Utilities throughout the GCC are experiencing a dual shock from the COVID-19 epidemic and the steep decline in oil prices. That has led to cascading consequences in areas ranging from operations to supply chains to finance.
The impact has been sudden and severe, and utilities need to be smart about how they react, to ensure that they not only manage the most-urgent implications of the crisis but position themselves to emerge stronger.
Because of the stay-home orders, most demand for power has shifted from industrial users to residential users, which use less energy and pay lower tariffs. (Recent data from Italy shows that demand has declined by about 15 percent as a result of many industries being shut down.) Energy grids have been affected by the changing demand patterns, and supply chains have been disrupted.
On the financial front, utilities face higher days sales outstanding, which reduces working capital, along with the spike in bond yields for emerging markets. And organizations face greater customer scrutiny in areas such as service assurance and billing.
The ultimate impact on utilities will depend on a range of factors, including the length and intensity of the epidemic, the global economic recovery, and oil market dynamics, and government stimulus packages. However, utilities can still shape their future by taking concerted and simultaneous actions on three horizons.
The immediate horizon: mobilize while “in the thick of it”
Many utilities have already taken steps to assure continued service—particularly for essential customers such as hospitals and nursing homes—as well as assuring the safety of their workforce. However, innovative organizations can also launch programs to support societies during the crisis.
Some organizations have offered payment relief to at-risk businesses and households or expediting power connections to temporary hospitals.
More ambitious measures involve utilities leveraging their footprint, capabilities, and resources such as warehouse storage, transportation, and delivery networks, to support specific groups.
For example, they can they can coordinate with grocers and pharmacies on outreach effort to deliver essential products (groceries, medicine, and personal protective equipment) to the most vulnerable groups, such as the elderly or low-income people.
Although these increase costs, they help establish the goodwill that utilities will require to shore up popular support for government intervention.
The visible horizon: stabilize after “the dust settles”
Utilities can improve their situation by conducting a wall-to-wall financial review and reducing costs wherever possible. For example, they can divest parts of the portfolio, eliminate redundant operations and services, and outsource non-critical capabilities and functions. Because the field force is such a big part of the workforce, productivity initiatives typically offer an attractive ROI.
Throughout this process, utilities should look to digitization and technology as a means to improve performance and efficiency. A secondary benefit of reducing costs and improving financial performance is that utilities will be able to make a more convincing case for regulatory intervention either through higher tariffs or government support —if necessary.
The true horizon: strategize for the post COVID-19 era
Last, it’s highly likely that governments will step in to take action to boost economies in the post COVID-19 era, and some measures, such as stimulus spending on infrastructure, can go to utilities.
But in an environment of increased fiscal pressure and competing priorities, utilities need to establish why they are the best use of government resources. To that end, they should develop a set of projects that align with government objectives for economic stimulus spending.
Doing so entails identifying large-scale and shovel-ready projects with significant scope to generate a rapid economic impact. Moreover, project business cases should feature a high economic multiplier, contributing to local GDP and jobs (for example, distribution upgrades), and boost national productivity, such as smart-grid infrastructure or innovation that makes national economies more efficient and resilient. Finally, utility projects should be aligned with national policy objectives, such as promoting key industries or the shift to renewable energy.
Between the COVID-19 crisis and the drop-off in oil prices, the present operating environment for utilities is extremely challenging—but the future need not be. By taking the right steps to respond, on all three horizons at the same time, utilities can ensure they continue to play a crucial part of the GCC’s future economic growth.