Over the past two years, multiple disruptions to supply chains have affected operations across most industries. And the electric power sector is no exception. The sector was grappling with numerous challenges within its supply chain networks even before recent disruptions driven by the pandemic and the Russian invasion of Ukraine. 1
These disruptions—ranging from logistics bottlenecks to shortages of raw materials and components and labour shortages—have resulted in rising costs and a scarcity of essential electric supplies. 2 They have also widened the gap between demand and supplies of electrical equipment and components, slowing the clean energy transition. As a result, many electric power and renewable energy companies are revisiting supply chain strategies and rebooting their approach to supply chain risk management—and their boards increasingly expect it. Some are integrating supply chain management deeper into business planning and involving supply chain managers in the capital planning process. They are working to develop more secure and sustainable supply chains, while managing third-party risk to ensure resilience in the face of future disruptions.
To better understand the types of supply chain disruptors, their impact on the sector’s operations, and the strategies used to overcome these disruptions, Deloitte surveyed more than 50 electric power and renewable sector executives in the United States. The findings were supplemented by interviews with executives and leaders in utilities and other electric power providers. Using these insights, this report takes an in-depth view of how the electric power sector can improve its supply chain security, sustainability and resilience.
A combination of disruptors is driving supply chain gridlock and impacting end-to-end operations in the electric power sector. Pre-pandemic supply chain vulnerability, due largely to the geographic concentration of component manufacturing and critical minerals mining, has been compounded by the effects of the pandemic and the Russian invasion of Ukraine.
We have divided these disruptors into five categories—environmental, geographic, operational, technological and macro-economic—which impacted between 32% and 98% of our survey respondents’ supply chain operations (figure 1).
The impact of these disruptors on the electric power sector has been wide-ranging—from increased costs to project delays (figure 2). They’re not only impacting grid modernisation efforts and clean energy deployment, but also causing service-related delays. Electric power companies are draining inventories as they continue to upgrade equipment, while replacements are often delayed. 3 And ripple effects are impacting the broader economy, sometimes slowing new home construction due to a lack of electrical equipment—especially distribution transformers and smart meters4—and delaying transportation electrification. 5
Along with other supply chain disruptions, a US trade investigation into solar panel supplies from four Southeast Asian nations has also loomed over the industry, with the potential to further constrain supplies. To mitigate the dampening effect on the market, the Biden administration waived tariffs on panels from the four nations for two years and invoked the Defense Production Act to boost domestic solar panel manufacturing. a
aNichola Groom, “US to consider tariffs on solar panels made in Southeast Asia,” Reuters, March 29, 2022.
According to our survey, respondents believe increased operational costs (86%), project delays (64%), and loss of productivity (62%) are significantly impacting the industry. Among the industries most acutely affected by these supply chain constraints has been the solar industry, where a third of all utility-scale solar capacity scheduled in the United States for completion in Q4 2021 was delayed by at least a quarter. At least 13% of the planned capacity for completion in 2022 has either been delayed by a year or cancelled. 6 This trend will likely continue over the next two years as some utilities have warned they may need to delay 3–4 GW of total solar installations until 2024 due to shortages of solar panels and other equipment. 7
A severe shortage of key commodities, materials and labour can create an inflationary cost environment for companies, resulting in increased component costs. Transformer prices have doubled, while the average lead time for delivery has at least tripled from what it was two years earlier, reaching 52 weeks in some cases (figure 3). 8
Meeting a 100% clean electricity standard in the United States between 2035 and 2050 is expected to require tripling or quadrupling each year the 25 GW of wind and solar capacity added in 2021. 9 Renewable developers currently have 282 GW of wind and solar in project pipelines in the United States through 2025. 10 In addition, grid storage deployments would need to increase from an average of 1.6–11 GWh per year in the 2020s to 40–250 GWh per year in the 2040s.11
As electric power companies continue to announce decarbonisation goals, many will seek to build new renewable energy projects to fulfill them. And demand for renewables could increase even more rapidly with enactment of the Inflation Reduction Act and the incentives it provides. 12 But building clean energy technologies such as solar and wind generally requires more minerals, including rare earth elements, than traditional fossil-fuel technologies. 13 Our analysis shows that about 31 million tons of key minerals/materials are required to support solar and wind demand in the United States by 2050 (figure 4). With high reliance on imports for most of these materials—and competing demand from other industries for the same minerals—there’s an imminent mismatch between US climate goals and the availability of critical minerals essential to meet them.
