6 minute read 24 Mar 2020
Penguins marching in line

How energy companies can lead through uncertainty

By

Gavin Rennie

EY Global Energy Emerging Markets Leader

30-year professional in Energy. Proud to be part of an industry transforming to become lower-carbon and more customer-focused.

6 minute read 24 Mar 2020

We are in the midst of an unprecedented crisis that is, at its heart, a human tragedy of yet unknown scale, duration and impact.

While the future is unclear, what we do know is we are all in this together. Every sector and business must prepare for a period of intense disruption and increased risks. This is an opportunity to learn from – and help – each other so we are all best positioned to recover well and be better prepared for the future.

A fast-changing, uncertain outlook    

Energy groups have been squeezed by a big drop in demand for both oil and natural gas stemming from the outbreak of COVID-19, which has led to lockdowns, a collapse in industrial activity and travel bans all over the world. Oil prices have been sent crashing to their lowest level since 2001, while gas demand has fallen by as much as 20% in some cases.

Regional power markets are increasingly at risk of prolonged demand destruction. In Italy, electricity use is down 18% since restrictive measures were introduced on 8 March. In Spain and the Benelux region, power usage is down around 7% since both countries went into lockdown. France, Germany and the UK are also reporting weaker demand compared to the same period in 2019. Wholesale power prices, already under pressure after a mild winter, are down sharply – about 30% in Germany – with an ongoing decline a major risk to utilities. There are heightened liquidity fears, especially for energy retailers as business and consumers defer payment of their energy bills.

This is an opportunity to learn from – and help – each other so we are all best positioned to recover well and be better prepared for the future. 

Responding now and planning for the future

As governments around the world enact drastic measures to slow down transmission of the outbreak, energy companies are facing multiple challenges: from the health and well-being of employees to disruption in the supply chain and from working capital shortages to complete closure of operations.

How organizations respond to these challenges will be critical, not only for their business but for the wider economy and communities. During this incredibly challenging time, we are now more than ever relying on the safe access and delivery of power, gas, water and other essential services. A three-tiered response can help energy companies prioritize immediate actions and plan for recovery:

  • Assess

    Assessments should focus on the current and future business impact under various scenarios. This involves a geographical segmentation of functions and activities, including people, supply, demand, capital, technology and compliance obligations at an organizational level.

  • Respond

    Speed in decision-making is critical. Responses should consider actions to demonstrate social responsibility and take into consideration the potential impact on organizational reputation. This may also involve activating alliances and collaborating with industry bodies and peer groups to leverage insights and drive coordinated efforts.

  • Monitor

    Organizations should review risk management processes, systems and parameters to determine if their risk mitigation plans continue to be adequate and effective.

With events fast-moving and widespread, effective approaches will consider how best to respond to these challenges now, which actions to put in place over the near term and how to plan for recovery over the long term. While it’s impossible to predict when this crisis will ease, taking actions with recovery in mind can help position companies to bounce back.

Five ways to reshape and plan for recovery

EY has identified five priorities for business leaders to consider – many based on perspectives and experiences from China and other countries in Asia, where COVID-19 first impacted. Energy companies should look to include these as they continue to implement their crisis actions plans:

1.    Prioritize people safety and continuous engagement

Follow government advice regarding best practice around cleaning and social distancing. In particular, employees critical to maintaining critical assets and services need to be kept safe through regular health screening, ensuring they have access to personal protective equipment, and must follow social distancing guidelines by working in smaller and segregated teams or by being moved to offsite locations.

2.    Reshape strategy for business continuity

During operational disruption, continue to assess financial and operational risks and evaluate short-term liquidity. Work with governments to identify vital infrastructure – power stations, substations, distribution networks and more. Identify and postpone noncritical maintenance but prioritize emergencies. Review the resilience of tier one suppliers, prepare a list of alternatives and plan for possible delays of raw materials. Identify required skill sets from within the existing or recently retired workforce to cover critical operations.

3.    Communicate with relevant stakeholders

Clear, transparent and timely communications are critical as companies plan for recovery while securing ongoing support from customers, employees, regulators, governments and investors. Designate single points of contact to facilitate seamless engagement with regulators, local and national authorities, as well as other key internal and external stakeholders. Reassure impacted business and residential customers that service disconnections will be suspended for nonpayment and late fees will be waived and look into restoring services to previously disconnected households.

4.    Maximize the use of government support policies

Many governments have introduced fiscal stimulus and assistance programs. Monitor these opportunities for support, consider how they may best serve individual circumstances and hold proactive dialogue with debt and finance providers. Energy companies may need to consider capital raising, debt financing or additional credit options to ensure continuous business operations.

5.    Build resilience in preparation for the new normal

As new strategies are solidified, companies will want to review and renew business continuity plans. Planning for future contingencies based on risk intelligence scenario planning and modeling is critical given the unknown duration and impact of the crisis. Establishing lessons learnt relating to an increased proportion of the workforce working from home might also create opportunities and increase future resilience.

Effective approaches will consider how best to respond to these challenges now, which actions to put in place over the near term and how to plan for recovery over the long term.

Opportunities to make positive changes

Energy companies are used to weathering disruption of all kinds. In this global crisis, they can play a vital role in mitigating some of the disruption on industry and lessen the burden on citizens and customers. Those that act with compassion and speak the truth can build trust with communities. And those organizations that develop creative solutions to difficult situations can lay the groundwork for a culture of innovation.

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Summary

Today’s crisis reminds us of the importance of continually reviewing crisis preparedness and may even offer opportunities to make broader improvements. The potential duration and intensity of this crisis are unknown but what is certain is that when it ends, those energy and utility companies that have worked together with stakeholders to mitigate disruption will be best positioned for recovery.

About this article

By

Gavin Rennie

EY Global Energy Emerging Markets Leader

30-year professional in Energy. Proud to be part of an industry transforming to become lower-carbon and more customer-focused.