Are Pacific power utilities ready for the impact of COVID-19?
In the fragile energy scenario of small Pacific islands, contingency plans are crucial to keep the lights on during a crisis.
With the coronavirus pandemic and its human tragedy affecting hundreds of thousands of people around the world, it is important to have contingency plans in place to mitigate adverse impacts on the safety and health of nations. This becomes particularly important for one specific industry: the power and energy that sustain our basic living conditions. With the massive health measures that have been introduced by almost all states, it looks to me that security and reliability of electricity is not yet on the radar of policy makers and the international community. It is particularly alarming in the Pacific region, that remains most fragile to the global COVID-19 pandemic.
As legacy power infrastructure nears the end of its useful life, the power utilities in the Pacific become more vulnerable to unexpected system failures that can carry significant negative consequences for those who rely on them each day at home and in hospitals.
With an eclectic mix of needs, capacity and functions, these utilities are vulnerable since none of them have any contingency plans and cash reserves to prevent risks of uncertainties and operational disruptions. COVID-19 has become a new downside risk to these utilities that will be facing two headwinds: drastic decline in power demand and widening gap in liquidity to sustain basic infrastructure.
With the potential for a global recession, Pacific governments need to have a plan to protect the energy sector, as it is essential to sustain the basic public goods and health of the population. Needless to say, a single broken transmission or distribution line to a hospital could lead to human tragedy because of a simple power outage.
Hence, it is very important that governments and the international community support the power utilities by equipping them with tools and knowledge necessary to develop contingency plans to sustain uninterrupted electricity supply.
Here are three areas to prioritize:
1. Planning, planning, planning. The power sector is historically perceived as a non-cyclical business with a well projected long-term demand pattern. This is no longer true as COVID-19 severely impacts consumers’ demand. Utilities need to look at the impact of lessening consumption by commercial and industrial sectors, and the possible rise in demand from the residential sector, with schools and businesses closed and people working from home.
Drastic changes in the consumption profile and geography should be considered in planning for supply reliability and scheduled operations and maintenance. Supply priority among different consumer groups needs to be developed as part of planning. Greater collaboration between power utilities and hospitals and other public entities is urgently required to identify alternative or emergency power supply.
Drawing on the culture of joint and integrated planning should lay the groundwork for sharing resources that might be in short supply due to supply chain disruption. For example, rapid deployment of emergency off-grid solar PVs backed with battery storage systems can be one way to ensure a reliable supply of power for critical infrastructure like hospitals.
2. Create a standby liquidity cushion. COVID-19 seriously impacts utilities’ fragile financial position. Quarantine and other special measures result in suspended billing for electricity. Delay in billing and payments inevitably result in cash deficits for power utilities. As most of these companies have already operated in distorted tariff regimes not sufficient to cover operating costs, the supply of power in Pacific states can be seriously endangered by the inability of power utilities to pay for imported fuel.
Governments and utilities must consider setting up a liquidity reserve fund equivalent to at least three months of sales to mitigate the risk of power disruptions due to non-payments by consumers. They should also prioritize emergency investments such as deployment of off-grid generation facilities.
3. Accounting matters even more than usual. By taking a proactive response to emergencies, management is best placed to successfully respond, even during a stressful, critical situation like COVID-19. This proactive approach can be achieved thorough daily reporting and management accounts that focus on critical infrastructure, operations and which serve as “binoculars” to see emergency situations in the distance.
However, the biggest problem in managing power utilities which are state-owned enterprises is usually a delay between real life events and reports generated for analysis. The usual time lag sometimes exceeds six months. In a time of crisis, this is absolutely not acceptable and performance reporting must be strengthened to ensure that Pacific state-owned enterprises are maneuvering well.
Most Pacific state-owned enterprises have very poorly structured reporting and disclosure practices. This is an essential tool of management accounting that is missing. This means they cannot rationalize and prioritize the financial resources that prevent them from future crises.
As COVID-19 continues to be a worldwide emergency affecting all countries for an uncertain period, Pacific utility companies need to plan ahead for a potential power failure. The contingency plan is a fluid document that provides clear, straightforward information about the capacity, capabilities, possible failure modes and specific steps that need to be taken in the event of an emergency.
In addition to the three priority areas, the contingency plan as a whole should be prioritized, given its capacity to add resilience to loss-making power utilities. Any further delay in developing and operationalizing a contingency plan in the power sector can cost massive losses of life in the Pacific and elsewhere. The timely approval of contingency plans could turn the momentum toward power utilities’ reform and provide a clear time-bound action plan and resource to empower their corporate resilience.
Furthermore, the exercise of creating the plan can lead to discoveries of unidentified vulnerabilities of power sector and areas of urgency for actions and capital.