COVID-19 Is More an Opportunity Than a Risk for Energy Providers
By Rüdiger Schulze
Although the utilities sector has suffered less from the effects of the pandemic than other industries, the crisis can nevertheless be viewed as the opportunity to address the challenges of digitalization that have been pursued no more than half-heartedly up to now.
The energy sector is also affected by COVID-19: effects on the industry
Experts in governments, universities, and business associations agree that we are about to enter a recession of a scope that cannot yet be clearly foreseen – but no one doubts that it will happen. COVID-19, the respiratory disease caused by the SARS-CoV-2 virus, has become a pandemic in 2020, and the consequences of the measures initiated to slow down its spread are causing major hardship for the economy and society. This crisis differs distinctly from those in the past in that it is not a crisis of demand or supply, but that both demand and supply have been restricted in their activities as a consequence of political intervention. We can certainly expect an economic recovery once the lockdowns ordered by national and local governments have come to an end. However, the mechanics of an economic cycle that is regaining momentum is only one of many factors. One aspect that is still completely unclear is the extent to which the confidence of global players in supply chains will be restored. And since trust is a not insignificant “ingredient” of the economic cycle, any expectations of a rapid recovery to pre-crisis levels in 2020 are unrealistic.
As the energy industry is by definition a component of the utilities sector and a provider of critical services (CRITIS), it has suffered less from the crisis. Even if the general public does not perceive it to be essential for survival (in the same way as the food industry, for example), the services provided by the energy industry (electricity, power grid, etc.) are indispensable even in times of crisis.
If the energy industry in the narrower sense is understood to be the energy producers of electricity and/or natural gas, the network operators, and the electricity and/or gas distributors, some typical effects on the business model can quickly be identified.
- The normal consumption of the private consumer will not change significantly, so no change in consumption because of the coronavirus is to be expected (indeed, there may be a slight increase because people are sheltering in place).
- The declines in commercial consumption, on the other hand, will be massive.
- Part of these declines will occur because operations of commercial units such as service companies have been suspended during the lockdown and they are not consuming any energy.
- Nevertheless, the ramifications of the shutdown of major parts of the production economy, especially industrial production, for consumption are especially striking.
- A considerable increase in bad debts is expected because of payment default by both private and business customers. The payment moratoria created in Germany will delay the effect slightly, but it will become visible in the second half of 2020 at the latest.
- In Germany, a decision to suspend the obligation to file for bankruptcy until 30/09/2020 (one that is certainly problematic) may protect companies that are even now insolvent longer than usual. We may well see the appearance of “zombie companies”: enterprises that were already on the verge of insolvency before the coronavirus reached the country and will now be allowed to operate for another six months and accrue even more unpaid debts, including payments owed to energy providers.
- The decline in business activity in the commercial sector is also creating overcapacity in various administrative processes or in business customer sales. It is likely that the energy utilities will be registering employees for short-time work.
- Declines in demand for energy-related services are possible, but are not necessarily inevitable for all services. A differentiated analysis is required here. Immediate effects are likely to arise from the loss of prosperity; an example would be the postponed installation of a building outlet for charging an electric vehicle.
If the analysis is broadened to include integrated municipal utilities that operate public transportation, swimming pools, and other municipal services, the list of examples becomes even lengthier: these companies have suffered, or will experience, declines in demand due to the reduced demand for the services they offer. We can expect registrations of short-time work in these sectors.
If the energy industry in a broader sense (such as the refinery and filling station business) is also considered, we can quickly imagine what further impact will be felt due to the collapse in demand.
Options for action: not a revolution, but a catalyst for digitalization!
The impact on the energy sector as a whole is enormous. Precise economic models that show the monetary effects in detail are not yet available. Nevertheless, we can clearly see that the effect is moderate in comparison with other sectors. Even if the cumulative monetary implications of lower consumption in the energy industry reach high volumes, the “mechanics” of the industry will not be fundamentally impaired. Still, rebooting production processes that have been shut down and reactivating global supply chains will be a complex and highly complicated challenge, and projections of the long-term costs are of little merit at present. Comparatively speaking, the utility sector is still able to provide and bill its services; it is essentially in a situation of reduced demand.
