Geopolitics of energy:

navigating threats to the power sector

Geopolitics of energy: navigating threats to the power sector

Introduction: new geopolitical challenges and risks
The lenses through which geopolitical risk can be viewed apply to almost every business sector, and the power industry is no exception. At every stage of the lifecycle of a project, new challenges and risks are emerging that, if not managed correctly, can threaten the very viability and long-term profitability of the project concerned. But how do these risks manifest themselves and how can they be mitigated?

Geopolitics high on boardroom agendas
Geopolitical risks have always been with us, yet industry dynamics and global trends have caused their importance to rocket up board agendas over the last year. 61% of respondents of the Association of Insurance and Risk Managers in Industry and Commerce (AIRMIC) member survey expect geopolitical risk to become “harder to manage” in the next three years – 14% higher than the next biggest risk: climate and environmental disruption.¹

Unrest outbreaks in previously benign regions
Over the last 12 months we’ve seen the ripples of natural, man-made and political upheaval spread far and wide; and environmental, technological and political changes continue to highlight any number of new uncertainties as global trends set new domino chains in motion. At a societal level, the outbreaks of mass unrest in Chile, France and Hong Kong have made it clear that political risk events can arise suddenly in regions traditionally seen as risk-free, and the unfolding COVID-19 outbreak has highlighted the fragility of the global system to interconnected events.

As well as causing operational challenges for the power sector, investors are asking questions around how these risks are being identified and managed. 40% of respondents in the 2019 Willis Towers Watson Political Risk Survey felt that they were facing more pressure from investors regarding political risk management.² When uncertainty is your only certainty, it is easy to see why investors want to know companies are on the case. The last six months leading up to COVID-19 in Argentina illustrate some of the challenges faced in this area.

As COVID-19 continues to spread around the world, we’re seeing countries unable to pay and businesses that deal with public entities or governments directly facing political risk losses as a result. In many cases these losses will be more than the value of a contract, and upfront investments in sectors such as utilities, will also be at risk.

With the International Monetary Fund historical $53.6bn bailout to prevent a debt crisis¹, followed by Argentina’s central bank announcing new restrictions on foreign currency transactions in September², these have been topped off by an election with a new President whose August primary win triggered a free fall in stocks and bonds and a 20% decline in the value of the peso³.

Since then, it looks like Argentina has arguably had an effective sovereign default as the indirect effects of COVID-19 hit the country⁴.

Sources:
¹ https://www.weforum.org/agenda/2019/10/argentina-economic-crisis-presidential-election/
² https://www.washingtonpost.com/politics/2019/09/06/argentina-just-reinstated-foreign-currency-restrictions-heres-what-you-need-know/
³ https://www.weforum.org/agenda/2019/10/argentina-economic-crisis-presidential-election/
⁴ https://www.forbes.com/sites/afontevecchia/2020/04/22/argentinas-coronavirus-default-dance/#56848568515b

Understanding the geopolitics of power
While COVID-19 continues to grab the headlines, it’s important to remember that all the other risks don’t go away. The power sector is at the forefront of new challenges and risks that, if not managed correctly,
can threaten the very viability and long-term profitability
of sites.

While there is no doubt the global energy mix is changing, the last century has witnessed multiple transitions to and from different fuels and technology, and we can learn from that. Foreseeing trends is often a matter of perspective and sometimes it helps to take a step back and look at challenges with fresh eyes.

If you had watched Earth from space over the last 100 years you would have seen the physical representation of global energy dynamics. As time progressed, different areas of the world have been lighting up as Earth started to emit light. Cities, regions, and global industry have been connected to energy networks and the lights have come on, powering global innovation. But those lights are only one form of energy consumption, and IEA (International Energy Agency) research estimates the world consumes 10 times more energy than at the start of that 100-year period, and we’re not slowing down³.

Energy consumption is still going up, and linked to that, before we reach 2030 we’re likely to see some major climatic events which will accelerate the sense of urgency with which policy makers feel they need to change how we generate power.

