Strengthen resilience of energy supply chains

Workforce, regulation are constant energy issues

Downstream, midstream and upstream energy companies have a number of issues in common:

• They have difficulty securing workers in a specialized and competitive talent market.
• Managing regulation, coupled with new ESG demands, can be challenging.
• Cybersecurity and physical security require significant funding as companies constantly face the threat of attacks.

The solutions to these concerns can be elusive, but top companies are finding a way to stay on top of them.

Getting creative to attract workers

Although workforce challenges have eased somewhat, energy companies are still struggling to find workers to fill transportation and storage roles.

Companies have often used temporary agencies to fill jobs, paying them guaranteed fees to send dozens of workers to the job site. However, they have frequently found that many of those temporary workers have quit before completing the training because the work is difficult.

Now, energy companies are getting creative with their pay structures and creating financial incentives for longevity and attendance. They’re also developing relationships with vocational trade schools to meet some of their specialized labor needs.

Companies may even consider following the lead of a company in another industry that Grant Thornton Growth Advisory Principal Jonathan Eaton is familiar with. The company began recruiting nonviolent offenders who are reintegrating into society. They represent a labor pool that’s eager for work but having trouble finding employment.

After conducting a thorough background check to make sure that the offenders are drug-free and haven’t been charged with financial crimes, the company is giving them opportunities. “The company is finding now that these are some of their most reliable employees,” Eaton said.

Employers that conduct background checks need to be sure to follow all applicable laws and regulations related to drug screening, credit checks and other processes.

Monitoring regulatory and ESG issues

Downstream, midstream and upstream companies can experience a sort of regulatory whiplash depending on who’s in power in the federal government and even in state governments.

After the Trump administration worked to eliminate barriers for fossil fuels, the Biden administration has put significant incentives in place to help renewables grow as an answer to energy needs in the United States. The changes in the regulatory environment can make long-term forecasting difficult for companies in all stages of the energy stream.

Upstream energy providers have additional regulatory concerns, as regulators often have a say in where they can operate or whether they can use technology such as fracking to get access to product.

Although renewables are growing their market share, Eaton expects the need for oil and gas to remain.

“The U.S. will continue to need to source energy from both renewables and fossil fuels as it works toward an energy transition,” he said.

Meanwhile, the growing emphasis on the environmental, social and governance (ESG) movement among regulators and consumers creates challenges for companies throughout the oil and gas energy stream, but it also creates opportunities. Refinery processes, for example, are always going to create carbon emissions that have a negative impact on the environment.

Related resources

ARTICLE

Digital transformation: A primer for energy companies -->

ARTICLE

Energy companies strengthen cyber resilience -->

ARTICLE

Energy trends: Technology, regulation and a renewable boost -->

ARTICLE

Renewable energy a driver, enabled by tax credits -->

Asset tracking delivers critical improvements

Operational efficiency is critically important in the midstream sector, and leading companies are finding that technology for asset management and asset tracking helps them operate as profitably as possible and deliver effectively for their downstream clients.

Data analytics can lead to more precise management

Upstream energy companies face substantial obstacles as they attempt to drive growth:

• Prices are expected to remain volatile for the carbon steel and stainless steel materials that upstream companies need.
• Midstream and storage capacity may be limited, so it doesn’t make sense to extract products that they can’t deliver.

Technology and innovation present potential answers for materials issues as well as for workplace issues.

“Oil and gas companies are always investing in innovation and trying to find new ways to be more efficient and lower cost, and I think the focus on innovation will always be there,” Eaton said.

Companies are investing in technology that uses data from throughout the supply chain to enable more precise management. This technology can be used to monitor productivity and efficiency, help manage the servicing of equipment and even locate materials when necessary.

Forecasting and budgeting are critical

Capacity management with an eye toward cost containment and building efficiency is a priority for downstream energy companies.

Forecasting, budgeting and scenario planning help downstream companies make the most of the workforce and materials they have.

“These facilities run nonstop,” Eaton said. “So the easiest way to control cost is to maximize the use of the capacity. And you need to have scenario planning based on budgeting, forecasting and enterprise business planning capabilities to identify potential issues and plan for them.”

