Travel restrictions are having the biggest initial impact on power project implementation as economies lock down due to coronavirus, but in the longer term developers and officials are most concerned that financing flows will dry up and even more state utilities will become insolvent, according to an African Energy survey of stakeholders in the industry and comments made in an AIX webinar
A survey of 78 Africa-focused energy companies carried out for the AIX Webinar organised by CbI Meetings on 30 April suggests that travel restrictions are causing the most difficulty for the African electricity supply industry. Companies largely reported a moderate to severe impact from Covid-19, with construction companies, utility-scale developers and governments among the worst affected. Over the medium term, developers expect that the impact will be most severe on interest and foreign exchange rate volatility, while officials expressed real concerns that insolvent utilities would be further disadvantaged, potentially setting back years of reform.
The survey showed the virus’s overall impact on businesses was significant but broadly manageable. On a scale of 0 to 5, where 0 was unaffected and 5 critically affected, 30 respondents rated the impact of coronavirus on their business at 3 (moderate impact), 22 rated it as 4 (severe impact) and 17 as 2 (limited impact). Only two respondents said they had been critically affected so far: one utility-scale developer and one political risk insurer.The 22 respondents that selected 4 were a diverse group, spanning all sectors of the industry, as were respondents selecting 3. At the lower end of the impact scale, respondents involved with advisory, equipment supply and finance were more prevalent.
In line with the survey results, AIX webinar panellists saw the industry as being more resilient than many other infrastructure segments. Contracts tend to be long term and supply is outstripped by demand in many African countries. One panellist argued that once fuel reserves at thermal power plants come to be replenished, many African countries will start to see cost savings as a result of lower oil prices.
The impact of coronavirus on travel for business development and technical personnel has been severe. More than half of respondents (40) reported that travel for business development has been critically affected by the virus – many airports on the continent have shut – and 38 respondents said travel for specialist personnel had been critically affected. Business development in Africa has traditionally required a lot of face-to-face meetings, with government and utility officials reluctant to hold official meetings with private companies remotely. There are some signs that this is changing but the shift in government focus towards managing the crisis means work with governments has slowed. One panellist said that lockdowns had resulted in more time for development work and meetings between private companies, a sentiment echoed elsewhere.
Another panellist said: “Necessity is the mother of invention. What we see here is a rapid innovation in terms of how we interface.We have already deployed three or four different types of technology that allow us to do remote commissioning, that allow us to support customers and even operate plants remotely. So in terms of customer support and added value, that is happening at a very rapid rate.We have also signed substantial deals virtually.That is definitely going to leave an echo post- Covid where people just find the well-being element of not spending half their time travelling pushes change.”
Longer-term structural consequences
However, panellists agreed that travel and equipment supply issues were likely to be short term, with longer-term structural consequences more of a concern.
The next most affected area was construction. Seven respondents said the sector had been critically impacted by the virus and 14 that the impact was severe. Another 19 respondents said the impact was moderate.While operating plants have so far been least affected, webinar panellists pointed out that this could start to change once specialist staff and components are required for maintenance or to fix faults. Plants in construction have seen a range of challenges, in particular delays in commissioning where specialists are required. One panellist said that construction risk was often borne by suppliers: engineering, procurement and construction contractors and equipment manufacturers.This is because force majeure provisions tend to allow for additional time but not additional costs.
However, on average, respondents said the impact of the virus on equipment supply was moderate. There was a wide spread of responses, with 20 respondents saying they had seen no impact at all on equipment supply and ten saying that the impact was critical.There were only seven respondents from the equipment supply sector, responding in the range of moderate to severe impact. One panellist at the webinar said there had been early issues with equipment supply from China but now restrictions on the movement of goods and people were the more significant problem.
Payment challenges from offtakers also saw a significant spread in reported impact.While 24 respondents said they had seen no impact, a further 15 said they had seen only a minor impact. However, 15 said they had seen a severe impact and five a critical impact. None of the five critically affected were utility-scale developers.Onewasautility,anotheranoff-griddeveloper,two were financiers and one an engineering, procurement and construction contractor.
Asked to look at the impact of coronavirus on different issues in the sector over a five-year time horizon, participants clearly viewed interest and foreign exchange rates as the most affected. Some 24 respondents said they expected a very severe impact on interest and foreign exchange rate uncertainty over the period, with 16 saying they expected a severe impact.Twenty respondents expected a very severe impact on project delays, with 21 expecting a severe impact.A moderate impact on the availability of finance for IPPs over the five-year period was expected.
“The cost of financing has been materially impacted,” one panellist said.“You only need to look at the sovereign spreads in the commodity-dependent countries which have seen anything from 500 to 1,000 basis point plus movements.This is definitely going to have an impact on the perception and pricing of risk in the countries that we work in.”
Government officials tended to be more pessimistic than average while utility-scale developers were substantially less pessimistic. Financiers were averagely pessimistic but less concerned about interest and foreign exchange rate volatility and more concerned about utility finances.
While short-term challenges such as travel restrictions and equipment supply were currently the main issues, structural problems are expected to emerge. Panellists said the huge projected fall in African output this year would affect businesses across the value chain.
One panellist drew attention to more commodity-dependent economies such as Angola, Ghana, Nigeria and Zambia, which have been hit by both coronavirus and the fall in commodity prices, severely restricting their governments’ ability to stimulate the economy.The panellists said this would have consequences across energy value chains that would become noticeable over the next six to nine months, as government backing remains central to investment in energy infrastructure.
However, utilities face serious issues in the short term. Their best paying and largest customers are consuming less power or none at all. Furthermore, cross-subsidies mean that even if households and small commercial customers were able to increase consumption sufficiently to cover the loss, their lower tariffs mean that revenue would still not be enough to cover costs in most cases. Some countries are also preventing utilities from disconnecting non-paying customers at the same time as ability to pay has dramatically decreased.
Regulators and governments are also having to facilitate negotiations between generators, system operators and distributors. One panellist said that generators in their country had declared force majeure, particularly those with projects in construction.“Up until around two weeks ago we thought our electricity supply industry was resilient but the system operator has now said that demand is down around 10%, causing the operator to also declare force majeure to the generators,” the panellist said. Panellists said that a lot of thought was being given to how to accommodate Covid-19 into force majeure clauses in contracts currently being negotiated, causing new challenges in drafting complex contracts.
Regulators will play a key role in bringing stakeholders to the table, arguing that the situation is short term and will normalise over the longer term, particularly in countries where there is a strong payment track record. Regulators are also looking at ways to secure the revenues needed to sustain the sector.
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