Further, the clean energy transition will require a significant expansion of transmission and distribution infrastructure, both new and end-of-life line replacements, including power transformers and high-voltage direct current (HVDC) systems, as well as digital equipment such as digital relays, smart meters, and smart inverters. 14 And the raw materials for many of these are highly dependent on a small number of countries, making them vulnerable to disruption. 15
Electric power and renewable energy companies are taking steps to resolve these supply chain pressures, including using emergency stocks of components such as transformers to address short-term demand, reviewing and planning all scheduled work, substituting available materials when possible, improving communication with suppliers on the timing and delivery of materials, and digitalising processes to boost efficiency. Figure 5 highlights the top three strategies our survey respondents are pursuing to overcome supply chain challenges.
Other solutions that companies, end users, and governments are implementing—particularly in the clean energy sector—include developing more domestic component manufacturing, boosting mining and production of critical minerals and materials, and committing to future demand to incentivise global investment. In June 2022, a group of independent power producers formed the US Solar Buyer Consortium to support expansion of the domestic solar supply chain. 16
However, to mitigate far-reaching impacts, the electric power sector will likely need to adopt new, holistic approaches. Developing resilient supply chains that are also secure and sustainable will require a cohesive supply chain management strategy.
Achieving the US national offshore wind (OFW) energy target of 30 GW by 2030 is expected to require a significant ramp-up in domestic manufacturing, infrastructure, and workforce. Industry stakeholders are tackling this goal on three fronts:
For electric power companies, the number of suppliers and contracted labourers providing expertise and skills has expanded over the years to meet a wide range of industry needs. 21 For example, from 2015 to 2020, Exelon’s supplier pool had grown by 18%, to 8,000 suppliers, and its spending rose by 13% to US$9.5 billion. 22 In the case of clean energy technologies, concerns about supply chain security affect not only manufactured components but also go deeper into the key materials and critical minerals needed to build those components (see Renewable transition: Separating perception from reality). To manufacture a solar panel, about 40 components must get to the factory, including rare earth elements,23 making analysing not just Tier 1, but also Tier 2 and Tier 3 suppliers increasingly important to diversify supply risk.
While having such a vast breadth and depth of suppliers can help mitigate supply constraints caused by natural disasters, pandemics, trade policies and more, it can also open the door to more non-compliance and safety risks, especially without adequate supplier qualification and risk management controls. Understanding these multi-tier supplier dependencies and vulnerabilities better can help power and renewable energy companies address not only the physical but also the cybersecurity risks that the sector is increasingly facing.
Consequently, many companies are expanding their supply chain management approach and integrating it into total third-party risk management (TPRM). In fact, their third-party networks now go well beyond suppliers of goods and services to include affiliates and joint venture partners, research and development (R&D) organisations, technology incubators, retailers, distributors, and sales agents that can cause disruptions in the supply chain.
Until recently, companies in the electric power sector often addressed supply chain risk management in siloes, separating risks related to policy, technology, finance, corruption, cybersecurity, suppliers and other stakeholders, and more. And supply chain owners often had sole responsibility. But siloed approaches to TPRM can result in check-the-box exercises in which a business unit or function narrowly focuses on a single part of the business, without considering the effects on other areas of supply chain. Today, there’s increasing co-ordination between functions in a more integrated, cross-risk approach. Executives across the organisation, from chief financial officers to chief operating officers, are increasingly involved, and some companies are combining supply chain with TPRM. These programmes are continuously monitored to enable proactive management of emerging risks. A senior supply official at a Midwestern utility noted that they recently integrated supplier relationship management into their supplier quality team and aligned it with the supply chain function.
