategies. Similarly, New York State announced it is placing renewable energy at the core of its economic recovery strategy.
The combination of a pandemic-driven economic shock, an oil-price driven credit shock, and a creaking financial market are leaving no economy, region, or industry untouched. The power and gas sector is no exception.
According to Wang, to proactively manage the challenges related to COVID-19 today and in the medium- to long-term, power and gas utilities need to implement a mix of the following:
- Immediate response planning
- Workforce engagement
- Supply chain risk assessment
- Cash flow management
- Regulatory engagement strategy
Source: Anthony Wang, Guidehouse Insights