No. 5: Accuracy of financial reporting
While the P&U industry continues its transformation, governments and regulators are persisting in their demands to keep prices stable — even as they push for greater supply certainty, increased investment in renewables and reductions in greenhouse gas emissions. All of these competing factors, in addition to the more traditional reporting issues, increase the burden of financial reporting.
No. 4: Volatility in interest and foreign exchange rates
Political and economic uncertainty across countries can impact the value of a P&U organization’s assets and liabilities alike. Fluctuations in foreign exchange rates, in particular, can negatively affect operating profits, something the sector can ill afford given stagnating revenues and declining margins in many markets.
As we transition to the future energy and utility world, where many P&U organizations will be seeking to expand supply chains, networks and assets beyond traditional borders, the industry will be increasingly exposed to interest and exchange rate volatility. This is why 44% of respondents ranked this in their top three risks.
No. 3: Volatility in prices of commodities and industrial inputs
It’s not just exchange rates and interest rates that can become volatile — the underlying valuation of key commodities can also fluctuate significantly. Geopolitical changes can impact oil prices, as can the rise of new sources, such as shale gas, while major catastrophes can create supply shocks, as seen in the aftermath of Fukushima. All this and more can increase P&U organizations’ risk exposure to commodity price volatility, which can be fundamental to the long-term success of their business models.
However, as Talib Dhanji, US Commodities Markets Lead, Ernst & Young LLP, warns, “Few utilities have invested in the talent or resources to manage commodity risk. For the most part, regulatory requirements do not provide the right incentives for them to do so. To me, this is a lost opportunity.”
Despite this lack of action, there is strong awareness of the need to do more, with 60% of respondents ranking this in their top three financial risks.
No. 2: Credit ratings and financing
The International Energy Agency estimates that, worldwide, over US$19 trillion will be invested in the power sector alone between 2016 and 2040. This means that managing large capital investment programs will become a critical success factor for utilities as they compete to deliver capital projects on time, within budget and to the expected standards.
As we continue to see an increase in energy demand and infrastructure expansion in emerging markets and consolidation in mature markets, it will be essential for utilities to find effective ways to finance their ambitions to address new competitive challenges and create fresh value.
But without a solid credit rating, P&U organizations may limit their liquidity and access to capital markets, putting all this at risk. Little wonder this was listed in the top three financial risks by 78% of respondents.
No. 1: Regulatory or rate changes impacting cost recovery of assets
While there are certainly threats to traditional P&U organizations from the rise of new technologies, there are also numerous opportunities to diversify power generation portfolios presented by both renewables and distributed generation. At the same time, operations could be transformed and long-term costs significantly reduced by robotics, automation and artificial intelligence.
However, regulatory frameworks often provide little incentive to invest where costs cannot be recovered under traditional rate-based models. And in mature markets, capital infrastructure investments that rely on cost of service rate strategies have been even harder to justify with regulators.