Breaking through the gridlock

Without a grid fit for purpose, neither the energy transition nor energy supply is secure. Our Deep Dive looks at the challenges in Australia, Europe and the US.

Grid. A short, terse word unlikely to make anyone brim with excitement. But, as so often is the case, the key to success is rooted in proper appreciation of the mundane stuff beavering away in the background. In the case of infrastructure investments in power, it is the electrical grids and their presence, location, condition and capacity that make all the difference. It’s also the grids, the enabling infrastructure, that allow renewable energy to replace coal, oil and gas.

The scale of this challenge is enormous. The International Energy Agency found in its Smart Grids: Tracking Progress 2022 report that investment in electricity grids increased by 6 percent in 2021, to a little over $300 billion globally.

This vast sum is still nowhere near enough to achieve net-zero emissions by 2050. Instead, the IEA estimates that investment would need to average around $600 billion annually through to 2030 to get back on the 2050 trajectory.

That figure comprises $231 billion in advanced economies, $219 billion in developing economies and a further $132 billion in China alone. In particular, the IEA found that emerging market and developing economies are facing the biggest shortfall, averaging only around $80 billion of grid investment per year since 2015 – a long way from $219 billion. The gap in advanced economies is currently $80 billion per year. In China it stands at $50 billion annually.

Amount of annual investment the IEA estimates is needed for reaching net zero by 2050

All this is to say that modernising and upgrading electricity grids is a global problem that will require a wide range of solutions and financing options. Problems with grid capacity and connection of renewables keep arising the world over.

Vietnam, for example, saw a boom in solar and wind construction following the introduction of generous feed-in tariffs by the government. But development was so rapid and widespread, exceeding government targets, that projects faced curtailments as the pace of transmission had not kept up. This culminated in the country’s National Load Dispatch Center announcing in early 2022 that no new wind or solar projects would be connected to the grid for the rest of the year.

In Australia, a study by a team of researchers at the Australian National University published in February found that many solar and wind farms were facing curtailment on more than 100 days each year due to grid capacity constraints, as well as identifying two solar farms suffering output losses of 53 percent and 43 percent, respectively, throughout 2022.

Reports from Germany found that around 4 percent of that nation’s renewable electricity production was never used in 2022 because its grid lacked transmission capacity.

Each of these countries, and every other one that is trying to phase out fossil fuels, faces unique challenges that are distinct to them, either because of the policy settings, geographical constraints, a lack of available capital or a combination of these.

But there are broad themes that resonate across borders and continents when it comes to facing up to the difficulties posed by the need to upgrade electricity grids.

First, there is a lack of capacity in both transmission and distribution infrastructure after a strong push to invest in renewable generation. While governments have incentivised renewable energy development, and investors have proved keen to deploy capital in the space, a coordinated strategy around the build-out of grid infrastructure has often been lacking.

Second, most electricity grids were built with a hub-and-spoke model in mind. Large thermal generators would provide baseload power, with grids established to get power from these hubs to the customers that need to use it.

Renewable energy generation is far more distributed, spread out in places that have sometimes never hosted large-scale power generation before. And the advent of technology like rooftop solar and behind-the-meter storage has meant that grids need to be updated to cope with two-way transmission, rather than the one-way direction of travel that used to be the norm.

Third, the increasing frequency and intensity of extreme weather events due to climate change means that governments and investors must consider the resiliency of grids as never before, ensuring they are able to cope with both high and low temperature extremes and major storms.

“People used to look at electricity transmission and distribution in the same way as regulated utilities, looking at them through similar lenses as they would transport and other core, regulated infrastructure assets,” says Gordon Hay, partner and head of core infrastructure funds at Morrison & Co, and a director of Australian electricity distribution business Transgrid.

“But it’s clear that these networks are exposed and are on the frontline of the energy transition. We will not be able to transition to a low-carbon economy without very substantial investment in the transmission necessary to make these power flows work.

“So these assets are actually exposed to really strong growth – and the best transmission or distribution businesses are able to establish themselves commercially and service other parts of the energy transition, too. Unlike the way people used to look at regulated utilities, which are a big, stable monopoly, these are growth-exposed assets.”

Ray Neill, a managing director in Brookfield Asset Management’s infrastructure group, echoes this view: “Electricity transmission and distribution is a critical industry undergoing significant change, with a requirement for enormous amounts of capital to be invested in it.

“We tend to find that those situations where capital is required can present us with attractive investment opportunities.”

While several sources argued that until recently electricity grids were fit for purpose, all agreed that the challenge ahead is enormous, but also the opportunity. We take a look at how these differ in Australia, Europe and the US (use table above to navigate to regional sections).