28 May 2020
Posted in Power
Utilities might continue dealing with economic and operational challenges post the COVID-19 pandemic, says GlobalData
Due to COVID-19, electric utilities are exposed to various risks such as financial market volatility and erosion of market capitalization, credit and liquidity concerns, increase in government intervention, increasing unemployment and decline in consumer spending, production curtailment because of demand constraints, and other restructuring activities. These factors are expected to negatively impact a utility’s financial condition and result in the near term.
To curb the risks thrown open by the existing uncertainties in the post-COVID-19 phase, utilities would require to maintain their liquidity. Utilities have tried various financial instruments to raise liquidity to fund their operational and capital expenditure. Some have opted for term loans and some others opted for debt-based financial instruments, especially, bonds. Some utilities are also selling off their non-core assets to generate liquidity and reduce operational expenditure.
Somik Das, Senior Power Analyst at GlobalData, comments: “ To see their way through the uncertainties thrown open by the pandemic, utilities are expected to maintain liquidity and reduce costs. The COVID-19 pandemic threatens to hamper the utilities’ short-term operations eventually affecting their economic performance. To maintain cashflows, tackle supply chain disruptions, handle repairs and replacement of components, utilities need to have proper liquidity. To see its way through the uncertain market conditions, utilities might pursue other measures such as delaying investments, reducing capital expenditure, and eventually reducing operational and maintenance (O&M) costs.
“Utilities need to be aware that its efforts of maintaining liquidity would lead to a reduced ability to cover O&M costs, leading to a reduction in revenues in the near-term. Hence, they would need to effectively manage the O&M costs, as well as work through existing arrangements to maintain liquidity.”