An expected doubling of the world’s electricity grids by 2050 is creating opportunities for companies with the materials and know-how to create a new backbone for the global energy system, write Charlie Donovan, Harry Boyle, and Will Grey at Impax Asset Management.
The drive to decarbonise the world’s electricity system has so far focused on expanding energy sources such as solar and wind power generation. In its 2023 World Energy Investment, the IEA estimated a record USD 659 billion was invested in new renewable energy capacity in 2023.
However, investment in the grid infrastructure has not kept pace. Meanwhile, electricity demand is growing, and the risks of potentially devastating blackouts are rising.
Expanding and modernising grids will be key to the transition to a more sustainable economy. More than USD 21 trillion must be invested in the world’s grids by 2050 to support a global net-zero trajectory, according to BloombergNEF. Once deemed a ‘boring’ sector, we see a highly dynamic investment landscape emerging.
A multi-trillion-dollar investment trend
Although investment in renewable energy generation has risen rapidly, capital flowing into grids has been static, the IEA says in its 2023 Electricity Grids and Secure Energy Transitions report.
Increasing electrification and higher economic growth in developing economies means that global electricity demand is set to triple between now and 2050, according to the Energy Transition Commission. Investment in grids will need to rise commensurately between now and 2050, with additional spending on expanding energy storage capacity.
Driving much of this growth is the electrification of industrial steel production, producing green hydrogen and other processes, as will the rise of artificial intelligence and energy-hungry datacentres. In emerging markets, reliable power is still needed for basic needs such as heating.
Demand growth is only half of the story. The power system of the future must become more intelligent for three reasons:
- First, low-carbon energy systems will be supplied by millions of generators, ranging in size from enormous wind and solar farms to individual rooftop installations.
- Second, more interconnections between grids and large-scale batteries will be needed to manage the intermittency of solar and wind generation.
- Third, electricity networks are becoming bidirectional with more users becoming both consumers and producers (electric vehicles will be charging when electricity is cheap and discharging when it is expensive).
Investment opportunities as grids modernise
We see the required global build-out creating investment opportunities across four broad sectors.
- Developers and operators
In markets such as the UK and Spain, the integrated utilities which own and operate power grids can offer investors the prospect of consistent, regulated and inflation-linked returns.
Grid operator revenues should rise in line with long-term growth in electricity usage, as a percentage of end electricity prices is typically given to transmission and distribution providers.
To prepare for this growth, these companies are building capacity for rising electricity consumption and to manage the more geographically diverse and intermittent renewable generation. Much of the extra spending will flow to engineering, procurement and power grid construction companies.
- Materials
The world’s electricity network of overhead, underground and submarine cables must double in length by 2050 to 152mn km to realise net-zero goals, BloombergNEF estimates.
Ageing grid infrastructure must be replaced: two-fifths of Europe’s grids are more than 40 years old; the average age of a US large power transformer is similar.
Regional networks of high voltage direct current cables will emerge to connect areas rich in renewable generation capacity with centres of demand. This is a specialist market, especially for sub-sea cables.
This ramp-up will support demand for key components, including converters and voltage control equipment.
- System intelligence
Amid increasingly distributed generation and the emergence of more ‘prosumers’, there is growing need for advanced systems to help manage them including smart grids that use sensors and the ‘internet of things’ to track flows of power and changes more accurately in supply and demand.
Increased system intelligence relies on smart metering. Even in mature markets, major investment in smart grids is planned, with the EU aiming to invest EUR 170 billion in grid digitalisation by 2030.
This is a supportive environment for suppliers of smart grid solutions.
- Energy storage
The intermittency of solar and wind generation is driving investment in a range of energy storage technologies, including utility-scale lithium-ion batteries, innovative solid-state batteries, longer-duration flow batteries, and well-established technologies such as pumped hydroelectricity.
Increasingly, new wind and solar farms are being developed with co-located battery storage. Utility-scale battery storage can contribute to a low-carbon grid through storing excess renewable generation and balancing electricity supply and demand.
There is a growing need for energy storage able to provide power at scale over days and weeks. Here, in addition to the well-established technology of pumped hydroelectricity, companies are placing big bets on electricity conversion.
Tackling bottlenecks in the clean energy transition
In many markets, it is now cheaper to build renewables and storage than to operate existing coal-fired plants. But bottlenecks in connecting cheap supply to growing demand will not resolve themselves. Fortunately, we see renewed focus by governments on plugging the gaps in market incentives and regulatory design needed to redirect capital towards the electricity value chain.
The price competitiveness of renewable power generation, widespread policy support, market incentives and improvements in technology will likely spur a rapid and sustained rise in investments in grid infrastructure. Such momentum creates opportunities for companies, from grid operators to suppliers of critical and emerging technologies to the industry.
This is an abbreviated version of an article that was previously published by Impax Asset Management
