As the global push towards decarbonization intensifies, the role of utilities in the energy transition becomes increasingly critical. Utilities are at the forefront of efforts to decarbonize electricity supply and electrify energy demand, collectively known as the energy transition. They are tasked with increasing the share of renewable energy in their generation mixes, modernizing networks to integrate these variable power sources, and managing the diverse power needs of industry, households, and transportation. Additionally, utilities must spearhead efforts to provide electricity access to nearly 700 million people who still lack it today.
However, recent findings reveal that fewer than 40% of utilities globally can collect enough revenue to meet their operating and debt service costs, a bare minimum for financial sustainability. This situation is especially dire in low-income and lower-middle-income countries, where high costs of supply, low tariffs, operational inefficiencies, and poor sector planning create persistent cycles of underperformance.
The financial struggles of utilities
Utilities in low and middle-income countries are less likely to recover their costs compared to those in higher-income nations. More than half of utilities in these regions do not even collect enough revenue to cover their operating costs, let alone debt service. This financial shortfall often leads to underinvestment in critical infrastructure and increased reliance on government subsidies, which place additional fiscal burdens on governments already struggling to finance other essential services.
To add to these challenges, utilities in these regions face higher distribution and transmission losses, delayed payments from customers, and significant volatility in operating costs due to their reliance on fossil fuels, particularly in areas where liquid fossil fuels like diesel are used extensively.
Capital intensity and vulnerability to shocks
As utilities shift from fossil fuels to renewable energy sources, they face increased capital intensity, which exposes them to new risks. Decarbonizing the power supply mix by 2050 could increase the required intensity of transmission networks by 30%, necessitating significant upfront capital investment.
Despite these challenges, the shift towards renewable energy also presents opportunities. Reducing reliance on liquid fossil fuels, which are subject to volatile prices, can lower operating costs and improve financial stability. Additionally, greater integration of renewable energy sources can reduce utilities’ exposure to global commodity price fluctuations, enhancing their long-term financial viability.
Opportunities through decarbonization and regional integration
Decarbonization offers utilities a pathway to improved performance and sustainability. By investing in renewable energy and modernizing infrastructure, utilities can reduce their dependence on volatile fossil fuel markets. Moreover, the energy transition creates momentum for increased regional power trade and system integration, offering utilities in low and middle-income countries a chance to enhance grid reliability, reduce costs, and improve service quality.
For example, in Western Africa, many countries have historically relied on expensive and volatile heavy fuel oil (HFO) for power generation. The region’s transition towards renewable energy, supported by projects installing solar and hydroelectric capacity, is set to reduce dependence on HFO and stabilize electricity prices.
The road ahead
To navigate the challenges and seize the opportunities presented by the energy transition, utilities need to operate in supportive policy environments. Governments play a crucial role in lowering the costs of achieving the energy transition and universal access. This includes creating robust policy and legal frameworks that reduce private investor risk and developing infrastructure based on least-cost planning and transparent procurement.
Regulators, too, have a vital role to play. They need to ensure that utilities can recover reasonable costs through tariffs, while also adopting innovative tariff designs that fairly allocate additional costs between utilities and their customers.
The recent insights underscore the urgent need for utilities, particularly in low and middle-income countries, to improve their financial and operational performance to meet the demands of the energy transition. By addressing the challenges outlined and capitalizing on the opportunities available, utilities can play a pivotal role in ensuring a sustainable, reliable, and affordable energy future for all.
For further reading, refer to the source: The Critical Link: Empowering Utilities for the Energy Transition by the World Bank.