Interconnected drivers and risks can be difficult to unpick, but this is where thinking about the geopolitics perspective is useful because it gives context to the ‘who, what, where, when and whys’, and leads to asking the right questions. What opportunities and risks does this open up and how should they be dealt with?Dialling in on risk
In the last Willis Towers Watson Power Market Review⁵, we introduced you to the six lenses used to explore these nuances and build an integrated view of risk. In an increasingly connected world, many of the geopolitical drivers of risk are interrelated, and effects often cascade beyond local geographies or individual industry sectors.

Think of these lenses as focusing dials on a microscope. There isn’t one answer to viewing geopolitical risk under the lens – every company’s exposure is different, and the real value is in uncovering different perspectives to ask useful questions. Do you want to zoom out for the global macro view, or zoom in to a local issue? If you don’t have the expertise in-house to understand them, who do you need to talk to?

The lenses cover a broad range of risks – from cyber-attacks to the impact of sanctions – and recognise interconnecting global trends such as shifting public sentiment, population dynamics and technological innovation.

Six lenses – an integrated approach to geopolitical drivers of risk
The six lenses that we deploy to examine geopolitical risk fall into the following categories:

People risk: Safety and security issues can pose clear risks to employees; however, there are also risks associated with workforce management, including recruitment and retention, which must be understood and managed.

Investment and return: Exposure across multiple geographic locales means geopolitical drivers of risk can be diverse. In order to protect assets and investments, this diversity of risk must be critically considered, and appropriate risk management tools deployed.

Business resilience and value chain: When risks materialise as incidents and events it is crucial to have effective business continuity practices. Response and recovery plans, which have been properly tested and exercised, can limit the impact of incidents and help companies quickly resume business operations.

Climate and environmental: The risks presented by climate and environmental factors, including storms and earthquakes, can be better understood with advanced analytics. By modelling environmental events and physical assets, risks to property and people can be quantified and managed.

Cyber risk: Digital ecosystems and connected devices fundamentally underpin the modern power sector. Having a comprehensive understanding of a company’s cyber footprint is critical to managing this source of risk, including network outages and regulatory impositions.

Reputational risk: Impacts on brand and reputation can affect the ability of a company to attract customers, recruit talent or even to gain an operating licence in a country. Being attuned to the relationships between geopolitical drivers and reputation helps anticipate and mitigate these risks.

Organisations need to identify and understand their geopolitical risks and the connections between them in order to mitigate the risks and seize new opportunities, so:

when there’s a change of government on the other side of the world, the components delivered by your supply chain are less likely to be affected; or

when fire hits a remote data hub many thousands of miles away, your customers and suppliers can still work with you; or

when your competitors leave a geography due to civil unrest, your understanding of the situation may present you with an opportunity.

As our contribution to this Review, we wanted to set out three possibilities that bring these lenses to life, and which can be used to construct bespoke scenarios for clients. This is the approach we have taken across all the Natural Resources reviews this year, and we would recommend looking at the reports to understand the sector specific issues and consider how these may create secondary impacts for you.

Storyline One - geopolitics of power: business resilience, climate and environment, investment and return lenses
Enabled by technology, the development of large-scale regional networks will strengthen the reliance on energy grids as geopolitical nodes in the coming years. While the issue of cybersecurity is often highlighted and the risk of breaches to data and operations is essential, the geopolitics of power distribution and the potential for conflict need to be explored.⁶

Enhanced energy security
At an international level, the potential for cross-border electricity trading and the creation of grid communities⁷ raises the opportunity for enhanced energy security, which can be a positive investment factor. Examples include the Viking Link between the United Kingdom and Denmark, the North Sea Link between the UK and Norway, the Nord Stream 2 pipeline between Russia and Germany and the upcoming EuroAsia interconnector that will create a grid between Israel, Greece and Cyprus.

Each of these examples are infrastructure investment efforts aimed at diversifying supply routes with strong geopolitical drivers⁸. However, connecting these networks can increase the likelihood for nations to use inter-state electricity cut-offs, blockades or embargoes as foreign policy tools⁹. This creates opportunities for power companies to respond.
The importance of data
Back in 2017, The Economist published a story entitled, “The world’s most valuable resource is no longer oil, but data”¹⁰, and this is where the power sector should be thinking about the decades of information that they have regarding responding to supply and demand dynamics, and what can be done with that. For example, while large thermal plants take many hours to increase their output from a cold start, small, energy efficient, deployable plants could help enable energy security¹¹.

