There may be trouble ahead

Utilities are facing an increasingly complex risk landscape. Ahead of a major research project exploring attitudes to long term threats for energy and water businesses, Utility Week and global risk advisor Marsh hosted a round table for an exchange of views on emerging and interconnected risks in today's world.

In 2022, Utility Week and Marsh partnered to create the first UK Utilities Risk Report. This endeavour was driven by a recognition of the increasingly complex risk landscape in which companies in the UK’s energy and water sectors are operating and a desire to support senior leaders trying to navigate their way through.

Ahead of the launch of the 2023 report in April, we convened a roundtable of senior industry leaders to consider how the risk landscape has evolved over the past year and the impact this will have on the five-year outlook.

Unsurprisingly, the current cost of living crisis was high on the agenda, with attendees agreeing that the fallout from the economic downturn will continue to be felt by customers and companies for years to come.

One customer director from an energy retailer said that this is inextricably linked to a range of risks facing utilities, including bad debt, cash flow, customer legitimacy and company reputation.

For customers themselves, many are in acute distress, with some facing the devastating prospect of choosing between turning on the heating or feeding their children.

“That is an incredibly difficult conversation to have,” the energy director added. “We can refer people but, bluntly, customers look to you to solve those problems for them, but we can’t.”

The director said the sector is “facing a downward spiral” if it does not address the “interconnectedness of these risks”. A major concern for them is the risk of a perceived lack of action from utilities to address affordability issues which could affect long-term customer legitimacy.

“The sector is so toxic that getting any kind of customer support for the kind of bill increases that will be needed is going to be really challenging.”

One regulatory director from a water company agreed that customer legitimacy represents a significant challenge for the sector, particularly in relation to resilience risks.

“I think one of the things we know we’re going to need in order to deal with some of the resilience risks is a massive programme of investment,” they said. “At the moment, certainly from a water perspective, the sector is so toxic that getting any kind of customer support for the kind of bill increases that will be needed is going to be really challenging.”

Increased politicisation

There was consensus among attendees that current regulatory frameworks will be inadequate to tackle the challenges ahead. “I’m increasingly worried that the regulatory framework is not acting as an enabler of better management processes and, actually, might be getting in the way of it,” the water director added. “I don’t see how we recover the asset health deficit with the current regulatory toolkit. And I don’t see how we achieve that without the customer legitimacy. All of these things are interdependent.”

One executive from a network operator insisted that the increased politicisation of the sector is contributing to a woefully short-term approach from the regulators. “I think there is a real deficit in long-term policy, which is probably one of our biggest long-term risks. When you’ve got an infrastructure asset-heavy business, you need to know what the long-term policy looks like so you can invest with confidence,” they said.

“It is a real worry for us that there is a lack of long-term, strategic, joined-up planning that you need to have confidence that net zero is achievable.”

Traditionally, they added, politicians would be expected to take a more short-term view which reflects the election cycle, while the regulators would take a longer-term view. “What we’re seeing now is a lot more politicised. The regulators know their names are going to be in the media as well, so they are doing everything they can to cover their backsides by kicking it out to all of us [utility companies], even when many of the challenges are based on their decisions over decades in some cases. But it’s everybody’s fault – except for the politicians and the regulators.”

According to another attendee from an energy company, the complex dynamic between politics and regulation has created significant uncertainty for both the sector and for investors. “The current political and regulatory framework is certainly volatile,” the net zero and policy director said. “The reality of three different prime ministers with three different approaches to intervening in the industry in dramatically different ways has been a short-term challenge, but we see this continuing to be a theme as we look ahead to the next election and the possible administration we might have in two years’ time.”

The attendee expressed their concern that this political uncertainty will feed into a broader dearth of joined-up strategic planning for the future of utilities. From an energy sector perspective, they said, this disjointed approach will have a pervasive impact on generation, networks, the retail market and the future of competition. They added: “It is a real worry for us that there is a lack of long-term, strategic, joined-up planning that you need to have confidence that net zero is achievable.”

As the debate continued, concerns were raised about the cost of achieving net zero. In light of the cost of living crisis, there is a risk that “those who can least afford it will be required to subsidise the rest”.

