Covid-19 impact on the power sector – what does the future hold?

The unfolding human tragedy of the Covid-19 outbreak is fast and deeply impacting livelihoods and businesses, across the world and of course in the Middle East, and across all sectors without exempting power.

While it is difficult to speculate on the course of evolution and hopeful recovery out of the declared pandemic, reflecting on some of the possible effects on MENA power sector, one can shed light on the business patterns and decisions that might be involved in the short and long-term.

The human and economic impacts are intertwined and have manifested in a multitude of ways. The reduction in workforce availability and productivity, either due to direct illness, or due to enforced or advised social distancing measures, spurs a slowdown of business activity and mobility, and a softening of global energy demand.

MENA countries reliant on oil and gas export revenues (GCC, Iraq, Algeria, Libya, etc.), or on tourism (UAE, Egypt, Jordan, Morocco, etc.) see income streams disruptions, while others reliant on a more varied industrial or service base, or on tax revenues, also see lower government collections.  Simultaneously, subsidies, whether for healthcare systems or supply of essential goods or foods, weigh on public budgets, with increased costs from stretched healthcare systems, or from supply chain premiums given the global trade restrictions.

In the short-term, business activity softness elicits a drop in energy and power consumption, at least from business sectors, if not so much from residential, as school shutdowns and work-from-home practices partly shifts business power demand to the residential sector.

Also, oil and gas power demand might increase on the back of intentions of various countries to ramp up oil production following the OPEC+ impasse and the uncertainty surrounding the recent deal for oil production cuts.  While the fuel price drop in principle would stimulate economic activity, yet the overall short-term picture remains one of controlled environments and lockdowns.

Potential slack in power demand may be short-lived, in which case the sector would have to adjust for a limited period of time to lower load factors.  The onset of the warm season will mitigate this drop.

Power producers will have more choices in terms of which power assets to capitalise upon.  Lower performance assets might be idled in favor of large-size efficient gas turbines, helping achieve more generation cost reductions.

The switch-off of lower performance turbines, renewables, especially during the day, would constitute a bigger share of power generated, but at the same time, more load balancing would be required by gas turbines at night.  Agile, highly reliable, and operationally flexible, advanced gas turbine assets are more critical to overall grid stability and power output normalisation.

The increased usage of highly digitalised grids, leveraging data analytics and automation, will be best positioned to capitalise on efficiencies and extract maximum value through dynamically managing their power assets through a holistic approach.

In the medium-term, should business activity and power demand remain subdued going into Q3 and Q4 of 2020, both project execution segment and the power service market may experience some effects.  For power projects currently under execution, schedule delays would not be unlikely, driven by workforce and supply chain restrictions.  Robustness and agility of EPC & OEM contractors’ business models will make a difference, where those with a more localised execution capabilities in the Middle East, more regional experience, and more agility in their supply chain networks, will have more workarounds and contingencies to overcome execution challenges and avoid COD delays.

For the power services segment, as portions of the installed fleet in many countries, especially those with power surpluses, like the UAE, Egypt, KSA, and Jordan, are less utilised, hence, scheduled service events that would have otherwise been due, would be pushed back in time.

Also, for maintenance events that are triggered, execution excellence of such works will be tested.  Service companies with strong and permanent local and regional teams, local workshops, and regionalised supply chains, will be better positioned to fulfill contractual service obligations.

In the long-term, should the economic slowdown enter a protracted phase into 2021, a myriad of consequences becomes possible.

Tighter fiscal budgets and lower power demand projections can cause power capacity expansion plans to be revisited, and only the most crucial and economical projects will be sanctioned.  This can favour mega-scale gas power projects, with some comparative advantages over renewables, such as lower capital expenditures, and where operational expenses will become more favourable given the drop in fuel prices.

The same budget and low fuel effect drivers can produce another effect, observed in project materialisation models, where IPPs takes more lead than initially expected, or where a project developer’s ability to finance or facilitate financing via the OEM becomes a primary criteria in new power projects moving forward.

Other long-term effects may include a potential scale back or growth rate slowdown of renewables, paired with a pick-up in activity for air quality control systems, that would be required to render gas power plants cleaner or greener from an environmental compliance and green power agenda perspective.  Advanced emissions control systems, with industry-leading performances and competitive economics can increase the techno-commercial viability of gas plants over other power generation options.

Given the extent to which the Covid-19 situation is fluid, and the complexity of the cause-effect sequences that might be triggered, especially over the long run, a constant re-evaluation of events, drivers, and risks is required.

Fuller and more dynamic analysis will reveal patterns and courses of action that will help public and private power generation stakeholders in MENA to continue to navigate the potential short-term challenges, while adjusting and deploying long-term strategies in line with their social, environmental, and commercial priorities.

Khaled Salem is the president at Mitsubishi Hitachi Power Systems MENA