The role of research
Quantifying how possible futures will affect companies can allow them to make choices based on their risk appetite, capability and aspirations, and to use existing expertise to create new revenue streams. This is where research can play an important role. Alongside the physical sciences, economic modelling and social science are providing new insights and access to scenarios to represent the possible futures¹². For example, COP25 ended with no agreement on trading carbon credits¹³ and COP26 has been postponed, which raises the risk of rapid policy interventions in the future that will not leave companies time to respond if they haven’t considered implications and responses.

Modelling environmental effects on your business model and having access to experts who can translate those effects into business insights has never been more important, and this is reflected in the broad people, capital and risk expertise that makes up our Climate Quantified^TM proposition.

In the Review you will find two articles that set out the challenges and opportunities around Environmental Social and Governance (ESG) issues, along with information on how our Climate Quantified^TM proposition can provide a framework to support you in developing a strategic response.

It is vital that the state of community opinion, politics and the security situation are monitored and responded to, and that political and security risk management are integrated into company culture.”

Storyline Two – generating resilience: people, business resilience, reputation and trust, investment and return lenses
At a local level, establishing new sites can result in land use conflict and trigger localised political risk¹⁴, while current sites can also serve as focal points for local and international issues¹⁵. Both instances can cause reputational harm, investor uncertainty, and local security issues. It is therefore vital that the state of community opinion, politics and the security situation are monitored and responded to, and that political and security risk management are integrated into company culture.

Threat assessments
Experience indicates that the benefits of conflict analysis are greater when the approaches are integrated throughout the project cycle as opposed to being introduced only when conflict surfaces mid-flow. Predicting the occurrence and nature of political and social disruptions may seem impossible, but threat assessments can make use of recent examples such as attacks on pipelines and oil-processing infrastructure to add context to ‘actor mapping’¹⁶.

How closely do your security specialists collaborate with your environmental specialists, community outreach, communications staff and general management? Could they list the dividers and connectors in their project area and how their project increases or decreases them? While this kind of analysis won’t give you all the answers, red teaming and scenario building with these questions in mind can give you input on the ‘who, how and where’.

Continuous situational analysis
The scope of threats may be broad, and for this reason consultants may be commissioned to assist in analysis and planning. Typical areas of activity driven by continuous situational analysis may involve planning for medical emergencies, planning for political and natural disasters including evacuation, physical security at installations and a terrorist threat assessment of upstream and strategic installations. Other measures may include business diplomacy, lobbying, community liaison and the building of a dynamic network of local and regional influence and insight¹⁷.

Addressing ESG risk
We also expect institutional investors to increasingly demand that Environmental, Social and Governance (ESG) risk is addressed before investing in projects in many parts of the world, and to be more active; this therefore needs to be part of the planning process and outputs used to inform employee risk assessments. Having an onsite engagement plan with local stakeholders and an assessment of regional interests will be essential to understand land use dynamics, and tools like virtual reality can be used to showcase your asset today and what it could be in the future¹⁸.

Potential adaptation options
This also brings an exciting opportunity dynamic to pivot to site lifecycles and to look at the potential adaptation options that could make existing power stations more attractive in the short term by increasing energy efficiency and reducing emissions. Investment in research and development for new technologies is one option that could serve to adapt and transform infrastructure to increase the lifespan of sites through additions like Carbon Capture Storage or looking at completely new uses.

Companies should learn from the innovation journeys of other sectors to think outside the box to create new value in future stranded assets¹⁹. For example, innovative companies are working with local governments to transform sites into new uses that take advantage of transport links, proximity to transmission lines, and their detailed site knowledge to create renewable energy sites²⁰, gas capture²¹, battery storage locations²², vertical farms, housing and tourism, which in turn can reduce regional inequality that can develop into social unrest²³.
Storyline Three - digitalising geopolitics: cyber, people, reputation and trust lenses
With inherently global economies becoming progressively dependent on digitalisation and technology, it is essential to understand the strengths and weaknesses of these capabilities. Technology has improved resilience to countless threats from an individual level to a societal level. However, increased dependence on digitalisation and the reliance on power puts the reputation of companies under the spotlight.