Companies can manage these risks by improving supply chain visibility—illuminating each tier of the supply chain from primary supplier (Tier 1) through their supplier’s supply chain (Tier 2 and beyond). With greater visibility, they can better understand the potential risks involved with each supply chain partner, across all tiers. For example, a company might think it is diversifying risk by procuring solar panels from four to five suppliers, but if those suppliers were all purchasing a critical element for producing solar panels, such as polysilicon, from the same supplier, the risk may be insufficiently managed. Most of our survey respondents reported limited visibility into their supplier network beyond Tier 1 or Tier 2 (figure 6).
Cyberattacks targeting energy systems have increased over the last five years,24 and power sector vulnerability may be rising as renewable and distributed energy resources (DERs) are added and systems become more complex, digitalised, and decentralised. What’s more, these attacks are more frequently targeting operational technology (OT) and industrial control systems (ICS), and the software used to connect information technology (IT) and OT. 25 These cyber criminals often see ICS as attractive targets for ransomware thinking operators might pay up to avoid downtime.
Digitalising resources and connecting them to operating systems can create new vulnerabilities, including supply chain risks for digital components such as software, virtual platforms and services, and data. Several cyberattacks specifically targeting the energy sector have exploited supply chain vulnerabilities in trusted third-party suppliers with less secure networks (see Managing cyber risk in the electric power sector for additional details).
The supply chain for digital components is complex, fragmented and virtual. Software development is often sourced globally to save costs, and parts of the process may be subject to control by adversaries who could insert malicious code or otherwise interfere with software or data sets. Similarly, virtual platforms and services hosted in data centers within adversary nations are subject to the same types of collection and interference.
To prevent or limit the impact of future cyberattacks, electric power and renewable energy companies can also enhance visibility into their suppliers’ cybersecurity profiles and require that they meet certain minimum standards. For example, they could require that suppliers have a formal cybersecurity programme for the product or services offered or provide a “bill of materials” detailing the provenance of all product components. Figure 7 indicates how widespread selected vendor requirements currently are among our survey respondents.
Notably, some power and utility companies are applying lessons learnt from compliance with the North American Electric Reliability Corporation’s Critical Infrastructure Protection (NERC-CIP) standards. While NERC-CIP standards are mandated only for bulk electric system assets, some power companies are expanding their enhanced cybersecurity supply chain risk management to other parts of their businesses.
Companies in the electric power sector are increasingly committing to putting environmental, social and governance (ESG) considerations at the core of their decision-making process and integrating it into their strategies and operations. And supply chains are becoming an important focus area. Since supply chains are outside a company’s core operations, they can create some of the highest ESG compliance exposure. The sector’s vast breadth and depth of suppliers also means that ESG risks, especially for the clean energy sector, reach multiple value chain partners and sectors, including manufacturing, mining, and construction. As investors, customers, regulators and other stakeholders begin demanding sustainable and ethical practices across the production cycle of clean energy, ESG considerations in the supply chain will likely multiply.
Electric power companies can benefit from a thorough understanding of potential ESG risk exposure across their supply chains—from raw material procurement through production and, ultimately, the entire product life cycle. They can also gain from incorporating traceability into the supply chain to track the provenance of products and components from the point of origin through delivery to the end user, providing supply chain transparency for investors and customers. For example, many solar developers adhere to the Solar Energy Industries Association's Solar Supply Chain Traceability Protocol—a set of guidelines intended to trace the origin of solar materials, especially to prove their procurement is free from unethical labour practices. 26
In 2020, Scope 3 emissions for the global electric power sector accounted for, on average, 110% more than Scope 1 and Scope 2 emissions combined. 27 And supply chain emissions are a significant contributor to these emissions. 28 In March 2022, the US Securities and Exchange Commission (SEC) proposed requiring US-listed companies to disclose greenhouse gas emissions generated by suppliers and partners if they are material or included in any company’s emission reduction targets. 29 Companies in the sector have started prioritising environmental issues in their supply chains, and approaches include gathering information on suppliers’ sustainability performance through the request for proposal (RFP) process, supplier scorecard reviews, and asking suppliers to voluntarily fill out annual sustainability surveys. However, only 13 utilities have committed to reducing some or all Scope 3 emissions. 30 According to our survey, only 36% of respondents have specific sustainability metrics in their supplier procurement process.