Options for action and possible measures do not indicate that there will be any radical upheavals in established business models or existing processes. On the contrary, familiar fields of action that have long been the subject of discussion in view of the advancing digitalization of the past few years are recognizable. In fact, the current crisis is to this extent an opportunity for the energy industry because it will act as a “catalyst” and force the industry to deal with process improvements through digitalization. Below is a systematic classification and list sorted according to “impact” of various examples (although without any claim of being exhaustive).
- In the energy industry, concepts such as New Work that are characterized by working from home, remote working, agile leadership, flexibilization of space concepts, etc. are still largely ignored, much like an unwanted step-child. True, there are isolated innovative approaches here and there. For the most part, however, their development is still frequently blocked by cultural as well as technological barriers. Up to now, many companies in the industry have allowed employees to work from home – if at all – only when a direct request has been made and even then only grudgingly. And solely if the technical requirements had previously been set up for the workplaces. Now we see that out of the necessity forced upon them by the COVID-19 crisis many companies have introduced working from home in the administrative departments. But a lot more is required for effective collaboration, namely: People (employees with the right mindset and relevant training), Places (the right remote-enabled workstations), and Tools (the indispensable software and communication tools). The flexibilization of space concepts is financially interesting as well if, for instance, it is possible in the long term to increase the number of company employees working from home and reduce the need for office workplaces. What can be done with the unused office space, or how should the remaining space be used and designed?
- The labor market for skilled workers in many locations has been exhausted for some time now. For example, specialist positions at municipal utilities have sometimes remained vacant for months or years, both in administration and in the area of key processes for the energy industry. The situation has been even more dramatic in new business fields such as e-mobility. In some cases, jobs have been created with the support of funding programs, but adequately qualified specialists have not been available. Layoffs in other industries could now translate into a strategic advantage for utilities, heightening as it were their appeal to specialists.
IT and OT (information technology and operational technology (facilities, networks, power plants, etc.))
- As they are a part of CRITIS (critical infrastructure), energy providers are required by law even now to ensure that production, networks, and processes are “crisis-proof”, e.g., in the area of cybersecurity. This has often been achieved in the past through the use of simple tools relating primarily to processes such as ISMS (information security management system). Many of these systems do not provide any means of implementing preventive measures or, if worse comes to worst, of taking the ad-hoc actions required when a threat has actually penetrated defenses. Yet facilities, power plants, and grids (the operational technology) are vulnerable to substantial external risks owing to the progress of digitalization. There has been – and still is – a lack of focus on these threats. The current crisis could heighten awareness of this aspect as working from home now becomes more common for network control technicians and other service staff. For example, the remote read-out of the data recorded by sensors in networks or facilities as part of so-called predictive maintenance will become much more widespread in the future. The disadvantage is that this exacerbates vulnerability to further cyberattacks and increases energy providers’ need for protection of their IT and OT – with respect both to concepts and technology.
- Where IT is concerned, cloud technology and cloud services are popular topics that are the subject of frequent discussion. Here as well, the energy industry appears hesitant to move ahead. The topic is complex, so the following is a highly simplified differentiation.
- To begin with, the debate about cloud technology is intense indeed. One of the major points concerns the use of clouds as “storage” for company data; another relates to the function of clouds as external processors or for improvement of performance of processes with high demands on computing power. The discussions are interesting for several reasons, not only from a technological viewpoint. More in-depth evaluation is worthwhile for financial reasons since IT costs can be turned into variables and managed more effectively.
- Most importantly, however, clouds are enablers of more extensive services at specific added-value stages for the energy industry. A completely new field is emerging here. For example, there are entire ERP systems that can be operated from the cloud rather than “on site.” Some relatively new competitors of SAP such as “PowerCloud” are investing heavily in the area of CRM and billing and already present an attractive alternative to classic ERP systems, but one from the cloud that is comparable to a cell phone app.
- Certainly, the cloud debate is only indirectly advanced by the discussion here. Nevertheless, the increasing digitalization of processes is forcing energy providers to devote more attention to opportunities generated by the cloud.