C-Suites should wake up to new policy landscape
Geopolitics drivers associated with digitalisation and cyber vulnerabilities are deep and varied, which is one of the reasons why cyber risks continue to be at the top of board agendas, and why there isn’t a one size fits all answer.
Geopolitics at the national level can leave companies facing unintended consequences as bystanders in new trade wars. If an embargo such as the US government’s attempt to block Huawei’s involvement in 5G networks were to hit the power sector, do you understand what the impact would be? As the sector looks to digitalisation to gain efficiency, awareness of your supply chain and investors is going to be increasingly important, as is understanding the capabilities of the potential players on the board.

Cyber-attacks
For example, one of our geopolitical risk partners, Elisabeth Braw from RUSI’s Modern Deterrence programme, recently flagged up Refined Kitten. While the name might evoke the image of a cuddly pet, Microsoft has just announced that Refined Kitten is a hacker team, believed to be backed by Iran, that can do things that virtually no other known hacker group can do, namely infiltrate the control systems of critical national infrastructure, including oil refineries and electric utilities²⁴.At a company level, while most of the intrusions detected by power companies seem to have been basic reconnaissance operations or intellectual property theft, malicious actors are getting in to systems through unpatched vulnerabilities. While people risk is often thought about in terms of shadowy outsiders looking to cause harm, it is important to remember the risks that can arise from within the business from your own people’s actions – intentional or not. Do you have security awareness programme to measure the effectiveness of your internal training? Have you run an internal phishing exercise to test readiness, and what templates and hooks are you offering your employees?²⁵Uncertainty around COVID-19 may provide a doorway in²⁶. Ninety-one per cent of cyber-attacks start with a phishing email²⁷, and aren’t always directly aimed at your business. As was subsequently determined, NotPetya had been created by a hacker group working for Russian military intelligence, and initially targeted Ukrainian government agencies and businesses²⁸. Even though Maersk – one company impacted – was not the primary target, it was “collateral damage,” as its chairman, Jim Hagemann Snabe, later explained²⁹. Being aware of the art of the possible has never been more important for risk managers to ensure scenario planning and business continuity exercises are relevant.

Delivering cyber resilience is a core part of effective corporate governance for power and the power sector. This year we’ve seen energy companies participating in initiatives such as the World Economic Forum Systems and Cyber Resilience working group to produce guidance and principles that will help board members meet the unique challenges of managing cyber risk in the power ecosystem.

Cross sector working groups and access to state-of-the art science can play a role in understanding the art of the possible, and our team is tapping in to this knowledge and bringing it closer to our clients through initiatives such as the Willis Research Network or RUSI’s Modern Deterrence programme³⁰ that brings cutting edge defence and security research to its members.

Conclusion – multiple perspectives to build resilience
Given the speed, regularity and relative surprise of such events, and the unforeseen decisions, it may be time to reconsider how well businesses really are prepared for the impact of geopolitical events. In one of our recent articles, General Sir Richard Shirreff (former Deputy Head NATO) set out how the military approach to risk management might help the boardroom³¹, and this should be a question that all mature companies ask themselves.

What risks are on the horizon and who can speak to them or be invited in to build awareness and understanding? This is where board composition, NED selection, and trusted advisors are increasingly important to encourage a holistic view that recognises and explores interconnectivity of risks and how these can be pivoted to opportunity.

When designing scenarios to build resilience to these changes, power companies should assemble multi-disciplinary, diverse teams from across the organization. This is the approach that our geopolitical team takes, and it reduces the possibility of blind spots. A classic example of the power of scenario planning is the approach pioneered by Shell. When the 1973 oil crisis hit, Shell was better prepared than its competitors because its management had already considered a comparable scenario³².

Next steps
It is also important to consider the opportunities and ensure scenarios explore positive futures. As you read the Review, think about the trends and drivers and ask yourself, are these issues on our list as risks or opportunities, and do we have a plan? For example, if considering political risks, solutions such as VAPOR³³ allow global companies to assess the financial impact of political risk exposure that can feed into your company’s business continuity planning, but if your company needs to examine its supply chain dynamics to understand the impact of the Chilean Water Directive on lithium production³⁴, the Willis Research Network, with its strong links to the scientific community, can help find the relevant experts.

