Balancing Supply And Demand: Key Risks In Utilities

The overall functioning of the economy depends on a consistent and reliable supply for households and businesses. The supply-demand balance faces key risks in utilities because of growing demand and external factors.

The energy and utilities sector faces challenging demands for energy due to changing consumer habits, demand for renewable energy and fluctuating energy supply prices. Various factors make the energy supply environment challenging and risk management more necessary. These include:

• Unpredictable weather events such as heat waves, cold snaps and storms can impact energy supplies.
• Economic growth leads to tougher challenges for utilities to meet the ramped-up energy needs to produce and distribute.
• Advancements in technology can cause higher energy demands and market disruptions.
• Environmental regulations and energy resource costs can influence availability.
• Evolving consumer preferences.
• Regulatory uncertainties.

Related Reading: Proactive Risk Management For Utilities: Why It Matters

The Ever-Changing Landscape Of The Energy And Utilities Industry

The utility industry faces internal and external challenges that force it to adapt and change to remain competitive.

A resilient and forward-looking approach to risk management is necessary. This approach will acknowledge the evolution of both internal and external risks that come with the industry’s dynamic nature.

The energy and utilities industry is experiencing the effects of transformation from many risks today.

• Supply chain disruptions.
• Extreme weather events caused by climate change.
• Cybersecurity threats have grown from advances in technology.
• Societal and economic unrest.

The COVID-19 pandemic and political divisiveness further complicated these risks. Therefore, risk management must guard the utility industry against growing uncertainty. The energy industry must use risk management to retain innovation, collaboration, and infrastructure resilience.

What Immediate And Long-Term Concerns Are Utilities Facing?

The growth in demand for smarter use of energy is in line with the growing demand for more sustainable energy. Net zero targets and cheaper energy have increased the demand for renewable energy sources.   

The nature of the industry as an evolving service must consider both long-term and more immediate key risks in utilities. This proactive approach makes time for informed decisions that protect the companies from damage by unmitigated obstacles.

Related Reading: An Introduction To Risk Assessments

What Are The Biggest Immediate Obstacles Facing Utility Companies?

• How energy is generated and consumed has changed with the advancement of technology. Supply and demand experienced shifts to more renewable energy solutions. This added more variables to how supply is forecast for the nation. Customers demand more eco-friendly energy solutions like solar and wind instead of oil, coal, gas and hydropower.
  
• Customers are more price-conscious and do their own due diligence by finding a way to cut their energy bills.
  
• The threat of cyber-attacks increases with technological advancement and the move to smart data. Examples of cyber security protection measures to protect data include data encryption, staff training and network segmentation.
  
• Climate change is causing extreme weather patterns like floods, hurricanes, wildfires and rising sea levels that can harm power plants. The utility industry must invest in strategies such as increased use of renewable sources and more robust infrastructure so that demand doesn’t exceed supply.
  
• Economic and societal unrest threaten net zero plans. Political disputes over what the decarbonisation goals entail have emerged at COP events, creating barriers instead of a results-focused approach. This has been hindered further by social unrest, the pandemic and more political divisions. To limit the global temperature increase to 1.5 degrees centigrade demands a reduction in emissions of 50% by 2030. Barriers such as unneeded administrative processes and slow development of renewable energy solutions must be thwarted.
  
• Regulation in the utilities industry is a changing process. Utilities must track any regulatory changes impacting prices and how investments progress. Adaptations to current business models need to align with any regulation changes.
  
• Congestion on the grid  causes delays in the production of renewable energy projects. This leaves those projects in limbo, waiting for more capacity on the network, updated infrastructure and better funding. Many renewable energy developers are stuck in a backlog, waiting to connect to the UK’s grid. This threatens to undermine how the UK progresses towards meeting net zero targets and can deter investment in greener energy solutions in the UK.

What Are The Main Long-Term Key Risks In Utilities?

COVID-19 caused disruptions in our energy supply chain that highlighted why long-term risks must be a focus in risk management plans. 

• People spent more time at home, so the demand for electricity and water grew exponentially.
  
• The pandemic exposed problems with utilities getting materials and equipment.
  
• Reliability was compromised because of delays in infrastructure upgrades.