In the social sphere, electric power companies have often been at the forefront in developing their local communities economically—and momentum is growing for developing local supply networks. Two areas are especially important across electric power sector supply chains:
While many companies have set a code of conduct for their suppliers that requires them to adhere to environmental standards, ensure DEI in their supply chains, safeguard employee health and safety, and maintain ethical labour practices, compliance is not universal. Creating meaningful ESG progress within the supply chain requires an engagement journey that moves from setting aggressive emissions reduction goals, to implementing initiatives to help suppliers meet goals, and creating additional value-added opportunities for suppliers. Figure 8 illustrates five steps that can help electric power and renewable energy companies build a strategic relationship with their suppliers to boost ESG engagement.
The linear nature of most electric power industry supply chains makes them highly susceptible to disruption. While traditionally associated primarily with recycling waste, applying circular economy (CE) initiatives across all phases of product and service life cycles can help power and renewable energy companies develop more secure, sustainable and resilient supply chains. Embedding these initiatives into their business models can help companies reduce costs, optimise resources, and create added value through new products and services.
Companies in this sector can also play a significant role in developing circular economies in related industries, such as automotive and manufacturing, helping advance their energy transitions.
Deloitte’s CE framework (figure 9) for the electric power sector shows how products and materials move through the supply chain. It consists of three dimensions related to product/service flow that integrate circular strategies. It also involves cross-sector collaboration between public and private stakeholders. These dimensions/strategies give rise to new business models that enable multiple benefits for supply chains.
Figure 10 provides examples of circular business models the electric power sector is implementing across the three dimensions.
Although many electric power companies are undertaking circular supply chain initiatives for more than one dimension, very few are taking comprehensive action across all three dimensions. According to our survey, only 6% of respondents are implementing CE activities across all three dimensions (figure 11)
Companies in the electric power and renewable energy sectors should consider committing to circular economy principles and developing a longer-term vision for security, sustainability and resilience. Below are some considerations for companies looking to realise this vision:
Digitalisation can enable complete visibility throughout the supply chain and improve the transparency and traceability of materials and products. Blockchain technology can enable authenticated data communication between supply chain stakeholders, thus increasing supply chain transparency. Digital twin and advanced analytics can help improve decision-making by ordering and tracking inventory, collecting and storing performance data more efficiently, and proactively addressing maintenance issues before a failure occurs.
Sourcing in a circular supply chain requires greater planning and co-ordination that may supersede organisational boundaries. Therefore, procurement’s role as an interface to stakeholders in the upstream supply network should become more strategic. Procurement departments can improve their understanding of materials, affect the circularity of the final product, and become trusted advisers, especially on supplier knowledge. 36 Instead of just chasing savings, the environmental and social footprint criteria become increasingly important in sourcing decisions.
Standardisation of products, processes or procedures ensures all stakeholders in a supply chain are on the same page. It can enable lower production and procurement costs through economies of scale, easier and less expensive repair and replacement, as well as recycling. For example, in the case of solar, it would mean a more consistent method of designing products and assembling photovoltaic panels to make end-of-life recycling simpler and safer.
Supply chain disruptions will likely continue to occur, possibly with higher frequency. It is therefore increasingly important for the electric power sector to build resilient supply chains that are secure and sustainable, and can not only withstand such disruptions, but also emerge stronger.
Deloitte’s Power, Utilities & Renewables practice helps clients across power generation, transmission and distribution; natural gas and water distribution; and renewable energy development anticipate and respond to complex market challenges and resulting opportunities by offering an unparalleled range of services, innovation and critical thinking.