Customers first

Throughout the roundtable event, the need to protect customers and provide the best possible service remained at the forefront of the discussion. However, there was acknowledgement that meeting increased customer needs is placing mounting pressure on frontline staff. From examples of call centre teams handling highly distressing calls to incidents of verbal abuse endured by field force staff, the strain on employees is palpable.

“The situation for large operational workforces is really challenging,” admitted one customer care director. “If I look at my immediate operations, the number of attempted suicides I have had is significantly higher than it was 12 months ago. Mental health absence is also higher.

“We added misinformation to our risk register last year. There is already so much heat around utilities, there only needs to be the slightest thing and suddenly it catches like wildfire.”

“We are massively investing in this but it still does not fully mitigate the issue we have with the changes in customer behaviour, probably the lack of respect and just the sheer emotional turmoil.”

Taking a long-term view, attendees voiced concerns that the pressure on staff will ultimately drive many people away from the sector, which will exacerbate the skills shortage.

As well as investing in mental health and wellbeing support for staff, many companies are also focused on ensuring internal communication is improved. Maintaining clear and transparent relationships among staff is important, especially in a post-pandemic world with remote workingis commonplace.

One attendee noted that clear and swift external communication is also critical, particularly in response to a rise in misinformation, often propagated by social media.

“We added misinformation to our risk register last year. There is already so much heat around utilities, there only needs to be the slightest thing and suddenly it catches like wildfire,” they said. “It can be challenging, particularly for networks because we are not as well known as some of the retailers. It can be quite difficult just trying to explain who we are and what we are doing when you are responding to misinformation.”

One attendee recounted an example of a misleading report about a cyber-attack on their water company which appeared in the press. Despite the claims being untrue, the incident led to extensive disruption for the business. “We’ve now added ‘actual’ and ‘perceived’ risks in relation to resilience overall,” they said.

Contributors to the 2022 Risk Report identified cyber-security as one of the biggest challenges for utilities. As Utility Week and Marsh embark on this year’s report, there will be a keen focus on how events around the industry are causing key risks – both actual and perceived – to evolve and to what extent the relationship between risks, including their propensity to add velocity to one another, is understood.

Comment

Carl Ratcliffe, industry practice leader and Ben Brennan, client relationship leader, Marsh urge sector leaders to keep moving forward in the face of increasingly hard to handle risks.

The risks highlighted at the roundtable were varied and wide reaching. Topics included: funding challenges; cyber-threats; cross-sector collaboration; climate challenge; managing public perception of the sector; resilience; and employee mental health and wellbeing. Attendees were also interested in companies’ ability to mitigate these risks and how the media reports on them.

Balancing the challenges to maintain and deliver services against lower allowances continues to be difficult. The current economic environment only increases the difficulty of this. Furthermore, current negative public opinion toward the sector has manifested through the rising cost of bills, level of shareholder returns, and – for water utilities – the environmental issues associated with storm overflows. Internally, the mental health and wellbeing of operational and customer contact centre staff is currently being examined. Customer service agents are at the frontline, dealing with various customer difficulties, while often facing similar challenges themselves. Consequently, across the sector, companies are assessing their employee support programmes.

Discussions exposed the requirement for interconnectivity between utilities managing both interdependency risks and risk velocity. For example, heightened planning for scenarios of multiple risks converging requires more thought and collaboration. Cross-sector scenarios, impacting multiple utilities, should be considered to test responses crisis response. Scenarios such as a large storm are reliable tests. This can cause widespread disruption to supply. In the event of a loss of supply, utilities’ ability to restore supply to customers and businesses will be heavily scrutinised.

It is essential the industry continues to move forward. The pandemic revealed that utility must remain resilient when entrenched working practices have to swiftly adapt to unique challenges. Ostensibly, it is challenging for utilities to manage costs within their fixed revenue allowances. The volatile geopolitical and economic backdrop further complicates this. Utilities delivering vital services for customers, while simultaneously satiating stakeholders, must balance risks with continued operational improvements.

How utilities respond and manage these risks is critical to future success. It will be interesting to see how these risks are rated on their severity and likelihood in the 2023 Risk Survey. Comparison to the 2022 edition results will provide interesting analysis; the findings from which will be available in April.