COVID-19-Related Risks and Challenges for European Power and Gas Utilities

Power and gas utilities are traditionally seen as safe havens for investors during economic downturns. However, despite showing resilience in the early stages of the crisis, utility stocks quickly ended up on the same roller-coaster ride as the rest of the market. As of late March, utility stocks had lost 29.5% of their value compared to the start of 2020. 

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 pandemic. 

Yet 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 mitigate these impacts going forward.

Key Challenges Affecting the Power and Gas Value Chain

(Source: Guidehouse)

Supply Chain Disruptions and Workforce Limitations Are Derailing Capital Investment Plans

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 centers 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 Must Respond to Changing Markets

Utilities need to respond to rapid changes within power, gas, and commodities markets. As demand falls due to lockdown measures, there implications on markets across the value chain.

Most notable is the immediate impact on wholesale prices, which are falling as a result of the widening supply-demand gap. Consequently, there will be swings in asset values and project returns, leading to potential reallocation of capital, sell-down transactions, and plant utilization. Moreover, despite falling wholesale prices, retail margins are coming under pressure for those exposed to pre-COVID-19 hedges, and liquidity swings may occur as a result of margin calls. Utilities need to manage their overhead expenses and merchant risk exposure to mitigate the damage while markets stabilize.

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 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 is leaving no economy, region, or industry untouched. The power and gas sector is no exception. 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