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Power utilities across the United States and globally are finding themselves under pressure to deliver a more resilient grid amid more frequent and catastrophic natural disasters. Growing demand for electricity -- driven by electrification of the economy and AI-fueled proliferation of data centers -- further exacerbates vulnerabilities of our power network.
Today’s grid has its roots in hundred-year-old technologies and is now facing a level of growth that has not been seen in our professional lifetimes. Electric infrastructure to satisfy surging demand requires significant equipment upgrades and system expansion. This large investment effort is happening on a global scale at the same time (e.g., Saudi Electric Company has a ~$130 billion capital program over six years).
Current trade tensions and disruption across the supply chain deepen the impact of the supply-demand imbalances of key components, leading to extended lead-times and higher costs. In this challenging environment only utilities with well-equipped sourcing team will be able to deliver on their capital plans without impairing affordability or shareholders’ returns.
Waiting on missing puzzle pieces
The grid challenge can’t be solved with a simple flip of the switch. Utilities’ lead times for certain critical components, such as transformers, stretch as long as two years – representing a four-fold increase vs. The pre-COVID baseline – and cost increases as high as more than four times compared to the same period.
The long wait list and elevated prices drain internal resources, delay much needed capital projects driving inefficiencies, increase regulatory risk, and threaten shareholder returns. Many utilities face the task of trying to patch the grid with ad-hoc maintenance work resulting in higher O&M cost.
Building out grid infrastructure is equivalent to doing a complicated and incomplete jigsaw puzzle, having to wait an undefined amount of time for key pieces to arrive. Even if you figure out some of the challenges, completing the puzzle is impossible without every piece. According to our research, transformers, switchgear, DC cables generators, meters, and wood utility poles are disproportionately hard affected by the challenges in the supply chain.
Approaches to addressing constraints
Utilities today face unprecedented challenges, driven by volatile pricing, tight capacity, aging infrastructure, and escalating global demand. While short-term measures are essential, resolving these constraints requires a strategic shift toward long-term solutions. New challenges require a revamped business model underpinned by key strategic initiatives.
Strengthening partnerships with key suppliers
Utilities must prioritize deepening relationships with their suppliers to address immediate supply constraints. This includes communication about demand forecasts, enabling suppliers to better plan production schedules. Hosting collaborative workshops can identify bottlenecks and develop practical recovery strategies to stabilize the supply chain. Advance payments or shorter payment cycles can provide suppliers with the financial flexibility needed to ramp up production and prioritize orders. Additionally, utilities can renegotiate contracts to include terms that ensure continuity, such as priority allocation during high-demand periods.
Enhancing agility in procurement process and capital project management
Today’s procurement processes must be driven by a need for speed as there is no shortage of utilities vying for a limited pool of equipment. Utilities should consider if their sourcing teams are organized to optimize effectiveness and adaptability. Upskilling the procurement functions with the right talent, tools, policy and process enhances coordination and helps avoid siloed behaviors, ensuring that proactive decisions align with overall organizational priorities. Cross-functional sourcing teams should integrate procurement, engineering, and supply chain expertise to facilitate faster decision-making and promote innovative solutions. Introducing digital tools for real-time tracking of supply chain risks and component availability may allow sourcing teams to proactively address disruptions.
Furthermore, utilities can adopt standardized design specifications that accommodate multiple equipment options, enabling quicker substitutions when certain components are unavailable. Close collaboration between procurement teams and suppliers ensures that projects remain aligned with shifting supply conditions.
Dynamic prioritization frameworks can help reallocate resources to high-impact or time-sensitive projects, minimizing overall delays. One such is AlixPartners’ Wheel of Procurement Excellence framework, which helps organizations identify and target specific areas to build resilience and maintain agility in procurement operations.
Diversify supply chains and localize procurement
Even while consolidating spending with key partners, it is important to avoid single points of failure risk with suppliers or regions that create vulnerabilities that are exacerbated during global disruptions. Utilities should expand their supplier network across multiple geographies to reduce reliance on high-risk regions. Proactively onboarding local suppliers can streamline logistics, shorten lead times, and improve quality control. This also allows utilities to respond more quickly to supply chain interruptions and strengthen partnerships with regional manufacturers. Utilities should consider fostering regional alliances to share supplier networks, allowing for greater resource pooling and collaborative risk mitigation.
Offering strategic long-term contracts
Long-term, large baseload volume contracts can be an enabling factor for suppliers to invest in new production capacity and allow them to secure financing. By committing to multi-year agreements with suppliers, utilities can ensure consistent production capacity for essential components. These contracts offer predictable pricing, protecting utilities from sudden cost increases and supply shortages. Strategic contracts may also include clauses for capacity expansion, enabling suppliers to invest in scaling their operations to meet growing demand. Such arrangements provide mutual benefits, offering utilities reliability while giving suppliers confidence in their long-term revenue streams.
Fostering an investment-supportive environment
Utilities have the regulatory expertise and industry influence to drive public-private initiatives that support domestic production capacity. By partnering with state and federal agencies, utilities can advocate for tax incentives, grants, and streamlined permitting processes to facilitate the construction of new manufacturing facilities. These efforts create a stable investment environment for suppliers, encouraging them to expand capacity and develop local operations. Utilities can also play an active role in planning and establishing regional manufacturing hubs, reducing dependence on overseas suppliers and creating jobs in their service areas.
Investing in workforce development
Utilities can take a proactive role in addressing labor shortages by partnering with trade schools and vocational programs to train workers in fields critical to grid modernization. Sponsoring apprenticeships, internships, and scholarship programs can help attract talent and create a direct pipeline of job-ready graduates. Over the long term, utilities should establish dedicated training facilities within their service areas, focusing on skills related to grid technologies, renewable energy systems, and advanced manufacturing. These efforts not only build workforce capacity but also strengthen ties with the communities that utilities serve.
Beyond building a pipeline of new talent, utilities must also prioritize improved labor retention policies to address the growing challenge of workforce departures. Enhanced retention strategies could include offering competitive compensation packages, clear career development paths, and programs that support employee well-being and work-life balance. Additionally, utilities should explore expanded insourcing efforts to decrease reliance on third-party contractors. Insourcing critical functions allows utilities to maintain greater control over operations, improve quality and safety standards, and foster a stronger connection between employees and organizational goals. This approach also ensures that utilities are less exposed to external labor market fluctuations, which can impact the availability and cost of contracted services.
Navigating the complex supply chain challenges in sourcing electric grid equipment is no small feat for utility companies. However, by focusing on near-term solutions like supplier collaboration, supply chain diversification, and strategic contracting, utilities can stabilize their operations and address immediate challenges. Simultaneously, long-term strategies such as vertical integration, fostering an investment-friendly environment, and workforce development lay the foundation for a resilient and sustainable future.
Recently our team optimized a large electricity provider’s procurement strategy. This is just one example of AlixPartners supporting a company looking to take urgent critical action. Key results included:
- Increased speed of delivery via standardizing and simplifying designs of key equipment and substation itself (less 2 months during design and construction)
- Diversified supply chain by implementing a “Market Balance” approach that mitigates risk of disruption and market concentration
- Reduced construction costs of new substations by finding the opportunities to eliminate internal inefficiencies and implement best practices (10%-15% due to lot size, design simplification, mandatory requirements optimization)
We’re eager to add more utilities to our list of success stories. Contact us to get the conversation started.