It’s also crucial that the industry guards against the following macroeconomic, strategic and operational risks.

• Changing consumer behaviours and population growth.
  
• Urbanisation increases demand and strains infrastructure for the utilities industry.
  
• The pace of grid modernisation and the integration of decarbonisation solutions.
  
• Changes in tariffs, policies and regulations.
  
• Volatile unemployment levels.
  
• Record-low interest rates can affect growth.
  
• The highly regulated nature of the industry where non-compliance leads to operational risks.
  
• Data privacy and cybersecurity.
  
• Financial challenges such as handling customer payments and maintaining profitability
  
• Stranded assets are likely if an investment goes to unneeded infrastructure that does not keep up with technology changes. For example, investment in a coal-fired power plant will face an unprofitable future as investment in renewable energy accelerates.

Related Reading: How To Manage Risk: 3 Examples Of Effective Risk Management Strategies

The Impact Of COVID-19 On The Energy and Utilities Industry

The COVID-19 pandemic raised concerns for the industry with unprecedented energy usage and distribution disruptions. The worst hit were the transportation buildings and commercial premises. Lockdowns kept people at home, leading to less demand for energy usage at the workplace.  

Unique Challenges Faced By Oil And Gas Companies

The oil and gas companies were hit hard by challenges, and the industry has learnt what needs to be considered.

The COVID-19 pandemic introduced the utilities industry to new challenges, and the main sectors affected were:    

• Transportation: During lockdown, travel restrictions and reduced economic activity contributed to a decrease in oil and gas consumption and plummeting oil prices. This was due to the lockdown measures and major travel restrictions. 
• The shift to remote working: This led to fewer drivers travelling to work. Therefore, this created shifts in energy usage patterns due to remote working as more residential energy usage became a focus. This created a dramatic drop in vehicle usage during the pandemic, which resulted in a 5% global reduction in oil demand in 2020.
• Shifts in consumer behaviour: Other shifts in consumer behaviour included an increase in time spent shopping online. The increased time at home has future implications for oil and gas demand in transportation sectors. 
• Commercial buildings closure: A vast reduction in electricity usage occurred at premises such as hotels and retail shops. This was compounded by many businesses closing during the lockdown months.

Balancing residential and business energy requires our infrastructure to handle the increased energy usage. This is due to more people working from home during business hours. 

We play a role in this balancing act, such as flexible electricity usage, by drawing more or less from the grid at certain times of the day. This demand-side responsibility reduces strain on the grid.

It must be recognised how the growth in electric vehicle chargers and batteries enables further demand shifting. The emergence of low-carbon technologies (LCTs) will likely increase exponentially in the years ahead.

How The Regulatory Landscape Is Changing

Ofgem (Office Of Gas and Electricity Markets) works towards many regulatory responsibilities to maintain healthy competition, promote consumers and safeguard our energy supplies from potential disruptions. 

Their many regulatory duties include:

• Support vulnerable customers, such as people with disabilities and customers on a low annual salary.  
• Price caps to limit what suppliers charge customers on default tariffs.     
• Clamping down on companies breaching unfair competition rules.
• Promoting energy efficiency and energy security.

The regulatory world is a changing environment in response to many new challenges ahead for a low-carbon future, including:

• The rising cost of energy requires regulators to protect consumers from high price spikes.
• A duty to recognise the financial pressure of price rises on household budgets and business premises.
• Regulators are working on new policies to support the transition to a low-carbon economy by achieving net zero by 2050.     
• The increase in homes and business premises using solar panels and battery storage pushes regulators to create policies that promote green energy technology.
• The focus on regulating how utility companies are supporting renewable energy sources includes managing ESG (Environmental, Social, Governance) scorecards and stakeholder engagement. This examines how companies handle carbon emissions and sustainability practices.
• Utility companies take data protection practices seriously, including more encryption and security audits to protect customer data. Cybersecurity measures are now heavily regulated to ensure the best intrusion detection systems and firewalls are implemented. 

The main driver here is how regulation needs to evolve to ensure that low-carbon energy technology participates fairly in the energy market. Decarbonisation is at the forefront of regulatory policy changes.    

These other regulatory bodies also play a role here in the utilities industry:

1. The Department for Business, Energy and Industrial Strategy (BEIS)
2. The Health and Safety Executive (HSE)
3. The Competition and Markets Authority (CMA)

The Changing Role Of ESG In Utilities

The energy and utilities industry is going through a shift to ESG (Environmental, Social, Governance) principles. The industry views the ESG as a robust set of standards for companies to monitor their influence on the environment, society and governance.

United Utilities, which supplies water for the northwest of the UK, views ESG as having long-term value for stakeholders. Phil Aspin, Chief Financial Officer at the firm, says:

“The provision of water and wastewater services creates a deep connection between the company and the stakeholders we serve. For investors, this means offering a financial return and, increasingly, demonstrating how we manage and perform on issues relating to environmental, social and governance (ESG) matters”.

This pushes for a more sustainable future. These ESG preferences and expectations have significant implications for the future of the UK utilities sector:

1. Increased focus on renewable energy sources. 
2. Enhancing energy efficiency.
3. Strengthening stakeholder engagement.

The ESG scorecard evaluates critical aspects of a company’s sustainability and ethical methods that comprise:

Environmental: A focus on the impact of carbon emissions and energy usage on the environment.

Social: How well a company maintains relationships with customers, staff and the approach to diversity and employee practices.

Governance: This examines company leadership and the level of transparency in the board of directors’ decision-making processes.

ESG metrics add critical data to financial reporting by providing a combination of financial and ESG performance. A company’s ESG performance is benchmarked by ESG scorecards and is now a defining comprehensive view of companies in the utilities industry. Investors and lenders can spot worthy investment opportunities by analysing the scorecard data.

The ethical practices of a company are a focus today for business partners and customers to gain a high-level view of a company’s methods. For utility companies, it can make or break a partnership deal.

How Can Utility Companies Adapt To Future Trends

Adapting to future trends in the energy sector is a critical step for utility companies to stay relevant in years to come.

What’s driving this need for adaptation?

• Climate change is driving investment in renewable energy technology. This reduces our carbon footprint by using hydropower, solar and wind. These sources are becoming more and more cost-competitive. Environmental responsibility allows a company to improve their reputations and reduce costs.
  
• Technological advancements create new opportunities. Energy storage and smart grid solutions improve how energy is managed. Smart grids optimise how energy is distributed and allow consumers to adjust usage based on real-time price changes.
  
• Digital technology enhances data analytics, and this enhances customer engagement. This makes companies stay competitive by improving how customer engagement flows.
  
• Consumers are embracing smart technology and demanding sustainable energy solutions. There is more interest in consumers choosing to manage their energy usage to take control of their bills.

There is an ongoing need to adapt to new technologies as they emerge. This includes a need to invest in company training programs and make sure that the workforce upgrades their skills to manage new systems.

Summary: The Importance Of Recognising Key Risks That Threaten Supply And Demand

What are the key takeaways from this blog post?

The energy and utilities sector faces numerous challenges, including:

• Supply-demand imbalances
• Regulatory uncertainties
• Environmental concerns
• Economic growth
• Technological advancements.

COVID-19 disrupted energy usage patterns, with reduced consumption at workplaces and shifts in consumer behaviour. Achieving a sustainable future requires balancing low-carbon energy sources with increasing electricity demand. A big reason is due to transportation electrification. 

The industry is adopting Environmental, Social, and Governance (ESG) principles, emphasising:

• Renewable energy
• Energy efficiency
• Stakeholder engagement. 

Adapting to future trends involves embracing the following:

• Renewables
• Smart grid technologies
• Sustainability commitments
• Digital transformation 
• Training and development programs are vital to empower employees for industry changes.

By proactively managing risks through adapting to new technologies, with strict adherence to ESG data and by listening to consumer demands, the utility industry can push ahead profitably and reliably as we strive for net zero goals by 2030. It’s vital that you stay informed on any developments around these points and stay alert to the merging risks.

If you’re unsure of anything mentioned in this blog post, you can get expert help from Veriforce CHAS. Explore our risk management solutions across different industries, or get in touch with our award-winning team at 0345 521 9111.