Green Economy Journal Issue 60

ENERGY
ENERGY
Supply chain
resilience can
PROPEL THE
POWER SECTOR
through the energy transition
– and please investors in the process
The power sector is on the verge of an existential transformation as it works to achieve a
comprehensive energy transition. But it must do so while resuscitating ageing infrastructure,
battling more severe and more frequent weather events, and defending against security threats
(both cyber and physical).
BY KEARNEY CONSULTING*
Huge barriers could thwart progress if left unaddressed.
Externally, critical materials and skilled workers are in
short supply, and their costs are rising. Internally, utilities’
traditionally rigid processes run counter to the agility they will
need to build a resilient and reliable grid while being nimble
enough to withstand supply chain shocks cost-effectively.
Power companies that stick to the status quo won’t survive easily.
The successful ones will fundamentally shift how their supply chain
and procurement functions work to reserve more money to spend
on transformation goals. Sourcing strategy will supersede pricing
tactics. Targeted savings will replace rigid budgets. And both
leadership and procurement will adopt what will seem like radical
new sourcing and supplier options, even though, yes, we realise
they have stringent technical qualifications.
In short, to meet the expectations of investors, society and
customers, power utilities will reimagine capital efficiency and make
their supply chains truly resilient, reliable and agile. Several outside
forces have led us to this point.
persistent lack of transformers, many of which are manufactured
overseas. Delivery times stretch to a year-plus and could be even
longer if geopolitical tensions rise.
Suppliers recognise the gap between demand and their supply
of transformers, but even if they can increase production or bring
it onshore, new facilities take time to build. Many shortages show
no sign of letting up, with manufacturers struggling to fill orders
during emergencies or cancelling them altogether (see figure 1).
Lead times: transformers
Lead times: electric cables
FRED economic data; Kearney analysis
Power transformer PPI (January 2019 through March 2023) 1
Figure 2. Lead times only paint part of the picture. We also see equipment prices trending up significantly.
1
Similar overall trend for electric wires and cable costs (in other words, steady and sharp increase in prices
that have remained elevated) since 2021.
Increased demand has prices rising, too. Where a transformer’s
price sat unchanged through 2020, it has risen 134% since then
(see figure 2).
Ageing infrastructure is another factor, as historical underinvestment
in maintenance and modernisation catches up with current needs.
Weak cables run short distances and transformers currently in place
are, on average, five to 15 years older than their intended lifespan.
And there are the ESG pressures that impact utilities. The growing
demand for EVs and an interconnected grid to charge them means
utilities will need even more infrastructure, including transformers,
whose production capacity lags projected growth of the EV market
(at a compound annual growth rate of 25%). ESG issues keep arising
in the minds of the public and governments as well, with increasingly
frequent natural disasters, from wildfires to heat waves straining
the power system.
These factors might have meant utilities could raise their rates to
cover escalating costs to build the required infrastructure. But large
rate increases during the past three years, ranging from 8% to 11% or
more across residential, commercial and industrial customers don’t
leave much room to gain revenue in this way now. 1
THE RISKS OF TRADITION
A recent Kearney survey revealed that just 27% of utilities have
standard processes to identify and prioritise risks consistently across
capital projects. 2
When another natural disaster hits or an extensive replacement
or upgrade project is urgently needed, does the utility have enough
detailed insight into its supply and demand to prioritise projects? Can
it shift quickly from one project to another as circumstances change?
And during this process, does it know the impact on operations and
earnings from spending rands in one place versus another, spending
rands in the wrong place or not at all?
The bottom line here
is that utilities now
require supply chains
that are responsive,
reliable and agile.
We see utilities’ related risks falling into three categories:
Demand planning. Without a clear understanding of supply and
demand across a utility’s business areas, it is challenging to manage
increasing or varied lead times for supply materials and equipment.
Longer term, more precise demand planning can help determine
time horizons. There’s also the shift to consider from reactionary
to precautionary planning that takes a longer-term view beyond
solely the next rate case.
Supplier reliability. An optimal and reliable selection of suppliers
can help overcome shortages and ensure a resilient supply chain. The
transformer production process, for example, is highly dependent
on raw materials, including copper, electric steel and aluminium.
Even as commodity prices fluctuate, having suppliers that can lock in
timely acquisition is crucial. Still, the current environment indicates
that equipment availability and resource scarcity are significant
challenges, and utilities have not yet fully fleshed out the solutions.
Agile governance. With a complete picture of the supply and demand
fields, a utility can shift from one area to another, anticipating required
lead times. For instance, if there is a major delay in transformer
replacement, an agile utility has enough data and resources to be
able to shift investments to another upgrade project.
Longer forecast periods (beyond the next rate increase) help
utilities and their suppliers plan more effectively. The bottom line
here is that utilities now require supply chains that are responsive,
reliable and agile.
THINK IN TERMS OF REINVENTION
We believe supply will become even more challenging. The supplier
base has shrunk, and the suppliers that remain are in the driver’s
seat, able to pick and choose which utility they will prioritise.
Without intervening in some way, utilities will simply not be able
to secure enough supplies, such as transformers, for years to come.
What pressures utility supply chains now
Various factors make it difficult for utilities’ supply chains to operate
efficiently and at full value. First, there’s the material shortage. A
scarcity of crucial items, such as electric steel, electronic components
and cable are disrupting supply. Utilities have acutely felt the
Figure 1. Worringly, shortages of critical equipment and materials do not
show signs of abatement.
1 US Energy Information Administration and Kearney analysis
2 Kearney ExCap III survey of utility companies
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