Utilities work to deliver on promises

Even as tax credits and incentives in the Inflation Reduction Act (IRA) provide an impetus for solar energy in the United States, leaders in the industry face solar supply chain issues because of materials sources that are almost completely based in China.

China’s share in all the key manufacturing stages of solar panels exceeds 80%, and its share for key elements including polysilicon and wafers is set to rise to more than 95%, according to an International Energy Agency report issued in July 2022.

Although China’s investment and innovation in this area have significantly reduced the costs of photovoltaic solar production, this geographic concentration of the supply chain is a constraint in a sector that is rapidly expanding. There is also geopolitical concern about the solar supply chain’s exposure to the Xinjiang region of China, a key polysilicon production area. These concerns have led companies to invest in production facilities elsewhere throughout the world, including building solar production facilities in the United States.

The desires of political and regulatory leaders to create geographic diversity in the solar supply chain, as well as the tax incentives in the IRA, can provide opportunities for U.S. participants in solar energy and other renewables.

Throughout the renewable energy sector, Sections 45X and 48C of the IRA were designed to strengthen the U.S. domestic supply chain with novel credit concepts. These IRA credits provide a direct benefit to manufacturers and producers of various components and property in the energy supply chain, incentivizing investment in renewables. Sections 45 and 48 also contain a 10% domestic content credit for renewable energy projects that is meant specifically to encourage domestic suppliers. At the same time, rising interest rates have diminished investor enthusiasm for solar project financing. This development has eased some of the pressure on the solar supply chain.

In solar energy, utilities play a major role in shaping the supply chain throughout the United States. Twenty-nine states and the District of Columbia have renewable energy portfolio standards that require companies selling electricity to generate or purchase a specific percentage of their energy from renewable sources, according to the State Power Project run by Harvard Law School’s Electricity Policy Initiative.

When utilities fail to meet their benchmarks, states can typically either assess fines or withhold incentives that have been put in place. For many of them, the first milestone is 2030, which isn’t far off.

Capacity is expanding

After the installation of 20 gigawatts of solar photovoltaic capacity in 2022, U.S. capacity reached 142 gigawatts, enough to power 25 million homes, according to the Solar Energy Industries Association. By 2033, the agency projects, capacity will grow by a multiple of five to more than 700 gigawatts.

As utilities work to expand their capacity and meet their benchmarks, they are taking advantage of tax credits and incentives enacted or amended by the IRA, including investment tax credits under Section 48 or production tax credits under Section 45. Both sections support incentives for investments in facilities that generate clean energy. As producers and distributors of solar energy, utilities have an interest in developing a more robust supply chain for solar manufacturing while focusing on domestic sourcing considerations.

Utilities are partnering with companies in the United States and abroad on various projects. In some cases, silicon foundry companies are working with local utilities to convert shuttered coal plants to produce wafers for solar cell production.

When rolled out correctly, there is an opportunity for utilities and their partners to develop a supply chain that is more stable, closer to the consumer and creates a superior product. Solar modules produced in China may be less efficient than those from South Korea, Japan, Taiwan and Malaysia. Utilities that can partner with producers in those countries and use joint ventures to ramp up U.S. production are likely to be rewarded.

Sourcing solar-skilled labor will also likely require utilities to create partnerships with nearby trade schools that can train the workers needed to staff the budding industry.

While it may seem odd for utilities, long a distributor of solar power, to add a focus on the solar manufacturing supply chain, it can make sense. The utilities have promises to keep and benchmarks to meet. As global demand for solar increases, utilities can partner with manufacturers to enable the development of solar panels that will be used by solar collection facilities and residential collectors who will also add capacity to the grid.

In some cases, certain energy and chemical manufacturing facilities are installing solar panels for company use. This provides an opportunity for businesses to improve energy efficiency and their ESG performance and control a portion of their own power, enhancing their reputations for clean energy use and reducing their dependence on the grid.

Although private investment in the sector has been tepid, the IRA tax incentives may provide the boost needed to encourage public-private partnerships.

Contacts: