A global grid upgrade is mission-critical

An electrification revolution is central to the energy transition. It will have to stretch across every aspect of human activity, from replacing fossil fuels in our transportation to removing gas boilers from our homes and workplaces and replacing them all with electric alternatives.

What can easily be overlooked is that this revolution means existing grid systems are simply no longer fit for purpose. Not just significant upgrades, but wholesale changes will have to be made to them.

The underlying assumption for mass electrification is a shift in the grid itself away from fossil fuels as the main source of power generation to the predominance of renewable energy sources, with fossil fuels relegated to a secondary role providing backup power and surge demand. This task is enormous.

“Grid capacity is one of the largest current barriers to the transition to a fully decarbonised energy system in many developed economies,” says Eloise John, director of energy, UK and Ireland, at AECOM.

Apart from electrifying our current needs, two very bew sources of surging power demand are exacerabting this challenge. First, the widespread adoption of artificial intelligence is driving accelerated growth in energy-hungry data centres. Richard Marshall, head of infrastructure research at DWS, sees the proportion of European power demand coming from data centres quintupling by the 2030s.

Second, as Barry Epstein, partner at Allen Matkins, says: “With the rapid electrification of the transportation sector, we are not only changing and diffusing the locations where generation enters the grid, but we also are increasing the total amount of electricity required at warp speed. Electric vehicle charging facilities can dramatically increase the demand of a retail customer.”

The grid challenge in Europe is particularly large given the previous over-reliance on Russian natural gas for much of the continent’s power. The EU Commission’s expected investment requirement for grid capacity upgrade is €584 billion by 2030.

But the reality is these challenges are global and magnified by climate change itself. In the US, Todd Bright, co-head of infrastructure for the Americas at Partners Group, says: “Heightened weather-related events and ageing transmission and distribution infrastructure present a growing challenge for maintaining a reliable and resilient electrical grid.”

In total, the International Energy Agency has calculated that investment in the world’s grids needs to double by 2030 to over $600 billion per year after more than a decade of stagnation. That provides enormous investment opportunities.

Grid revolutionaries

Due to the fragmented regulatory environment of the grid and the increasing need for innovative solutions, Bright notes that the investor landscape is highly diverse, “with utilities, energy solutions providers, private capital investors, and independent power producers all playing a part”.

“We are not only changing and diffusing the locations where generation enters the grid, but we also are increasing the total amount of electricity required at
warp speed”

Barry Epstein,
Allen Matkins

He says utilities usually focus on expanding physical transmission and distribution networks and rate-basing these investments, which has been a key driver of recent and expected increases in utility rates. Utilities and independent power producers are also increasingly incorporating energy storage to enhance grid resiliency.

Venture capital is typically investing in asset-light, emerging technologies such as advanced sensor technology, AI and cybersecurity for modern grid infrastructure. Meanwhile, private equity and infrastructure funds are actively investing in energy infrastructure and renewable services, such as battery storage, data management, distributed energy resources management systems (through demand response and virtual power plants), and energy efficiency.

For example, Partners Group has invested in Budderfly, a leading energy-as-a-service platform in North America. Bright says Budderfly acts “to reduce pressure on grids”, as opposed to simply requiring more physical transmission infrastructure to be built.

It is therefore a very diverse landscape both in terms of those who are seeking to make changes and of the areas in which they are pushing the revolution forward. But it is fair to say that there are three key areas where capital is being deployed and where the success of the revolution will be achieved: transmission, storage and software.

Transmission

The move towards reliance on renewables creates a physical location problem. The grid was broadly designed to move power from large generating stations – located near coal, natural gas or oil resources – to cities. Renewables are often located in different places.

“This puts stress on the grid where it was not designed to be stressed,” says Vinson & Elkins’s energy regulation partner Jeffrey Jakubiak. “Think what would happen if a car assembly plant were sited at the end of a street in your neighbourhood; the roads could not handle the increased traffic. The grid is facing the same problem.”

AI-driven data centre growth is exacerbating these location issues. “Data centres are often being located on parts of the grid not designed to handle large loads and offtakes of power,” Jakubiak says. “Again, this is stressing the grid in places not designed to handle such flows. All in all, a lot of new transmission will need be built very quickly to accommodate these new generating facilities and loads.”

There are many opportunities in the form of both upgrades to existing transmission lines (reconductoring at higher voltages to carry more power or hanging additional circuits on existing transmission towers) and entirely new transmission lines.

Investment in new transmission is coming from a combination of traditional utilities, utility affiliates that focus on transmission development, and “merchant” transmission developers, some of whom have been long-standing players in the renewable generation space.

This last group of developers is often backed by private equity. Epstein also notes that “some new companies are entering the business of developing and owning transmission line systems”, with privately financed long-distance transmission lines under construction or in planning across the US. The Ten West Link, stretching 125 miles from Tonopah, Arizona, to Blythe, California, and developed by Lotus Infrastructure Partners for over $280 million, is one such example.

Storage

By 2050, approximately two-thirds of the global energy supply is expected to come from renewables.

This has implications. Karl Byrne, a director in BlackRock’s Climate Infrastructure team, says: “Traditionally, large fossil fuel generators have stabilised the electricity grid by providing short circuit strength and system inertia. However, renewable generators do not provide inertia to the grid and only provide a fraction of the short circuit strength.”

There is now greater demand for standalone grid stability projects such as the synchronous condenser in Blackhillock in Scotland that BlackRock owns. Synchronous condensers are rotating machines connected into the transmission grid, providing system inertia and short circuit strength.

With the new model, which incorporates the decentralisation of generating capacity away from singular large power plants to a network of renewable facilities closer to consumption places, there are different challenges related to optimisation and balancing supply and demand.

“Grid operators now must deal with a more granular system with new demands on managing this supply and demand, which is more variable than with the traditional grid,” says Michael Brand, head of real assets at Mercer. “As the grid transitions to a collage of ‘microgrids’, there will be an increased need for energy storage to help balance out these challenges, creating opportunities for the development of battery systems to meet local demands. Storage and optimisation are key.”

An example of this is that knotty problem around electric vehicles. Sean McLachlan, senior investment director at Octopus Investments, says: “We have seen various EV charging stations looking to install batteries on-site for this very reason that power demand can often exceed the local grid connection size, and upgrading this connection can take years.”

Software

A successful energy transition simply cannot happen without upgraded grid systems, but James Johnston, the CEO of Piclo, a firm which develops software solutions to make energy networks more sustainable, suggests other possible shortcuts. “Smart technologies and AI present huge opportunities for modernising grids globally ahead of mass updates to infrastructure [and]… can provide immediate wins,” Johnston  says. He recommends integrating advanced metering infrastructure, installing smart devices and utilising software solutions as ways to enable flexibility and thus ease strain on the grid.

This is helped by the fact our energy system is increasingly becoming data-
driven and smart, and that whereas in the past, it was one-way from large, centralised power plants to end-consumers, now it is much more dynamic.

As Jakob Wilhelmus, director at PGIM, notes: “Both operators and consumers have gained insight into their electricity usage, but also control over when and how to use it. This has created a two-way system, where customers get to actively manage their energy usage through smart appliances or storage.”

Tom Fraine, co-CEO at Zoa, which uses an AI-powered electrification platform to help energy companies manage electronic devices at scale, says: “As household renewable installations become more common, there will be a critical need for systems that manage assets intelligently and dynamically. Advanced machine learning models trained on large energy datasets can help balance the grid.”

A significant share of future grid investment will therefore need to be in digital technologies. In 2022, $60 billion – 20 percent of total grid investment – was already being invested in them. That figure will only grow.