Lucy Stanbrough is Emerging Risks Research Manager for the Willis Research Network at Willis Towers Watson in London.
Lucy.Stanbrough@willistowerswatson.com

¹ 2019 Airmic member survey https://www.airmic.com/news/guest-stories/rethinking-geopolitical-risk
² 2019 Political risk survey report https://www.willistowerswatson.com/en-GB/Insights/2019/12/2019-political-risk-survey-report
³ https://ourworldindata.org/energy
⁴ https://www.sciencedirect.com/science/article/pii/S0301421505001758/pdfft?md5=536d85db8316833d20b5a2ed1a876c5a&pid=1-s2.0-S0301421505001758-main.pdf
⁵ https://www.towerswatson.com/assets/pdf/power-renewable-energy-market-review-2019.pdf
⁶ https://www.iris-france.org/wp-content/uploads/2019/03/GENERATE-Working-Paper-4.pdf
⁷ https://research.hks.harvard.edu/publications/getFile.aspx?Id=1554
⁸ http://large.stanford.edu/courses/2013/ph241/roberts2/docs/WEO2009.pdf
⁹https://energypolicy.columbia.edu/sites/default/files/CGEPTheGeopoliticsOfRenewables.pdf

¹⁰ https://www.economist.com/leaders/2017/05/06/the-worlds-most-valuable-resource-is-no-longer-oil-but-data
¹¹ https://www.ft.com/content/ba6bd46a-1d75-11e8-956a-43db76e69936
¹² https://www.willistowerswatson.com/en-GB/Insights/2019/12/a-changing-climate-of-risk-and-opportunity
¹³ Climate talks break up with no agreement on carbon trading, DECEMBER 15 2019
¹⁴ https://doi.org/10.1016/j.erss.2015.06.008
¹⁵ https://www.canada.ca/en/environment-climate-change/services/climate-change/task-force-just-transition.html
¹⁶ See p.34 http://www.actuarialpost.co.uk/downloads/cat_1/Willis%20Towers%20Watson%20EMR%202016.pdf and p.28 https://www.willistowerswatson.com/-/media/WTW/Insights/2017/09/mining-review2017.pdf for examples from the Energy and Mining markets
¹⁷ http://www.actuarialpost.co.uk/downloads/cat_1/Willis%20Towers%20Watson%20EMR%202016.pdf
¹⁸ https://startupsmagazine.co.uk/article-vr-startup-sitting-gold-mine

¹⁹ https://theconversation.com/coal-mines-can-be-closed-without-destroying-livelihoods-heres-how-124336
²⁰https://coloradosun.com/2019/05/29/guzman-tri-state-coal-plant-offer/
²¹ https://www.bgs.ac.uk/downloads/start.cfm?id=1370
²² https://pureportal.strath.ac.uk/files/19668385/RevManuscript_1_.pdf
²³ https://www.jbs.cam.ac.uk/faculty-research/centres/risk/publications/geopolitics-and-security/
²⁴ https://www.willistowerswatson.com/en-GB/Insights/2019/12/what-you-should-know-about-the-changing-cyber-risk
²⁵ https://www.willistowerswatson.com/en-GB/Insights/2019/03/social-engineering-avoiding-the-hackers-harpoon-and-phishing-net
²⁶ https://www.willistowerswatson.com/en-HK/Insights/2020/04/keeping-vigilant-against-increasing-cyber-risk-during-Covid-19-crisis
²⁷ https://cofense.com/enterprise-phishing-susceptibility-report/
²⁸ https://www.wired.com/story/notpetya-cyberattack-ukraine-russia-code-crashed-the-world/

²⁹ https://www.youtube.com/watch?v=VaqIYlYmDbA
³⁰ https://rusi.org/rusi-reports/modern-deterrence-first-year
³¹ https://www.willistowerswatson.com/en-GB/Insights/2019/12/geopolitical-risk-and-how-experience-of-the-battlefield-might-help-the-boardroom
³² The summer reader’s guide to scenario planning https://www.willistowerswatson.com/en-GB/Insights/2019/08/the-summer-readers-guide-to-scenario-planning
³³ https://www.willistowerswatson.com/en-GB/Solutions/services/vapor
³⁴ https://eandt.theiet.org/content/articles/2019/08/lithium-firms-are-depleting-vital-water-supplies-in-chile-according-to-et-analysis/