Digitalization of business processes
- A large number of business processes required during the provision of energy services have been the subject of initial steps in the direction of digitalization for quite a while. One good example is the management of field services (so-called “workforce management”), e.g., the coordination of network technicians who carry out maintenance work on customers’ premises. The essential functions concern the interaction of employees in the field with the systems for scheduling, warehousing, accounting, etc. located in the company using mobile devices and an internet connection. The result is improved efficiency of sales representatives in the field, and the quality of services can also be enhanced (for example, the rate of errors in material planning is reduced as there are no more mistakes in the communication of orders for replacement material in the warehouse). There are already excellent solutions for these tasks on the market (implementation of workforce management = “low-hanging fruits”).
- There are also promising concepts for meter-reading processes such as contactless meter reading based on the use of technologies such as long-range wide-area network (LoRa WAN) and read-out devices with the required functionality that completely bypass house calls to utility users.
- A further essential step in the ongoing development of energy providers’ business processes could be taken by developing bundled products on platforms (see also reference 1). The underlying vision is that of an “Amazon for energy providers” and other service providers offering unrelated single services: a platform that can be used to search for specific services (e.g., electricity contracts, whereby a deregulated end customer market is a prerequisite) as well as a platform that offers a combination of bundles, i.e., product and service packages. One example of such a combination is the “Happy Family Package”; by making one choice, a family covers all their needs for utility services, including electricity, telephone, laundry service, and fresh fruit deliveries, for a defined time period. Exactly what they need and exactly according to their configuration of the package.
- An even more radical approach to the digitalization of business processes is found in “zero-touch processes” that reduce manual effort and so cut costs. No-touch per se aims at eventually realizing a complete digitalization of processes. In the energy industry, too, there are various fields of application for the technology such as the digitalization of sales processes or the digitalization of classic back-office processes (for instance, in finance and financial controlling or in procurement). Technologies such as RPA (robotic process automation) or AI (artificial intelligence) offer a wide range of instruments for this purpose.
- An increase in bad debts is highly probable. This potentially has serious consequences for key performance indicators important to capital investors such as liquidity, ROCE, and working capital. Countering this adverse effect requires early analysis of the income statement and the customer base for the identification of critical positions and the address of risk positions at an early stage. One standard measure that could be initiated here would be the negotiation of the sale of part of the critical receivables to factoring providers. Analytical procedures that are offered as “off-the-shelf” products as part of cloud services (e.g., Amazon Web Services) could be helpful in this context.
- One could also imagine applying the analytical methods described here to other use cases of energy providers. Standard tools such as the cloud services just mentioned as well as applications for the analysis of other company data (e.g., from production or sales) can provide important insights for risk management. This information can be used at this time to renegotiate operator contracts for the public transportation system operated by the municipal utility on the basis of reliable figures – just to give one example. Often the assumptions of the city on which the annual subsidies/grants of the city are based cannot be dismissed as negligible.
COVID-19 is having far-reaching effects with an immense impact on the energy industry. However, the energy industry is in a relatively better position than other sectors (e.g., manufacturing) because of its status as a part of the utilities sector. Nevertheless, the crisis leaves the energy industry no choice but to act. Specifically, it represents a golden opportunity to address the challenges of digitalization that have been pursued no more than half-heartedly within the industry up to now.
- Exploitation of the opportunities to work from home, creation of the relevant cultural and technological requirements (New Work)
- Opportunities on the labor market to obtain skilled workers for specialist roles
IT and OT
- Improvement of cybersecurity for IT and OT (facilities, networks, power plants, etc.)
- Examination of possible opportunities for the use of cloud technologies and cloud services
Digitalization of business processes
- Workforce management as the “low-hanging fruit” of digitalization for field representatives
- Reduced expenditures for read-out processes through contactless read-out of meter data using LoRa WAN-compatible devices
- “No-touch” processes as a radical approach to reduce manual effort, e.g., in sales or back-office processes
- Marketing of bundled products on platforms (“Amazon for service providers”)
- Risk management through analysis of critical company data using analytics applications
- Renegotiation of operator contracts based on insights from operating processes, e.g., reliable sales figures